U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 for the fiscal year ended December 31, 2002

                                       or

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                          Commission File No. 0-26290

                                  BNCCORP, INC.
             (Exact name of registrant as specified in its charter)
               Delaware                                    45-0402816
    (State or other jurisdiction of              (I.R.S. Employer Identification
     incorporation or organization)                            No.)

         322 East Main Avenue                                 58501
        Bismarck, North Dakota                             (Zip Code)
 (Address of principal executive office)

       Registrant's telephone number, including area code: (701) 250-3040

           Securities registered under Section 12(b) of the Act: None

              Securities registered under Section 12(g) of the Act:

                          Common Stock, $.01 par value
                         Preferred Stock Purchase Rights
                                (Title of class)

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X

     The aggregate market value of the voting and non-voting  common equity held
by non-affiliates of the Registrant, computed by reference to the price at which
the common equity was last sold, as of the last business day of the Registrant's
most recently completed second fiscal quarter was $14,943,000.

     The number of shares of the Registrant's  common stock outstanding on March
15, 2003 was 2,701,829.

     Documents  incorporated by reference.  Portions of the  Registrant's  proxy
statement to be filed with the Securities and Exchange Commission in connection
with the  Registrant's  2003 annual meeting of stockholders  are incorporated by
reference into Part III hereof.

<PAGE>


                                  BNCCORP, INC.

                           ANNUAL REPORT ON FORM 10-K
                     FOR FISCAL YEAR ENDED DECEMBER 31, 2002

                                TABLE OF CONTENTS
                                                                    Page

                                     PART I
Item 1.  Business.................................................    3

Item 2.  Properties...............................................   15

Item 3.  Legal Proceedings........................................   15

Item 4.  Submission of Matters to a Vote of Security Holders......   15

                                     PART II

Item 5.  Market for the Registrant's Common Equity and
          Related Stockholder Matters.............................   16

Item 6.  Selected Financial Data..................................   17

Item 7.  Management's Discussion and Analysis of Financial
          Condition and Results of Operations.....................   19

Item 7A. Quantitative and Qualitative Disclosures
          about Market Risk.......................................   54

Item 8.  Financial Statements and Supplementary Data..............   58

Item 9.  Changes In and Disagreements With Accountants
          on Accounting and Financial Disclosure..................  108

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.......  108

Item 11. Executive Compensation...................................  108

Item 12. Security Ownership of Certain Beneficial
          Owners and Management...................................  108

Item 13. Certain Relationships and Related Transactions...........  108

Item 14. Controls and Procedures..................................  109

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and
          Reports on Form 8-K.....................................  110


<PAGE>

                                     PART I

The  discussions  contained  in this  Annual  Report on Form 10-K  which are not
historical  in nature  may  constitute  forward-looking  statements  within  the
meaning  of  Section  27A of  the  Securities  Act  of  1933,  as  amended  (the
"Securities  Act"),  and Section 21E of the Securities  Exchange Act of 1934, as
amended (the "Exchange Act") and, as such, may involve risks and  uncertainties.
We caution  readers that these  forward-looking  statements,  including  without
limitation,  those  relating to future  business  prospects,  revenues,  working
capital, liquidity, capital needs, interest costs and income of BNCCORP, Inc., a
Delaware corporation,  are subject to certain risks and uncertainties that could
cause  actual  results  to  differ   materially  from  those  indicated  in  the
forward-looking  statements  due to several  important  factors.  These  factors
include,  but are not  limited  to:  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 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.  For a  discussion  of some of
the additional  factors that might cause such differences,  see Item 1. Business
"-Factors That May Affect Future Results of Operations."

We refer to "we," "our," "BNC" or the  "Company"  when such  reference  includes
BNCCORP, Inc. and its consolidated  subsidiaries,  collectively;  "BNCCORP" when
referring only to BNCCORP,  Inc.; "the Bank" when referring only to BNC National
Bank;  "Milne Scali" when  referring only to Milne Scali & Company,  Inc.;  "BNC
Insurance"  when  referring  only to BNC  Insurance,  Inc.;  and "BNC  AMI" when
referring only to BNC Asset Management, Inc.

Item 1. Business

General / Growth Strategy

BNCCORP is a bank holding company  registered under the Bank Holding Company Act
of 1956 (the "BHCA")  headquartered in Bismarck,  North Dakota. We are dedicated
to providing a broad range of financial  products and superior  customer service
to businesses and consumers within the communities we serve. BNCCORP operates 21
locations in Arizona,  Minnesota and North Dakota  through its  subsidiary,  BNC
National  Bank.  The Company also provides a wide array of insurance,  brokerage
and trust and financial services through BNC National Bank's subsidiaries, Milne
Scali,  BNC Insurance  and BNC AMI, and the Bank's trust and financial  services
division.  The Company offers a wide variety of traditional  and  nontraditional
financial  products  and  services in order to meet the  financial  needs of its
current customer base,  establish new relationships in the markets it serves and
expand its business opportunities.

Expansion,  mergers  and  divestitures  have  played  an  important  role in our
strategy.  During the three years ended  December  31, 2002,  we  completed  the
following transactions:  established a bank subsidiary in Arizona, merged all of
our banking  subsidiaries under one national bank charter,  acquired Milne Scali
in April 2002 and sold the Fargo,  North Dakota  branch of the Bank in September
2002. See Note 2 to the Consolidated  Financial Statements included under Item 8
of Part II for  further  information  related  to  these  transactions.  We will
continue to emphasize  internally generated growth by focusing on increasing our
market  share  within  the  communities  we  serve.  We  may  also  seek  growth
opportunities  through select  acquisitions of financial services companies that
we believe  complement our  businesses.  We may also generate  growth through de
novo  branching  in  markets  such as  Arizona,  Minnesota,  North  Dakota  and,
possibly, other states.

At December 31,  2002,  we had total  assets of $602.2  million,  total loans of
$335.8 million and total deposits of $398.2 million.

Mission Statement

Our mission is to provide tailor-made financial solutions for our customers that
will assist them in achieving their goals, while enhancing shareholder value.

Goal

Our primary goal  continues to be the creation of a  well-capitalized  financial
services  organization  focused on local  relationship  banking and  providing a
broad range of financial  products and services  that will meet the needs of our
customers, both commercial and consumer.
<PAGE>

Operating Strategy

We  provide  relationship-based  banking  and  financial  services  to  small to
mid-sized  businesses,  business  owners,  professionals  and  consumers  in our
primary  market areas of Arizona,  Minnesota  and North  Dakota.  Our goal is to
become a one-stop financial services provider offering traditional bank products
and services,  insurance,  brokerage, asset management,  trust, tax planning and
preparation,   employee  benefit  plan  design  and   administration  and  other
financial-related  services.  The other key elements of our  operating  strategy
are:

     o    Emphasize individualized, high-level customer service.

     o    Encourage an entrepreneurial  attitude among the employees who provide
          products and services.

     o    Maintain high asset quality by  implementing  strong loan policies and
          continuously monitoring loans and the loan review process.

     o    Centralize administrative and support functions.

History / Strategic Vision

Since our formation more than 15 years ago, we have diligently pursued a sharply
focused  strategic  vision:  to provide a broad range of financial  products and
superior service to a well-defined  customer base, primarily consisting of small
to mid-sized  businesses,  business  owners,  professionals  and  consumers.  We
believe that our entrepreneurial approach to banking and the introduction of new
products and services will  continue to attract small and mid-sized  businesses,
their owners and employee base.  Small  businesses  frequently  have  difficulty
finding banking  services that meet their specific needs and have sought banking
institutions that are more relationship-oriented. By remaining committed to this
strategic vision, we have built a company that is distinguished by its:

     o    Diversified business base of banking,  insurance and brokerage / trust
          / financial services;

     o    Presence in multiple attractive markets: Arizona,  Minnesota and North
          Dakota;

     o    Strengthening financial performance,  as investments in new businesses
          and markets drive earnings growth; and

     o    Determined  management  team,  with  a  decided  focus  on  delivering
          results.

In  this  section  of  this  annual   report  on  Form  10-K,  we  detail  these
distinguishing  strengths,  which have not only helped  customers to reach their
financial  goals,  but also have  established a solid  foundation  upon which to
build shareholder value.

Diversified  Business  Base.  BNCCORP today  consists of three core  businesses:
banking, insurance and brokerage/trust/financial services. This structure allows
us to offer a wide range of services that is  responsive to the financial  needs
of our customers, while also diversifying and balancing our sources of revenue.

Banking  segment.  BNC National Bank operates 15 banking branch offices in three
states.  Known for its business banking services such as business  financing and
commercial  mortgages,  corporate  cash  management and merchant  programs,  our
banking  division  also  offers a full range of  consumer  lending  and  deposit
options.  The Bank is  differentiated  by its service  culture of "high personal
touch," supported by effective technology. Among the innovative services offered
are online, bill pay and telephone banking operations,  and products such as the
"Sweep/Repo"  account,  the  "Wealthbuilder"  family of  variable-rate  interest
checking and money market deposit products and the BNC cash back debit card.

The banking  segment's  loans  primarily  consist of commercial  and  industrial
loans, real estate mortgage and construction loans, agricultural loans, consumer
loans and lease financing. In allocating our assets among loans, investments and
other  earning  assets,  we attempt to maximize  return while  managing  risk at
acceptable  levels.  Our  primary  lending  focus  is on  commercial  loans  and
owner-occupied  real  estate  loans  to  small  and  mid-sized   businesses  and
professionals.  We  offer a broad  range  of  commercial  and  consumer  lending
services,  including  commercial  revolving  lines of  credit,  residential  and
commercial  real estate  mortgage and  construction  loans,  consumer  loans and
equipment  financing.  Interest  rates charged on loans may be fixed or variable
and vary with the degree of risk,  size and maturity of the loans,  underwriting
and servicing costs, the extent of other banking  relationships  maintained with
customers and the Bank's cost of funds. Rates are further subject to competitive
pressures,  the current  interest rate  environment,  availability  of funds and
government  regulations.  For more  information on our lending  activities,  see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Financial Condition - Loan Portfolio" included under Item 7 of Part
II.
<PAGE>

Each of our bank  branches  offers the usual and  customary  range of depository
products provided by commercial  banks,  including  checking,  savings and money
market  deposits  and  certificates  of deposit.  During  2002,  we continued to
increase  core  deposits   largely   through  the  continuing   success  of  our
Wealthbuilder  interest  checking and money market deposit  accounts  introduced
during 1999.  These are  competitively  priced floating rate accounts with rates
variable at our  discretion.  The Bank's deposits are not received from a single
depositor or group of affiliated depositors,  the loss of any one of which would
have a material  adverse  effect on our  business.  Rates paid on deposits  vary
among  the  categories  of  deposits  due to  different  terms,  the size of the
individual  deposit,  the  nature  of  other  banking   relationships  with  the
depositor,  the current  interest rate environment and rates paid by competitors
on similar deposits.  The Bank also accepts brokered deposits and obtains direct
non-brokered  certificates of deposit  through  national  deposit  networks when
management  believes such  transactions  are  beneficial  to the Bank.  For more
information on our deposit activities, see "Management's Discussion and Analysis
of  Financial  Condition  and  Results of  Operations  -  Financial  Condition -
Deposits" included under Item 7 of Part II.

Our  banking  segment  also offers  services  such as money  orders,  travelers'
checks, MasterCard and Visa merchant deposit services and, in some markets, safe
deposit, lockbox and messenger services.

Insurance  segment.  Milne Scali and BNC  Insurance  are  independent  insurance
agencies  representing  many of the nation's  leading  insurance  carriers.  Our
insurance  operations  were greatly  expanded in 2002 through the acquisition of
Milne Scali, one of the largest  independent  insurance  agencies in the Arizona
market.  Today,  we offer a full array of insurance  brokerage  services  with a
strong  concentration  in  business  insurance,  risk  management  and  employee
benefit-related   insurance.   We  also  offer  home,   personal  life,  health,
disability,  automobile and other vehicle insurance, universal and mortgage life
insurance,  workers'  compensation,  excess  liability  coverage,  farm and crop
insurance and commercial trucking coverage. The insurance segment will generally
have its  strongest  performance  in the first  quarter of each  fiscal  year as
contingency payments from insurance carriers are generally paid during the first
quarter.

Brokerage/trust/financial  services  segment.  BNC AMI and the Bank's  trust and
financial services  divisions provide customers with an extensive  complement of
financial  services  options.   The  trust  and  financial  services  divisions,
presently  operating  primarily  out  of  Bismarck,  provide  trust,  financial,
business,  estate and tax  planning,  estate  administration,  agency  accounts,
payroll  services,   accounting  services,  employee  benefit  plan  design  and
administration,  individual  retirement accounts ("IRAs"),  individual custodial
self-directed  IRAs,  asset  management,  tax  preparation  and the  BNC  Global
Balanced  Collective  Investment  Fund,  a  proprietary  investment  vehicle for
qualified  retirement  plans. BNC AMI, with offices in Bismarck and Minneapolis,
in affiliation  with Raymond James Financial  Services,  Inc.  offers  financial
services  alternatives  such as  securities  trading,  investment  management of
institutional and individual accounts, mutual funds and annuities.

With this "palette" of financial resources,  a customer can turn to us to obtain
business  financing or a home mortgage;  access the cash management,  insurance,
accounting and tax  preparation  services  needed to run a successful  business;
create a 401(k) program for employees;  or establish a trust to manage  personal
assets - to cite just a few examples.  We employ a "relationship pricing matrix"
that gives  customers even more reason to take maximum  advantage of our diverse
services.

Revenues  from  external  customers,  measures  of profit  and/or loss and total
assets for each of the  segments  listed  above are  presented in Note 16 to the
Consolidated Financial Statements included under Item 8 of Part II.

Attractive     Markets.     We    operate    in    three    distinct    markets:
Tempe-Phoenix-Scottsdale,   Arizona;   Minneapolis-St.   Paul,  Minnesota;   and
Bismarck-Mandan,  North Dakota and surrounding  communities (Crosby,  Ellendale,
Garrison,  Kenmare,  Linton,  Stanley and Watford City).  While these areas have
very  different  fundamentals,  each  enjoys a solid  economic  base and what we
believe are compelling  long-term growth dynamics.  To ensure that we maintain a
sharp focus on each market area,  Chairman  Tracy Scott has  responsibility  for
managing  operations in North Dakota, with President and Chief Executive Officer
Greg Cleveland directly in charge of the Arizona and Minneapolis market areas.

Our Arizona  market has been one of the fastest  growing areas of the country in
population  and personal  income for the past several  years.  The population is
expected  to  continue  increasing  at a rate of more  than  100,000  per  year.
Tourism,  retirement  and  job  creation  in such  industries  as  software  and
biotechnology are among the drivers of the economy,  according to studies by the
University  of Arizona.  Segments  with  significant  operations  in the Arizona
market include banking and insurance.
<PAGE>

The Twin  Cities area is home to a large and  growing  population,  with a tight
labor market and robust construction.  The U.S. census estimates that the area's
population will rise by more than 900,000 by 2030,  driving  business  formation
and residential construction over the long term. Key growth industries currently
include electronics  manufacturing,  healthcare,  education and food processing.
Banking is the primary segment operating in the  Minneapolis-St.  Paul area with
some brokerage activities also conducted in the market.

Bismarck-Mandan  is characterized  by low  unemployment and generally  favorable
economic conditions.  Bismarck is not only the state capital, but also the trade
and  transportation hub for South Central North Dakota. The area is experiencing
strong residential and commercial growth, and its diverse economic base includes
energy,  health  care,  agriculture  and an expanding  data  processing/customer
service component. The banking, insurance and brokerage/trust/financial segments
are all represented in the North Dakota market.

Individually, each of our markets presents strong potential demand for our range
of financial services  offerings.  Together,  we believe they provide attractive
business opportunities and balance our exposure to regional economic cycles.

As of December  31, 2002,  32 percent of our loans were to borrowers  located in
North  Dakota,  30 percent to  borrowers  located  in  Minnesota,  26 percent to
borrowers located in Arizona, 7 percent to borrowers located in South Dakota and
the  remainder  to  borrowers  in various  other  states.  Other  than  brokered
certificates of deposit and direct non-brokered certificates of deposit obtained
through  national  deposit  networks,  each  banking  branch  draws  most of its
deposits from its general market area.

The following table presents total deposits and net loans outstanding at each of
our locations as of December 31, 2002 (in thousands):

<TABLE>
<CAPTION>


                                         Total        Net Loans
                    Location            Deposits    Outstanding 1
        -----------------------------  -----------  -------------
        <S>                            <C>          <C>
        Bismarck, ND.............       $119,021      $124,885
        Crosby, ND...............         17,263           258
        Ellendale, ND............         11,117           521
        Garrison, ND.............         15,363           465
        Kenmare, ND..............         11,830           222
        Linton, ND...............         42,698         9,847
        Minneapolis, MN..........         48,650       105,436
        Phoenix, AZ..............         13,186        75,529
        Stanley, ND..............         16,306           958
        Tempe, AZ................         33,148        18,431
        Watford City, ND.........         10,973           108
        Brokered deposits........         31,386            --
        National market deposits.         27,304            --
                                       ----------    ----------
           Total ................       $398,245      $336,660
                                       ==========    ==========
------------------
<FN>
1 Before  allowance  for credit  losses,  unearned  income  and net  unamortized
deferred fees and costs.
</FN>
</TABLE>

Strengthening  Financial Performance.  In 2002, we demonstrated the value of our
financial  management  strategies.  Efforts to diversify our sources of revenue,
and in  particular  the decision to expand our  insurance  business  through the
Milne Scali acquisition, drove a 64 percent year-over-year increase in earnings.
Our management of our investment  portfolio generated unrealized gains of nearly
$4.4 million.  We believe that our continued  attention to asset quality  should
help guard the loan portfolio against future economic shocks.

While we are  justifiably  proud of these  strong  results,  we believe our full
earnings potential should be even more evident in the coming year due to several
factors.  First,  our  financial  performance  in 2003 will  reflect a full year
contribution  from Milne Scali,  which was part of the Company for only two full
quarters of 2002. Second, we should benefit from our efforts to improve both the
cost structure and productivity of BNC AMI.
<PAGE>

Determined Management Team. Our financial and operational accomplishments during
2002 are,  in large  measure,  a  reflection  of our  determination  to  enhance
shareholder  value. The  determination to invest in the future led to a thriving
and highly  profitable  insurance  agency business and the creation of a growing
presence in the Arizona market. A determination to make tough decisions, such as
divesting  the  Fargo  branch  of the  Bank  and  maintaining  a tight  grasp on
operating costs,  should lead to greater  efficiency and  profitability.  And, a
determined focus on achieving excellence in business - through superior service,
a consistent vision and prudent financial  management - should continue to yield
positive results in the years to come.


Regional Community Banking Philosophy

In  order  to meet the  demands  of the  increasingly  competitive  banking  and
financial   services   industries,   we  employ  a  regional  community  banking
philosophy.  This  philosophy  is based on our belief that banking and financial
services clients value doing business with locally managed institutions that can
provide a full service commercial banking  relationship through an understanding
of the  clients'  financial  needs and the  flexibility  to  deliver  customized
solutions through our menu of products and services. With this philosophy we are
better able to build  successful  and broadly  based client  relationships.  The
primary  focus for our  relationship  managers is to cultivate and nurture their
client  relationships.  Relationship  managers  are  assigned to each  borrowing
client to provide continuity in the relationship.  This emphasis on personalized
relationships requires that all of the relationship managers maintain close ties
to the  communities  in which they serve so that they are able to  capitalize on
their efforts  through  expanded  business  opportunities.  While client service
decisions and day-to-day  operations are maintained at each location,  our broad
base of financial  services  offers the  advantage of  affiliation  with service
providers  who can  provide  extended  products  and  services  to our  clients.
Additionally, BNCCORP and the Bank provide centralized administrative functions,
including  credit and other policy  development  and review,  internal audit and
compliance services,  investment management,  data processing,  accounting, loan
servicing and other specialized support functions.

Distribution methods

We offer our banking and financial  products and services through our network of
offices and other traditional industry  distribution methods.  Additionally,  we
offer 24-hour telephone  banking services through BNC Bankline.  We also provide
Internet  banking and bill-pay  services  through our  Internet  banking site at
www.bncbank.com.  This system allows customers to process account  transactions,
transfer funds,  initiate wire transfers,  automated clearing house transactions
and stop payments and obtain account  history and other  information.  Messenger
services in select markets are also of great convenience to our customers.

Risk Management

The uncertainty of whether  unforeseen events will have an adverse impact on our
capital or earnings is an  inevitable  component of the business of banking.  To
address the risks  inherent in our  business we identify,  measure,  control and
monitor them. Our management  team is responsible  for  determining  our desired
risk profile,  allocating  resources to the lines of business,  approving  major
investment  programs that are  consistent  with  strategic  priorities  and risk
appetite and making capital management  decisions.  We address each of the major
risk categories identified by the banking regulators,  if applicable, as well as
any additional  identified  risks inherent in our business.  Such risks include,
but  are  not  limited  to,  credit,  liquidity,   interest  rate,  transaction,
compliance,  strategic and  reputation  risk. In each  identified  risk area, we
measure  the level of risk to the Company  based on the  business we conduct and
develop plans to bring risks within  acceptable  tolerances.  See  "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations-Financial  Condition-Loan Portfolio and-Liquidity,  Market and Credit
Risk"  included  under  Item 7 of  Part  II and  "Quantitative  and  Qualitative
Disclosures  About  Market Risk"  included  under Item 7A of Part II for further
discussion of credit, liquidity and interest rate risk.

Competition

The  deregulation  of the banking  industry and the  availability  of nationwide
interstate  banking  have  increased  the level of  competition  in our  already
intensely competitive market areas. The increasingly  competitive environment is
a result of changes in regulation,  changes in technology  and product  delivery
systems and the pace of consolidation  among financial services  providers.  The
Bank and its subsidiaries compete for deposits,  loans, insurance and brokerage,
trust and financial  services as well as customers  with  numerous  providers of
similar  products and services.  Principal  competitors  include  multi-regional
financial  institutions as well as large and small thrifts,  independent  banks,
credit  unions,  many  national  and  regional  brokerage  companies,   mortgage
companies,  insurance companies, finance companies, money market funds and other
non-bank financial service providers.  Some of these competitors are much larger
in total assets and capitalizations,  including the availability of larger legal
lending limits, have greater access to capital markets and offer a broader range
of  financial  services  than BNC. In addition,  some of the non-bank  financial
institutions  that  compete  with us are not  subject to the  extensive  federal
regulations that govern our operations.

<PAGE>
In order to compete with other financial  services  providers,  the Bank and its
subsidiaries   principally  rely  on  local  promotional  activities,   personal
relationships  established  by  officers,  directors  and  employees  with their
customers,  specialized  services  tailored to meet the needs of the communities
served  and  cross-selling   efforts  among  the  various  segments  within  our
organization.  We believe that many of our competitors  have  emphasized  retail
banking  and  financial  services  for large  companies,  leaving  the small and
mid-sized  business  market   underserved.   This  has  allowed  us  to  compete
effectively by emphasizing  customer service,  establishing  long-term  customer
relationships  and providing  services  meeting the needs of such businesses and
the  individuals  associated  with them.  The  banking  and  financial  services
industries are highly competitive,  and our future  profitability will depend on
our ability to continue to compete successfully in our market areas.

Supervision and Regulation, Economic Conditions and Monetary Policy

General.  BNCCORP and the Bank are extensively regulated under federal and state
laws and  regulations.  These laws and  regulations  are  primarily  intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP. From time to time,  legislation,  as well as regulations,
is  enacted  that has the  effect  of  increasing  the  cost of doing  business,
limiting or  expanding  permissible  activities,  or affecting  the  competitive
balance  between  banks and other  financial  services  providers.  Proposals to
change laws and regulations governing the operations and taxation of banks, bank
holding  companies  and other  financial  institutions  and  financial  services
providers are frequently made in the U.S.  Congress,  in the state  legislatures
and by various regulatory agencies.

The  following   information   briefly  summarizes  certain  material  laws  and
regulations  affecting  BNCCORP and the Bank and is qualified in its entirety by
reference to the particular statutory and regulatory  provisions.  Any change in
applicable laws,  regulations or regulatory  policies may have a material effect
on our business,  operations and future prospects.  We are unable to predict the
nature or extent of the effects that new or revised federal or state legislation
may have on our business and earnings in the future.

Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is  subject  to  regulation,  supervision  and  examination  by the Board of
Governors of the Federal Reserve System ("Federal Reserve"). BNCCORP is required
to file periodic  reports with the Federal Reserve and such other reports as the
Federal Reserve may require pursuant to the BHCA. The Bank is a national banking
association  and is subject to  supervision,  regulation and  examination by the
Office of the  Comptroller of the Currency  ("OCC").  Since the Federal  Deposit
Insurance  Corporation  ("FDIC")  insures the deposits of the Bank,  the Bank is
also subject to regulation and supervision by the FDIC.  Additionally,  the Bank
is a member of the Federal Reserve System.

If, as a result of an  examination  by federal  regulatory  agencies,  an agency
should determine that the financial condition, capital resources, asset quality,
earnings  prospects,  management,  liquidity or other  aspects of a bank or bank
holding company's operations are unsatisfactory or that the bank or bank holding
company or its  management  is violating or has violated any law or  regulation,
various  remedies are  available to these  regulatory  agencies.  Such  remedies
include  the  power  to  enjoin  "unsafe  or  unsound"  practices,   to  require
affirmative  action to correct any  conditions  resulting  from any violation or
practice,  to issue an administrative order that can be judicially enforced,  to
direct an  increase in capital,  to restrict  the growth of the bank,  to assess
civil  monetary  penalties,  to remove  officers and directors and ultimately to
terminate the bank's deposit  insurance  and/or revoke the bank's charter or the
bank holding company's registration.

Acquisitions and Permissible  Activities.  As a registered bank holding company,
BNCCORP is  restricted  in its  acquisitions,  certain  of which are  subject to
approval by the Federal Reserve. A bank holding company may not acquire,  or may
be  required  to  give  certain  notice  regarding  acquisitions  of,  companies
considered  to engage in activities  other than those  determined by the Federal
Reserve to be closely related to banking or managing banks.

<PAGE>
Transactions with Affiliates.  Under Section 23A of the Federal Reserve Act (the
"Act"),  certain restrictions are placed on loans and other extensions of credit
by the Bank to BNCCORP which is defined as an  "affiliate" of the Bank under the
Act. Section 23B of the Act places standards of fairness and  reasonableness  on
other of the  Bank's  transactions  with its  affiliates.  The  Federal  Reserve
recently  issued  Regulation W to implement  Sections 23A and 23B of the Act and
codify many previously issued Federal Reserve interpretations of those sections.

Anti-Tying  Restrictions.  Bank  holding  companies  and  their  affiliates  are
prohibited from tying the provision of certain  services,  such as extensions of
credit, to other services offered by a holding company or its affiliates.

Restrictions on Loans to One Borrower.  Under federal law,  permissible loans to
one  borrower  by banks  are  generally  limited  to 15  percent  of the  bank's
unimpaired  capital,  surplus,  undivided profits and credit loss reserves.  The
Bank seeks participations to accommodate  borrowers whose financing needs exceed
its lending limits or internally established credit concentration limits.

Loans to Executive  Officers,  Directors  and  Principal  Stockholders.  Certain
limitations and reporting  requirements  are also placed on extensions of credit
by the Bank to principal  stockholders  of BNCCORP and to directors  and certain
executive  officers  of the  Bank  (and  BNCCORP  and its  nonbank  subsidiaries
provided certain criteria are met) and to "related  interests" of such principal
stockholders,  directors and officers.  In addition,  any director or officer of
BNCCORP or the Bank or principal stockholder of BNCCORP may be limited in his or
her ability to obtain  credit from  financial  institutions  with which the Bank
maintains correspondent relationships.

Interstate  Banking and Branching.  The BHCA permits bank holding companies from
any state to  acquire  banks and bank  holding  companies  located  in any other
state,  subject  to  certain  conditions,   including  certain  nation-wide  and
state-imposed concentration limits. The Bank has the ability, subject to certain
restrictions,  to acquire by  acquisition  or merger  branches  outside its home
state. The  establishment  of new interstate  branches is also possible in those
states with laws that expressly  permit it.  Interstate  branches are subject to
certain laws of the states in which they are located.  Competition  may increase
further as banks branch across state lines and enter new markets.

Capital  Adequacy.  The capital adequacy of BNCCORP and the Bank is monitored by
the federal  regulatory  agencies using a combination of risk-based and leverage
ratios.  Failure to meet the applicable capital guidelines could subject BNCCORP
or the Bank to supervisory or enforcement actions. In addition, BNCCORP could be
required to guarantee a capital  restoration  plan of the Bank,  should the Bank
become "undercapitalized" under capital guidelines. See "Management's Discussion
and  Analysis  of  Financial  Condition  and  Results  of   Operations-Financial
Condition-Capital  Resources and Expenditures"  included under Item 7 of Part II
and Note 18 to the Consolidated  Financial  Statements  included under Item 8 of
Part II for further  discussion  regarding the capital status of BNCCORP and the
Bank.

Prompt  Corrective  Action and Other  Enforcement  Mechanisms.  Federal  banking
agencies possess broad powers to take corrective and other supervisory action to
resolve  the  problems of insured  depository  institutions,  including  but not
limited to those  institutions  that fall below one or more  prescribed  minimum
capital ratios. Each federal banking agency has promulgated regulations defining
the following five categories in which an insured depository institution will be
placed, based on its capital ratios: well capitalized;  adequately  capitalized;
undercapitalized;     significantly     undercapitalized;     and     critically
undercapitalized.  At December 31, 2002,  the Bank exceeded the required  ratios
for classification as well capitalized.

An  institution  that,  based upon its capital  levels,  is  classified  as well
capitalized, adequately capitalized or undercapitalized may be treated as though
it were in the next lower capital  category if the  appropriate  federal banking
agency,  after notice and opportunity for hearing,  determines that an unsafe or
unsound condition or practice warrants such treatment.  At each successive lower
capital  category,  an  insured  depository   institution  is  subject  to  more
restrictions.   The  federal  banking  agencies,   however,   may  not  treat  a
significantly undercapitalized institution as critically undercapitalized unless
its capital ratios actually warrant such treatment.

<PAGE>
In addition to measures  taken under the prompt  corrective  action  provisions,
commercial banking organizations may be subject to potential enforcement actions
by federal  regulators  for  unsafe or unsound  practices  in  conducting  their
business or for violations of any law, rule, regulation or any condition imposed
in writing by the agency or any written agreement with the agency.

Safety and  Soundness  Standards.  The Federal  banking  agencies  have  adopted
guidelines  designed  to assist  the  agencies  in  identifying  and  addressing
potential  safety and soundness  concerns before capital becomes  impaired.  The
guidelines set forth operational and managerial  standards relating to: internal
controls,  information  systems and internal audit systems;  loan documentation;
credit  underwriting;   asset  growth;  earnings;  and  compensation,  fees  and
benefits.  Additionally,  the federal banking  agencies have also adopted safety
and soundness  guidelines with respect to asset quality and earnings  standards.
These guidelines provide six standards for establishing and maintaining a system
to identify  problem assets and prevent those assets from  deteriorating.  Under
these standards,  an insured  depository  institution  should:  conduct periodic
asset quality reviews to identify  problem assets;  estimate the inherent losses
in problem assets and establish reserves that are sufficient to absorb estimated
losses;  compare problem asset totals to capital;  take  appropriate  corrective
action to resolve  problem  assets;  consider  the size and  potential  risks of
material asset  concentrations;  and provide periodic asset quality reports with
adequate  information  for  management  and the board of directors to assess the
level of asset risk.  These  guidelines  also set forth standards for evaluating
and  monitoring  earnings and for ensuring that earnings are  sufficient for the
maintenance of adequate capital and reserves.

Dividend  Restrictions.  Dividends  from bank  subsidiaries  often  constitute a
principal  source of income to a bank  holding  company.  Federal  rules limit a
bank's ability to pay dividends to its parent bank holding  company in excess of
amounts  generally  equal to the bank's net profits  from the current  year plus
retained net profits for the  preceding two years or if the payment would result
in  the  bank  being  considered  "undercapitalized"  under  regulatory  capital
guidelines. Bank regulatory agencies also have authority to prohibit a bank from
engaging in activities  that, in the opinion of the applicable  bank  regulatory
authority, constitute unsafe or unsound practices in conducting its business. It
is possible,  depending upon the financial condition of the bank in question and
other factors,  that the applicable bank regulatory  authority could assert that
the payment of dividends or other payments might, under some  circumstances,  be
such an unsafe or unsound  practice.  At December  31, 2002  approximately  $9.4
million of  retained  earnings  were  available  for Bank  dividend  declaration
without prior regulatory approval.

Community Reinvestment Act and Fair Lending Developments. The Bank is subject to
certain fair lending  requirements  and  reporting  obligations  involving  home
mortgage lending operations and Community  Reinvestment Act ("CRA")  activities.
The CRA generally  requires the Federal banking  agencies to evaluate the record
of a financial institution in meeting the credit needs of its local communities,
including low- and  moderate-income  areas. A bank may be subject to substantial
penalties and corrective  measures for a violation of certain fair lending laws.
The  Federal  banking  agencies  may  take  compliance  with  such  laws and CRA
obligations into account when regulating and supervising other activities of the
Bank.   A  Bank's   compliance   with  its  CRA   obligations   is  based  on  a
performance-based  evaluation  system  that  bases CRA  ratings  on its  lending
service and  investment  performance.  When a bank holding  company  applies for
approval to acquire a bank or other bank holding  company,  the Federal  Reserve
will review the assessment of each subsidiary bank of the applicant bank holding
company,  and such  records  may be the basis for denying  the  application.  In
connection  with  its  assessment  of  CRA  performance,  the  appropriate  bank
regulatory agency assigns a rating of "outstanding,"  "satisfactory,"  "needs to
improve,"  or  "substantial  noncompliance."  As a result of its most recent CRA
assessment, the Bank was rated satisfactory under this rating system.

Deposit  Insurance.  Through the Bank Insurance Fund (the "BIF") and the Savings
Association  Insurance  Fund (the "SAIF"),  the FDIC insures the deposits of the
Bank  up to  prescribed  limits  for  each  depositor.  FDIC-insured  depository
institutions  that are  members of the BIF and SAIF pay  insurance  premiums  at
rates based on their assessment risk classification, which is determined in part
based on the  institution's  capital ratios and in part on factors that the FDIC
deems relevant to determine the risk of loss to the insurance funds.  Assessment
rates currently  range from zero to 27 cents per $100 of deposits.  The FDIC may
increase or decrease the  assessment  rate schedule on a semi-annual  basis.  An
increase  in the  assessment  rate could have a material  adverse  effect on our
earnings,  depending  on the amount of the  increase.  The FDIC may  terminate a
depository  institution's  deposit insurance upon a finding by the FDIC that the
institution's  financial  condition is unsafe or unsound or that the institution
has engaged in unsafe or unsound  practices or has violated any applicable rule,
regulation,   order  or  condition  enacted  or  imposed  by  the  institution's
regulatory  agency. The termination of deposit insurance for the Bank could have
a material adverse effect on our earnings.
<PAGE>

All  FDIC-insured  depository  institutions  must pay an  annual  assessment  to
provide  funds for the  payment of  interest  on bonds  issued by the  Financing
Corporation,  a Federal corporation chartered under the authority of the Federal
Housing  Finance  Board.  The bonds,  commonly  referred to as FICO bonds,  were
issued to capitalize  the Federal  Savings and Loan Insurance  Corporation.  The
FDIC  established the FICO assessment  rates effective for the fourth quarter of
2002 at approximately $.0084 per $100 annually for assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the  FDIC's   insurance  funds  and  do  not  vary  depending  on  a  depository
institution's capitalization or supervisory evaluations.

Cross-Guarantee.  The Financial  Institutions,  Reform, Recovery and Enforcement
Act of  1989  provides  for  cross-guarantees  of  the  liabilities  of  insured
depository  institutions pursuant to which any bank subsidiary of a bank holding
company may be required to reimburse the FDIC for any loss or  anticipated  loss
to the FDIC that arises from a default of any of such  holding  company's  other
subsidiary  banks or  assistance  provided to such an  institution  in danger of
default.

Support of Banks.  Bank  holding  companies  are also  subject to the "source of
strength doctrine" which requires such holding companies to serve as a source of
"financial and managerial"  strength for their  subsidiary  banks and to conduct
its  operations  in a safe and sound  manner.  Additionally,  it is the  Federal
Reserve's  policy  that in serving  as a source of  strength  to its  subsidiary
banks, a bank holding  company should stand ready to use available  resources to
provide  adequate  capital  funds to its  subsidiary  banks  during  periods  of
financial stress or adversity and should maintain the financial  flexibility and
capital-raising  capacity  to obtain  additional  resources  for  assisting  its
subsidiary  banks. A bank holding  company's  failure to meet its obligations to
serve  as a source  of  strength  to its  subsidiary  banks  will  generally  be
considered by the Federal Reserve to be an unsafe and unsound  banking  practice
or a violation of the Federal Reserve's regulations or both.

Registration with the Securities and Exchange  Commission.  BNCCORP's securities
are registered  with the Securities  and Exchange  Commission  ("SEC") under the
Exchange  Act.  As  such,   BNCCORP  is  subject  to  the   information,   proxy
solicitation,  insider trading and other  requirements  and  restrictions of the
Exchange Act.

Conservator  and  Receivership  Powers.  Federal  banking  regulators have broad
authority to place depository  institutions into conservatorship or receivership
to include,  among  other  things,  appointment  of the FDIC as  conservator  or
receiver of an undercapitalized institution under certain circumstances.  If the
Bank  were  placed  into   conservatorship  or  receivership,   because  of  the
cross-guarantee  provisions of the Federal  Deposit  Insurance  Act, as amended,
BNCCORP,  as the sole  stockholder of the Bank, would likely lose its investment
in the Bank.

Bank Secrecy Act. The Bank Secrecy Act requires  financial  institutions to keep
records and file reports that are determined to have a high degree of usefulness
in  criminal,  tax  and  regulatory  matters,  and  to  implement  counter-money
laundering programs and compliance procedures.

Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein,  the Bank is also subject to certain  consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not  limited to, the Truth in Lending  Act,  the Truth in Savings  Act,  the
Electronic Funds Transfer Act, the Expedited Funds  Availability  Act, the Equal
Credit  Opportunity  Act,  the Home  Mortgage  Disclosure  Act,  the Real Estate
Settlement  Procedures  Act, the Fair Credit  Reporting  Act, the Flood Disaster
Protection  Act, the Fair  Housing Act and the Right to  Financial  Privacy Act.
These laws mandate certain  disclosure  requirements  and regulate the manner in
which  financial  institutions  must deal with customers when taking deposits or
making loans to such customers.

Gramm-Leach-Bliley  Act. The  Gramm-Leach-Bliley Act signed into law on November
12, 1999 (the  "Financial  Modernization  Act") has expanded the powers of banks
and bank holding companies to sell any financial product or service,  closed the
unitary thrift loophole,  reformed the Federal Home Loan Bank ("FHLB") System to
increase  community  banks'  access  to  loan  funding,   protected  banks  from
discriminatory  state  insurance  regulation and established a new framework for
the  regulation  of bank and  bank  holding  company  securities  brokerage  and
underwriting  activities.  The  Financial  Modernization  Act also  included new
provisions   in  the  privacy  area,   restricting   the  ability  of  financial
institutions  to  share  nonpublic  personal  customer  information  with  third
parties.  We have been  reviewing  implementing  regulations  and other guidance
issued by bank  regulatory  agencies in response to the Financial  Modernization
Act and establishing  policies,  procedures and programs required or recommended
by such regulations and guidelines.
<PAGE>

USA Patriot Act of 2001.  Enacted in  response to the  terrorist  attacks in New
York,  Pennsylvania and Washington,  D.C. on September 11, 2001, the USA Patriot
Act of 2001 (the "Patriot Act") is intended to strengthen U.S. law enforcement's
and the intelligence communities' ability to work cohesively to combat terrorism
on a variety of fronts.  The  potential  impact of the Patriot Act on  financial
institutions  of all kinds is  significant  and wide  ranging.  The  Patriot Act
contains  sweeping  anti-money  laundering and financial  transparency  laws and
requires various regulations including: due diligence requirements for financial
institutions  that  administer,  maintain  or manage  private  bank  accounts or
correspondent  accounts for non-U.S.  persons;  standards for verifying customer
identification  at the time of account  opening;  rules to  promote  cooperation
among  financial  institutions,  regulators,  and law  enforcement  entities  in
identifying  parties  that may be involved  in  terrorism  or money  laundering;
reports by nonfinancial trades and business filed with the Treasury Department's
Financial Crimes  Enforcement  Network for transactions  exceeding  $10,000 and;
filing of suspicious  activity  reports by brokers and dealers if they believe a
customer  may be  violating  U.S.  laws  and  regulations.  The  impact  on bank
operations from the Patriot Act will ultimately depend on the types of customers
served by the bank and the form that issued and pending  regulations  ultimately
take.

Changing Regulatory Structure.  The Federal Reserve, OCC and FDIC have extensive
authority to police  unsafe or unsound  practices  and  violations of applicable
laws and regulations by depository institutions and their holding companies. The
agencies' authority has been expanded by federal legislation in recent years. In
addition,  state banking authorities  possess  significant  authority to address
violations of their state's banking laws by banks operating in their  respective
states by enforcement and other supervisory actions.

As indicated  above,  the laws and regulations  affecting banks and bank holding
companies are numerous and have changed  significantly in recent years. There is
reason to expect  that  changes  will  continue  in the  future,  although it is
difficult  to predict  the outcome of these  changes or the impact such  changes
will have on us.

Economic  Conditions and Monetary Policy.  Profitability in our banking segment,
like most  financial  institutions,  is  primarily  dependent  on interest  rate
differentials. In general, the difference between the interest rates paid by the
Bank on interest-bearing  liabilities,  such as deposits and borrowings, and the
interest  rates  received by the Bank on its  interest-earning  assets,  such as
loans  extended  to clients and  securities  held in the  investment  portfolio,
comprise the major portion of the banking  segment's  earnings.  These rates are
highly sensitive to many factors that are beyond our control, such as inflation,
recession  and  unemployment,  and the impact  which  other  changes in economic
conditions might have on us cannot be predicted.

The monetary and fiscal  policies of the Federal  government and the policies of
the  regulatory  agencies,  particularly  the  Federal  Reserve,  influence  our
business.  The  Federal  Reserve  implements  national  monetary  policies  with
objectives  such as  curbing  inflation  and  combating  recession  through  its
open-market  operations  in the U.S.  government  securities  by  adjusting  the
required  level of reserves for depository  institutions  subject to its reserve
requirements,  and by  varying  the  target  federal  funds and  discount  rates
applicable to borrowings by depository institutions.  The actions of the Federal
Reserve in these  areas  influence  the growth of bank  loans,  investments  and
deposits and also affect  interest rates earned on  interest-earning  assets and
paid on  interest-bearing  liabilities.  We cannot fully  predict the nature and
impact on BNC of any future changes in monetary and fiscal policies.

Employees

At December 31, 2002, we had 285 employees,  including 270 full-time  equivalent
employees.  None  of  our  employees  is  covered  by  a  collective  bargaining
agreement.  We consider our relationships with our employees to be satisfactory.
Approximate  employees  by  segment  were as follows as of  December  31,  2002:
banking, 161; insurance, 110; and brokerage/trust/financial, 14.

Factors That May Affect Future Results of Operations

In addition to the other  information  contained in this report,  the  following
risks may  affect  us. If any of these  risks  occur,  our  business,  financial
condition or operating results could be adversely affected.

Failure  to  Successfully  Execute  our  Growth,   Operating  and  Cross-Selling
Strategies.  Our financial  performance and profitability depends on our ability
to execute our corporate growth, operating and cross-selling strategies.  Future
acquisitions  and continued  growth can present  operating and other issues that
could have an adverse effect on our business, financial condition and results of
operations.  Our  financial  performance  will  also  depend on our  ability  to
maintain  profitable  operations  through  implementation  of  our  banking  and
financial services philosophies, including our efforts to cross-sell our various
products and services, which were described earlier.  Therefore, there can be no
assurance that we will be able to execute our growth and operating strategies or
maintain any particular level of profitability.


<PAGE>

Regional  Presences,  Related  Economic  Conditions  and Credit  Concentrations.
Although our operations are presently  somewhat  geographically  disbursed,  our
focus in the Arizona,  Minnesota and North Dakota regions could adversely affect
our results of  operations  if economic and business  conditions in any of these
regions were to exhibit weaknesses.  A prolonged decline in economic or business
conditions  in our market areas,  in particular in those  industries in which we
have credit  concentrations,  could have a material impact on the quality of our
loan portfolio or the demand for our other products and services,  which in turn
may have a material  adverse  effect on our results of  operations.  A continued
weakening in the national  economy  might further  exacerbate  local or regional
economic conditions. The extent of the future impact of these events on economic
and business conditions cannot be predicted.

Changes in Market Interest Rates.  Changing  interest rates impact our earnings.
Changes in interest rates impact the demand for new loans, the credit profile of
existing  loans,  the rates received on loans and investment  securities,  rates
paid on deposits and borrowings  and the value of our  derivative  contracts and
their associated impact on earnings. The relationship between the rates received
on loans and investment securities and the rates paid on deposits and borrowings
is  known  as  interest  rate  spread.  Given  our  current  volume  and  mix of
interest-earning assets,  interest-bearing liabilities and derivative contracts,
our interest rate spread could be expected to increase  during periods of rising
interest rates and to decline during periods of falling interest rates. Although
we believe our current level of interest  rate  sensitivity  is  reasonable  and
effectively  managed,  significant  fluctuations  in interest  rates may have an
adverse effect on our business, financial condition and results of operations.

Government Regulation. The financial services industry is extensively regulated.
Federal  and state  regulation  is  designed  primarily  to protect  the deposit
insurance  funds  and  consumers,  and not to  benefit  our  shareholders.  Such
regulations  can at times  impose  significant  limitations  on our  operations.
Additionally,   these  regulations  are  constantly   evolving  and  may  change
significantly  over time.  Significant  new laws, such as those issued in recent
years,  or changes in or repeal of existing laws may cause our results to differ
materially.  Further,  Federal  monetary  policy,  particularly  as  implemented
through the Federal  Reserve  System,  significantly  affects  interest rate and
credit conditions, which are material considerations for us.

Competition.  The banking and financial services business is highly competitive.
We  face  competition  in  making  loans,   attracting  deposits  and  providing
insurance,  brokerage, trust and other financial services. Increased competition
in the banking and financial  services  businesses  may reduce our market share,
impair our growth or cause the prices we charge for our services to decline. Our
results of operations may differ in future periods  depending upon the level and
nature of competition we encounter in our various market areas.

Failure to Perform on Behalf of Borrowers,  Guarantors and Related  Parties.  We
encounter  significant  sources of risk from the possibility that losses will be
sustained  if a  significant  number of our  borrowers,  guarantors  and related
parties fail to perform in accordance with the terms of their loans, commitments
or  letters of  credit.  We have  adopted  underwriting  and  credit  monitoring
procedures and credit policies,  including the establishment and  methodological
review and  analysis  of the  allowance  for  credit  losses.  We believe  these
processes and procedures are  appropriate to minimize this risk by assessing the
likelihood of  nonperformance,  tracking loan  performance and  diversifying our
credit  portfolio.  These  policies  and  procedures,  however,  may not prevent
unexpected  losses  that  could  materially  adversely  affect  our  results  of
operations.  Additionally,  as noted  earlier,  the  performance  of  borrowers,
guarantors and related parties can be negatively impacted by prevailing economic
conditions over which we have no control. Such negative impacts on these parties
could also materially adversely affect our results of operations.


Item 2. Properties

The principal offices of BNCCORP are located at 322 East Main Avenue,  Bismarck,
North Dakota.  The Bank owns the building.  The principal  office of the Bank is
located at 660 South Mill  Avenue,  Tempe,  Arizona.  The Bank also owns  branch
offices at 219 South 3rd Street and 807 East  Century  Avenue and an  additional
office  building at 116 North 4th Street in  Bismarck.  It also owns its banking
facilities in Crosby, Ellendale,  Kenmare, Linton and Stanley, North Dakota. The
Bank is  presently  constructing  an office  building at 17045 North  Scottsdale
Road, Scottsdale, Arizona.

The Bank's  facilities  at 502 West Main Street  (Mandan),  Garrison and Watford
City, North Dakota are leased.  The facilities  occupied by the Bank and BNC AMI
at 333 South Seventh Street,  Minneapolis,  Minnesota, and the Bank's facilities
at 640 and 660 South Mill Avenue, Tempe, Arizona, along with 2725 East Camelback
Road, Phoenix, Arizona are also leased.

Milne Scali  occupies  three  locations in Arizona:  1750 East Glendale  Avenue,
Phoenix, 4515 S. McClintock,  Tempe, and 2400 East Highway 89A, Cottonwood.  All
of  these  facilities  are  presently  leased.  See  Notes  22  and  27  to  the
Consolidated  Financial  Statements  included  under  Item  8  of  Part  II  for
information  related  to the  pending  purchase  of the  building  at 1750  East
Glendale Avenue in Phoenix, a related party transaction.
<PAGE>

We  believe  that all  owned  and  leased  properties  are well  maintained  and
considered in good  operating  condition.  They,  along with the property  being
constructed in Scottsdale,  are believed  adequate for the Company's present and
foreseeable  future  operations;  however,  future expansion could result in the
leasing or  construction  of additional  properties.  We do not  anticipate  any
difficulty  in renewing  our leases or leasing  additional  suitable  space upon
expiration of present  lease terms.  See Note 27 to the  Consolidated  Financial
Statements  included  under  Item  8  of  Part  II  for  additional  information
concerning our present lease commitments.


Item 3. Legal Proceedings

From time to time,  we may be a party to legal  proceedings  arising  out of our
lending,  deposit  operations  or other  activities.  We engage  in  foreclosure
proceedings  and  other  collection  actions  as  part  of our  loan  collection
activities.  From time to time,  borrowers may also bring actions against us, in
some  cases  claiming  damages.  Some  financial  services  companies  have been
subjected to significant exposure in connection with litigation, including class
action  litigation  and punitive  damage  claims.  While we are not aware of any
actions or allegations that should  reasonably give rise to any material adverse
effect,  it is possible  that we could be subjected to such a claim in an amount
that could be material.  Based upon a review with our legal counsel,  we believe
that the ultimate  disposition  of pending  litigation  will not have a material
effect on our financial condition, results of operations or cash flows.


Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter ended
December 31, 2002.


                                     PART II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
         Matters

BNCCORP's common stock, $.01 par value ("Common Stock"), is traded on the Nasdaq
Stock Market under the symbol "BNCC."

The following  table lists the high and low sales prices of our Common Stock for
the periods indicated as reported by the Nasdaq Stock Market. The quotes reflect
the high and low  closing  sales  prices for our  Common  Stock as  reported  by
Nasdaq.
<TABLE>
<CAPTION>

                            2002              2001
                     -----------------  ------------------
  Period              High      Low      High       Low
                     -------   -------  --------   -------
<S>                   <C>       <C>       <C>       <C>
First Quarter......   $8.90     $7.28     $8.56     $5.94
Second Quarter.....    8.60      7.47      9.50      7.00
Third Quarter......    7.75      5.49      9.41      7.51
Fourth Quarter.....    8.03      5.25      8.45      7.28
</TABLE>

On March 14, 2003, there were 117 record holders of the Company's Common Stock.

BNCCORP's  policy  is to  retain  its  earnings  to  support  the  growth of its
business. Our board of directors has never declared cash dividends on our Common
Stock  and does not  plan to do so in the  foreseeable  future.  In  making  the
determination to pay dividends, we will consider all relevant factors including,
among other  things,  our capital  position and current tax law as it relates to
the treatment of dividends. The ability of BNCCORP to pay cash dividends largely
depends  on the  amount  of  cash  dividends  paid  to it by the  Bank.  Capital
distributions,   including  dividends,  by  the  Bank  are  subject  to  federal
regulatory restrictions tied to the bank's earnings and capital. Approval of the
OCC,  the Bank's  principal  regulator,  would be  required  for the Bank to pay
dividends  in  excess of the  Bank's  net  profits  from the  current  year plus
retained  net  profits  for  the  preceding  two  years.  See  "Supervision  and
Regulation-Dividend Restrictions" included under Item 1 of Part I.
<PAGE>

Equity-Based  Compensation  Plans.  The following table  summarizes  information
relative to our equity-based compensation plans as of December 31, 2002:
<TABLE>
<CAPTION>

                               (a)                   (b)                 (c)
                        ------------------   -----------------  -----------------------
                        Number of securities                     Number of securities
                         to be issued upon    Weighted-average   remaining available
                            exercise of        exercise price    for future issuance
                            outstanding        of outstanding       under equity
                              options,             options,       compensation plans
                           warrants and         warrants and    (excluding securities
    Plan Category             rights               rights       reflected in column (a))
----------------------  ------------------   -----------------  -----------------------
<S>                     <C>                  <C>                <C>
Equity compensation
plans approved by
security holders              173,935              $10.48               169,717 (1)
----------------------  ------------------   -----------------  -----------------------
Equity compensation
plans not approved
by security holders             N/A                 N/A                   N/A

----------------------
<FN>
(1)  Shares  may be issued  under  our 1995 and 2002  stock  incentive  plans as
restricted  stock or stock based awards  (which  awards are based in whole or in
part on the value of our common stock).
</FN>

</TABLE>

Item 6. Selected Financial Data

The selected  consolidated  financial  data  presented  below under the captions
"Income  Statement  Data" and "Balance Sheet Data" as of and for the years ended
December 31, 2002,  2001,  2000,  1999 and 1998 are derived from the  historical
audited  consolidated  financial  statements  of the Company.  The  Consolidated
Balance  Sheets  as of  December  31,  2002,  2001  and  2000,  and the  related
Consolidated  Statements of Income,  Comprehensive Income,  Stockholders' Equity
and Cash Flows for each of the three years in the period ended December 31, 2002
were  audited by KPMG LLP,  independent  public  accountants.  The  Consolidated
Balance  Sheets as of December  31,  1999 and 1998 and the related  Consolidated
Statements of Income,  Comprehensive Income, Stockholders' Equity and Cash Flows
for each of the two years in the period ended  December 31, 1999 were audited by
Arthur Andersen LLP,  independent public accountants who have ceased operations.
The financial data below should be read in conjunction with and are qualified by
the Consolidated  Financial Statements and the notes thereto included under Item
8.

<PAGE>
<TABLE>
<CAPTION>
                           Selected Financial Data (1)
                                                                For the Years Ended December 31,
                                                ---------------------------------------------------------------
                                                     2002       2001         2000          1999         1998
                                                ----------   ----------   ----------   ----------   -----------
                                                (dollars in thousands, except share and per share data)
<S>                                             <C>          <C>          <C>          <C>          <C>
Income Statement Data:
Total interest income.......................... $   31,818   $   37,586   $   40,658   $   28,535   $   27,801
Total interest expense.........................     16,907       22,656       27,280       16,438       15,152
                                                ----------   ----------   ----------   ----------   ----------
Net interest income............................     14,911       14,930       13,378       12,097       12,649
Provision for credit losses....................      1,202        1,699        1,202        1,138        1,201
Noninterest income.............................     16,296        8,714        7,683        6,028        4,843
Noninterest expense............................     27,158       19,559       16,220       17,435       13,342
Income tax provision (benefit).................        822          691        1,183         (193)       1,017
                                                ----------   ----------   ----------   ----------   ----------
Income (loss) from continuing operations....... $    2,025   $    1,695   $    2,456   $     (255)  $    1,932
                                                ==========   ==========   ==========   ==========   ==========
Balance Sheet Data: (at end of period)
Total assets................................... $  602,228   $  555,967   $  547,447   $  445,232   $  372,227
Federal Reserve Bank and Federal
 Home Loan Bank stock..........................      7,071        7,380        9,619        5,643        3,512
Loans, net of unearned income..................    335,794      297,924      252,753      254,009      247,181
Allowance for credit losses....................     (5,006)      (4,325)      (3,588)      (2,872)      (2,854)
Total deposits.................................    398,245      375,277      330,894      316,772      284,499
Short-term borrowings..........................     28,120          760       33,228        2,200        7,790
Federal Home Loan Bank advances................     97,200      117,200      117,200       86,500       41,500
Long-term borrowings...........................      8,561           13       12,642       14,470        9,195
Guaranteed preferred beneficial interests
 in Company's subordinated debentures..........     22,326       22,244        7,606           --           --
Common stockholders' equity....................     36,223       30,679       29,457       23,149       25,255
Book value per common share outstanding........ $    13.41   $    12.79   $    12.30   $     9.65   $    10.57
Earnings Performance/Share Data(1):
Return on average total assets.................      0.36%        0.31%        0.47%      (0.07)%        0.55%
Return on average common stockholders' equity..      5.77%        5.51%       10.02%      (1.22)%        8.71%
Net interest margin............................      2.87%        2.90%        2.73%        3.38%        3.88%
Net interest spread............................      2.50%        2.40%        2.40%        3.07%        3.43%
Basic earnings (loss) per common share (1)..... $     0.74   $     0.71   $     1.02   $    (0.11)  $     0.81
Diluted earnings (loss) per common share (1)... $     0.74   $     0.70   $     1.02   $    (0.11)  $     0.77
Cash dividends per common share................         --           --           --           --           --
Cash dividends per preferred share............. $   526.67           --           --           --           --
Total cash dividends - preferred stock......... $       79           --           --           --           --
Average common shares outstanding..............  2,611,629    2,395,353    2,397,356    2,406,618    2,397,340
Average common and common equivalent shares....  2,628,798    2,421,113    2,398,553    2,407,018    2,503,535
Shares outstanding at yearend..................  2,700,929    2,399,170    2,395,030    2,399,980    2,390,184
Balance Sheet and Other Key Ratios (1):
Nonperforming assets to total assets...........      1.27%        0.80%        0.12%        0.64%        1.21%
Nonperforming loans to total loans.............      2.27%        1.47%        0.23%        0.65%        0.97%
Net loan charge-offs to average loans..........    (0.17)%      (0.33)%      (0.20)%      (0.46)%      (0.54)%
Allowance for credit losses to total loans.....      1.49%        1.45%        1.42%        1.13%        1.15%
Allowance for credit losses to nonperforming
 loans.........................................        66%          99%         619%         173%         119%
Average common stockholders' equity to average
 total assets..................................      5.93%        5.64%        4.71%        5.48%        6.33%
-------------------------
<FN>
(1) From continuing operations for all periods presented.
</FN>
</TABLE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

Overview

The following table summarizes income from continuing operations, net income and
basic and diluted  earnings per share for the twelve  months  ended  December 31
(amounts in thousands):
<TABLE>
<CAPTION>

                                          2002          2001         2000
                                      ------------  -----------  ------------
<S>                                     <C>          <C>          <C>
Income from continuing operations...    $   2,025    $   1,695    $    2,456
Net income..........................        2,039        1,245         2,297
Basic earnings per common share.....         0.75         0.52          0.96
Diluted earnings per common share...         0.75         0.51          0.96
</TABLE>
<PAGE>

2002 vs.  2001.  Strategic  initiatives  we pursued in recent  years,  including
diversifying our sources of business, focusing on what we believe are attractive
and growing core markets and managing for long-term  shareholder value generated
favorable results in 2002, particularly in the third and fourth quarters.

Net income for 2002 rose 64 percent, to $2.04 million, or $0.75 per common share
on a diluted basis,  compared with $1.25  million,  or $0.51 per share for 2001.
Our growth in earnings was primarily due to net income from insurance operations
of $1.03 million,  reflecting the  acquisition of Milne Scali in April 2002. The
results included income from  discontinued  operations of our former Fargo, N.D.
branch  office of $0.01 per  share in 2002,  and a loss of $0.08 per share  from
such operations in 2001. The 2001 results also included extraordinary charges of
$0.06 per share on early  extinguishment of debt and $0.05 for cumulative effect
of a change in accounting principle.

Net interest income remained relatively constant,  at $14.9 million in both 2002
and 2001. Net interest  income  included  mark-to-market  losses on the value of
derivative  contracts totaling  ($779,000) in 2002 and ($184,000) in 2001. These
losses are subject to  fluctuations  based on changes in interest  rates and the
associated  value of the  derivative  contracts.  Excluding  the  impact  of the
mark-to-market  losses,  net interest  income would have  increased  3.8 percent
year-over-year.

Demonstrating the benefits of our diverse business base,  noninterest income was
up 87 percent  year-over-year,  to $16.3  million for 2002.  Noninterest  income
represented 52.2 percent of gross revenues this year,  increasing  substantially
from 36.9 percent in 2001,  and  exceeding  our  internal  target of 50 percent.
Insurance  commissions,  largely  produced  by Milne  Scali,  were  the  largest
component of noninterest income in 2002. Loan fees, gains on sales of securities
and service  charges  also  increased  compared  to 2001,  while  brokerage  and
trust/financial services income declined.

Noninterest  expense was $27.2 million,  an increase of nearly 39 percent versus
2001. This primarily reflected our expanded banking and insurance  operations in
Arizona and the winding  down of the Fargo  office of our BNC AMI  subsidiary  -
actions that are expected to enhance  profitability in the future. In any event,
the rate of growth in both net income and  noninterest  income exceeded the rise
in noninterest expense.

Total assets  reached $602.2 million at December 31, 2002, up 8.3 percent from a
year ago. Total loans increased by 12.7 percent, to $335.8 million at the end of
2002,  while  total  deposits  rose 6.1  percent to $398.2  million.  All stated
amounts reflect continuing  operations.  Reflecting the success of our expansion
into new markets, the Arizona operations of the Bank accounted for approximately
28 percent of total loans and 12 percent of total deposits at the end of 2002.

Maintaining  sound asset  quality  continued to be a focus for us. The provision
for credit  losses was $1.2  million for 2002 versus $1.7  million for the prior
year.  Loan  charge-offs in 2002 were  $657,000,  or about one-half the level of
2001.  The allowance for credit losses as a percentage of total loans at the end
of 2002 was 1.49 percent,  nearly even with 1.45 percent one year ago. The ratio
of  nonperforming  assets to total assets was 1.27 percent at December 31, 2002,
compared  with  the  year-end  2001  level  of 0.80  percent.  The  ratio of the
allowance for credit losses to total  nonperforming  loans was 66 percent and 99
percent at December 31, 2002 and 2001, respectively.

Total common  stockholders'  equity was approximately  $36.2 million at December
31, 2002,  equivalent  to book value per common share of $13.41  (tangible  book
value  per  common  share of  $5.60).  Net  unrealized  gains in our  investment
portfolio as of December  31, 2002 were nearly $4.4  million,  or  approximately
$1.62 per share, on a pretax basis.

During  2002,  we  undertook  a series  of  actions  to  sharpen  the  focus and
strengthen  the  performance  of each of our  three  core  businesses:  banking,
insurance and brokerage/trust/financial services.

In banking, we sold our Fargo, N.D. branch allowing us to redeploy our resources
in markets we believe present greater potential for profitability.

In  insurance,  the  acquisition  of Milne  Scali in the second  quarter of 2002
significantly  increased the scale of our  insurance  business and that business
has already begun to generate encouraging earnings.

In brokerage/trust/financial services, in order to enhance the financial options
available  to our  customers,  we  formed  a  relationship  with  Raymond  James
Financial  Services,  Inc. We also reorganized the management and office network
of BNC AMI to improve the productivity of this aspect of our business.

We believe  that we have  achieved our goal of building a  diversified  business
base, which has long been a cornerstone of our strategy.  We believe each of our
core  businesses  is now well defined and well  positioned to serve the needs of
our  customers,   while  contributing  to  our  long-term   corporate  financial
performance and share value creation.
<PAGE>

We  believe  that our  record  financial  performance  in the third  and  fourth
quarters of 2002 provides a meaningful indication of our earnings potential.  Of
the $2.04  million in net income we recorded  for the year,  most was  generated
during the second half of the year. Looking ahead to 2003, we expect to derive a
full year of benefit from our investments in expanding our insurance operations,
implementing  programs to  encourage  cross-selling  across all of our  business
lines and controlling overhead.

2001 vs. 2000. We reported income from continuing operations of $1.7 million for
2001,  or $0.70 per share on a diluted  basis.  This  compares  with income from
continuing  operations for 2000 of $2.5 million, or $1.02 per share. The results
for  2001  reflected  double-digit  growth  in  both  net  interest  income  and
noninterest income, but also higher noninterest expense due to the establishment
of our Tempe, Arizona operations and the issuance of trust preferred securities.
Net income  for 2001 was $1.2  million,  or $0.51 per share on a diluted  basis,
after a loss on operations of our discontinued  Fargo,  N.D. branch of $0.08, an
extraordinary  loss on early  extinguishment  of debt of $0.06  per  share and a
charge for the  cumulative  effect of a change in accounting  principle of $0.05
per share.  For 2000,  net income was nearly $2.3  million,  or $0.96 per share,
although this reflected a gain on disposal of our asset-based lending subsidiary
of  $0.07  per  share,  a  loss  of  $0.24  per  share  from  operations  of the
discontinued  Fargo,  N.D branch and a gain on early  extinguishment  of debt of
$0.11 per share.

Our results for 2001 reflected our strategic  diversification of revenue sources
and active asset-liability  management. Net interest income increased 12 percent
to $14.9 million, as we continued to shift our earning asset mix from investment
securities  to loans while  growing the deposit base.  Gains  generated  through
management of the investment  portfolio  were  reflected in noninterest  income,
which rose 13 percent to $8.7 million. Other noninterest income items, including
loan fees, insurance commissions and income from brokerage,  trust and financial
services, held relatively stable or declined slightly.

Noninterest  expense was $19.6 million for 2001, a 21 percent  increase from the
previous year, again  reflecting our Arizona  initiative and expenses related to
trust preferred securities.  In particular,  we view the cost of operations such
as our Arizona  operations  as an important  investment  in growth.  Unlike many
companies,  we have  typically  expanded by  establishing  wholly new operations
rather  than  making  acquisitions.  In these  particular  cases,  we record the
investment  needed to operate in new  markets as an expense,  whereas  companies
that depend on acquisition for growth are able to recognize much of their "entry
cost" as goodwill.

The  benefits of our  investment  in building  new markets  were  evident in our
strong loan and deposit  growth during 2001.  Total loans rose 18 percent during
the twelve  months ended  December  31, 2001,  reaching  $297.9  million.  Total
deposits increased 13 percent over the 2000 level, to $375.3 million at December
31, 2001.  Significantly,  some 90 percent of the new loan volume and 19 percent
of the deposit  increase  were  generated by our new Arizona  operations.  Total
assets increased $15.0 million to $585.1 million at December 31, 2001.

Responding to the weaknesses  felt by many sectors of the nation's  economy,  we
continued to focus on  maintaining  credit  quality.  The  provision  for credit
losses was  increased to $1.7  million in 2001,  from $1.2 million for the prior
year.  The  allowance  for credit losses as a percentage of total loans was 1.45
percent at December 31,  2001,  increasing  slightly  from 1.42 percent one year
earlier.  The ratio of nonperforming  assets to total assets was 0.80 percent at
December 31, 2001,  compared  with 0.12 percent at year-end  2000.  The ratio of
allowance  for  credit  losses to total  nonperforming  loans was 99  percent at
December 31, 2001, compared with 619 percent one year earlier.

Total common  stockholders'  equity was approximately  $30.7 million at December
31, 2001,  equivalent  to book value per common share of $12.79  (tangible  book
value per  common  share of  $11.88).  Net  unrealized  gains in our  investment
portfolio as of December  31, 2001 were nearly $2.7  million,  or  approximately
$1.11 per share, on a pretax basis.


Results of Operations

Net Interest Income.  Net interest income, the difference between total interest
income  earned on  interest-earning  assets and total  interest  expense paid on
interest-bearing  liabilities,  is  the  banking  segment's  primary  source  of
earnings. The amount of net interest income is affected by changes in the volume
and mix of earning assets, the level of rates earned on those assets, the volume
and mix of  interest-bearing  liabilities  and the level of rates  paid on those
liabilities.

The following table sets forth, for the periods indicated,  certain  information
relating to our average  balance sheet and reflects the yield on average  assets
and cost of average  liabilities.  Such yields and costs are derived by dividing
income and expense by the average balance of assets and liabilities. All average
balances have been derived from monthly averages,  which are indicative of daily
averages.
<PAGE>
<TABLE>
<CAPTION>
                Analysis of Average Balances, Interest and Yields/Rates (1)
                                                       For the Years ended December 31,
                                ----------------------------------------------------------------------------------
                                            2002                         2001                     2000
                                ---------------------------  -------------------------- --------------------------
                                          Interest  Average           Interest  Average          Interest  Average
                                          earned     yield             earned    Yield             earned    yield
                                Average     or        or     Average     or       or     Average    or        or
                                balance    paid      cost    balance    paid     cost    balance   paid      cost
                                -------   -------- --------  --------  -------- -------  -------  -------  -------
                                                    (dollars in thousands)
<S>                             <C>       <C>      <C>       <C>       <C>      <C>      <C>      <C>      <C>
Assets
  Federal funds sold/interest-
   bearing due from........... $  3,795   $    66    1.74%   $  1,830   $    50   2.73%  $  5,660  $   242   4.28%
  Taxable investments.........  193,972     9,997    5.15%    206,572    12,716   6.16%   225,559   16,054   7.12%
  Tax-exempt investments......   19,979       977    4.89%     16,452       829   5.04%    17,624      940   5.33%
  Loans and leases (2)........  307,227    20,778    6.76%    293,716    23,991   8.17%   244,526   23,422   9.58%
  Allowance for credit losses.   (4,579)       --              (4,153)       --            (3,405)      --
                               --------   -------            --------   -------          --------  -------
     Total interest-earning
     assets (3)...............  520,394    31,818    6.11%    514,417    37,586   7.31%   489,964   40,658   8.30%
  Noninterest-earning assets:
     Cash and due from banks..   13,706                        11,997                       8,939
     Other....................   34,946                        19,388                      21,848
                               --------                      --------                    --------
    Total assets from
      continuing operations...  569,046                       545,802                     520,751
    Assets from discontinued
      Fargo branch............   22,258                        22,270                      17,003
                               --------                      --------                    --------
         Total assets......... $591,304                      $568,072                    $537,754
                               ========                      ========                    ========

Liabilities and Stockholders'
 Equity
  Deposits:
    Interest checking and
      money market accounts... $174,108     2,849    1.64%   $147,775     4,669   3.16%  $130,007    6,913   5.32%
    Savings...................    4,511        39    0.86%      3,758        56   1.49%     4,042       84   2.08%
  Certificates of deposit:
    Under $100,000............  104,964     4,068    3.88%     98,639     5,280   5.35%   101,624    5,768   5.68%
    $100,000 and over.........   73,639     3,286    4.46%     73,806     4,248   5.76%    54,592    3,263   5.98%
                               --------   -------            --------   -------          --------  -------
  Total interest-bearing
    deposits..................  357,222    10,242    2.87%    323,978    14,253   4.40%   290,265   16,028   5.52%
  Borrowings:
    Short-term borrowings.....    7,799       141    1.81%     10,206       441   4.32%     3,459      234   6.76%
    FHLB advances.............   97,711     6,214    6.36%    118,705     7,185   6.05%   154,784    9,766   6.31%
    Long-term borrowings......    6,063       310    5.11%      8,378       777   9.27%    13,497    1,252   9.28%
                               --------   -------            --------   -------          --------  -------
  Total interest-bearing
    liabilities...............  468,795    16,907    3.61%    461,267    22,656   4.91%   462,005   27,280   5.90%
      Noninterest-bearing
       demand accounts........   33,951                        28,474                      26,953
                               --------                      --------                    --------
       Total deposits and
        interest-bearing
        liabilities...........  502,746                       489,741                     488,958
Other noninterest-bearing
  liabilities.................   11,336                         8,765                       5,666
Liabilities from discontinued
  Fargo branch................   20,476                        24,654                      15,516
                               --------                      --------                    --------
         Total liabilities....  534,558                       523,160                     510,140
Subordinated debentures.......   22,056                        13,542                       3,108
Stockholders' equity..........   34,690                        31,370                      24,506
                               --------                      --------                    --------
         Total liabilities
          and stockholders'
          equity.............. $591,304                      $568,072                    $537,754
                               ========                      ========                    ========
Net interest income...........            $14,911                       $14,930                    $13,378
                                          =======                       =======                    =======
Net interest spread...........                       2.50%                        2.40%                      2.40%
                                                    ======                       ======                     ======
Net interest margin (4).......                       2.87%                        2.90%                      2.73%
                                                    ======                       ======                     ======
  Ratio of average
    interest-earning
    assets to average
    interest-bearing
    liabilities...............  111.01%                       111.52%                     106.35%
                               ========                      ========                    ========
 --------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>
<PAGE>

(2)  Average  balances of loans and leases include  nonaccrual loans and leases,
     and are presented net of unearned income.  Loan fee  amortization  totaling
     approximately  $1.3  million,  $812,000  and  $388,000  is included in loan
     interest  income for the twelve month periods ended December 31, 2002, 2001
     and 2000, respectively.

(3)  Tax-exempt  income was not significant and thus has not been presented on a
     taxable  equivalent  basis.  Tax-exempt  income of  $982,000,  $840,000 and
     $951,000 was recognized  during the years ended December 31, 2002, 2001 and
     2000, respectively.

(4)  Net  interest   margin  equals  net  interest  income  divided  by  average
     interest-earning assets for the period.

The following table illustrates, for the periods indicated, the dollar amount of
changes in our interest income and interest  expense for the major components of
interest-earning  assets  and  interest-bearing  liabilities  and  distinguishes
between the increase related to higher  outstanding  balances and the volatility
of interest  rates.  Changes  attributable  to the combined impact of volume and
rate have been  allocated  proportionately  to the  change due to volume and the
change due to rate:
<TABLE>
<CAPTION>
                       Analysis of Changes in Net Interest Income (1)
                                                  For the Years Ended December 31,
                                        -----------------------------------------------------
                                        2002 Compared to 2001          2001 Compared to 2000
                                        ----------------------       ------------------------
                                         Change Due to                 Change Due to
                                        -----------------            ---------------
                                        Volume    Rate       Total    Volume     Rate     Total
                                        ------- ---------  --------  --------  --------  --------
                                                        (in thousands)
<S>                                     <C>     <C>        <C>       <C>       <C>       <C>
Interest Earned on Interest-Earning
 Assets
  Federal funds sold/interest-bearing
   due from............................ $    24  $    (8)  $    16   $  (126)  $   (66)  $  (192)
  Investments..........................    (533)  (2,038)   (2,571)   (1,337)   (2,112)   (3,449)
  Loans................................   1,172   (4,385)   (3,213)    2,121    (1,552)      569
                                        -------- --------  --------  --------  --------  --------
    Total increase (decrease) in
     interest income...................     663   (6,431)   (5,768)      658    (3,730)   (3,072)
                                        -------- --------  --------  --------  --------  --------
Interest Expense on Interest-Bearing
 Liabilities
  Interest checking and money market
   accounts............................   1,067   (2,887)   (1,820)    1,139    (3,383)   (2,244)
  Savings..............................      16      (33)      (17)       (6)      (22)      (28)
  Certificates of Deposit:
    Under $100,000.....................     367   (1,579)   (1,212)     (166)     (322)     (488)
    $100,000 and over..................     (10)    (952)     (962)    1,101      (116)      985
  Short-term borrowings................     (87)    (213)     (300)      254       (47)      207
  FHLB advances........................  (1,361)     390      (971)   (2,198)     (383)   (2,581)
  Long-term borrowings.................    (178)    (289)     (467)     (475)       --      (475)
                                        -------- --------  --------  --------  --------  --------
  Total increase (decrease) in
   interest expense....................    (186)  (5,563)   (5,749)     (351)   (4,273)   (4,624)
                                        -------- --------  --------  --------  --------  --------
  Increase (decrease) in net interest
   income.............................. $   849  $  (868)  $   (19)  $ 1,009   $   543   $ 1,552
                                        ======== ========  ========  ========  ========  ========
---------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>
Year ended  December 31, 2002  compared to year ended  December  31,  2001.  Net
interest income decreased $19,000, or 0.1 percent, remaining relatively level at
$14.9 million.  Net interest spread and net interest margin adjusted to 2.50 and
2.87 percent,  respectively, for the twelve-month period ended December 31, 2002
from 2.40 and 2.90, respectively, for the twelve-month period ended December 31,
2001.

Net interest  income for the  twelve-month  periods ended  December 31, 2002 and
2001  reflected  mark-to-market  losses  on the  value of  derivative  contracts
totaling  ($779,000) and ($184,000),  respectively.  Without the  mark-to-market
adjustments  on these  derivative  contracts  for the two periods,  net interest
margin  would have been 3.01 percent for the twelve  months  ended  December 31,
2002 and 2.94 percent for the twelve months ended December 31, 2001.

The remaining fair value of our interest rate cap contracts on December 31, 2002
was  $136,000.  Therefore,  net  interest  income in future  periods can only be
negatively affected to that amount if the fair value of the contracts were to be
required to be written to $0. If the fair value of the derivative contracts were
to be  increased in future  periods due to increases in 3-month  LIBOR (the rate
upon which our current  cap  contracts  are based),  this would have a favorable
effect on net interest  income in those future periods as favorable  adjustments
to the fair  value of the  contracts  would be  reflected  as  reduced  interest
expense.
<PAGE>
The following  condensed  information  summarizes the major factors combining to
create  the  changes  to  net  interest  income,  spread  and  margin.  Lettered
explanations following the summary describe causes of the changes in these major
factors.
<TABLE>
<CAPTION>
                Net Interest Income Analysis - 2002 vs. 2001 (1)
                                                   For the Years
                                                 Ended December 31,        Change
                                                --------------------  ----------------
                                                  2002      2001
                                                ---------  ---------
                                                (amounts in millions)
<S>                                             <C>        <C>        <C>        <C>
Total interest income decreased.............    $  31.8    $  37.6    $  (5.8)   (15)%
  Due to:
    Decrease in yield on earnings assets....      6.11%      7.31%     (1.20)%   (16)%
  Driven by:
    Decreased yield on loans (a)............      6.76%      8.17%     (1.41)%   (17)%
    Decreased yield on investments (b)......      5.13%      6.07%     (0.94)%   (15)%
    The decreased yields were offset by:
    Increased average earning assets .......    $ 520.4    $ 514.4    $    6.0      1%
  Driven by:
    Increase in average loans (c)...........    $ 307.2    $ 293.7    $   13.5      5%
  Offset by:
    Decrease in average investments (d).....    $ 214.0    $ 223.0    $  (9.0)    (4)%

Total interest expense decreased............    $  16.9    $  22.7    $  (5.8)   (26)%
  Due to:
    Decrease in cost of interest-bearing
     liabilities............................      3.61%      4.91%     (1.30)%   (26)%
  Driven by:
    Decrease in cost of interest-bearing
     deposits (e)...........................      2.87%      4.40%     (1.53)%   (35)%
    Decrease in cost of borrowings (f)......      5.97%      6.12%     (0.15)%    (2)%
  These decreases in cost of interest-
   bearing liabilities were offset by:
    Increase in average interest-bearing
     liabilities............................    $ 468.8    $ 461.3    $    7.5      2%
  Driven by:
    Increase in average interest-bearing
     deposits (g)...........................    $ 357.2    $ 324.0    $   33.2     10%
  Offset by:
    Decrease in average borrowings (h)......    $ 111.6    $ 137.3    $  (25.7)  (19)%
--------------------
(1)  From continuing operations for all periods presented.

(a)  Our decreased loan yield is reflective of the significantly  lower interest
     rate  environment  during 2002.  The lower rate  environment  was caused by
     several Federal Reserve reductions in the Federal funds target rate causing
     prime rate to decrease  significantly during 2001 and continuing into 2002.
     The daily  average  prime rate in 2002 was 4.68 percent as compared to 6.91
     percent  for 2001.  The lower  prime  rate  caused  floating  rate loans to
     reprice at lower levels and new loans to be originated at levels lower than
     those originated in the prior period.

(b)  The  decreased  yield on  investments  was  also  reflective  of the  lower
     interest rate environment during 2002.

(c)  The  increase in average  loans was driven  primarily by loan growth in the
     Arizona and Minnesota markets.

(d)  Average  investments  declined as the portfolio was  restructured to better
     manage our capital,  shift our earning asset mix from  investments to loans
     and to establish  the proper  forward-looking  risk/reward  profile for the
     investment portfolio.

(e)  The decrease in cost of  interest-bearing  deposits was  reflective  of the
     lower interest rate environment during 2002. Floating rate deposit accounts
     repriced  at lower  levels  and  certificates  of  deposit  renewed or were
     originated at lower levels than those in the prior period.

(f)  Borrowing  costs decreased due to the lower rate  environment  during 2002,
     the payoff of our 8 5/8  percent  subordinated  notes  during  2001 and the
     adjustment of the $15.0 million  floating rate  subordinated  debentures in
     response  to the lower  rates in 2002.  Borrowing  costs in 2002 would have
     decreased to 5.28 percent  (versus 5.97 percent)  without  factoring in the
     $779,000  impact of marking our interest  rate cap contracts to fair value.
     The  fair  value  adjustments  to the  interest  rate  cap  contracts  were
     reflected as increases in borrowing costs.

(g)  Average   interest-bearing   deposits  increased  largely  due  to  further
     increases in volume of our Wealthbuilder interest checking and money market
     accounts originating primarily in our Arizona and Minnesota markets.

(h)  Average   borrowings   decreased  due  to  lower   averages  of  short-term
     borrowings,  the pay down of $20 million of FHLB  advances in early 2002, a
     continued  shift in our funding base from  borrowings  to core deposits and
     the retirement of our subordinated  notes,  which were outstanding  through
     August 31, 2001.
</TABLE>
<PAGE>

Net  interest  income and margin in future  periods  may be  impacted by several
factors. Changes in net interest income are dependent upon the volume and mix of
interest-earning  assets  and  interest-bearing  liabilities,  the  movement  of
interest rates and the level of  non-performing  assets.  Achieving net interest
margin growth is dependent on our ability to generate higher-yielding assets and
lower cost funding  sources such as deposits and  borrowings.  If variable index
rates, such as the prime rate, were to decline, we could experience  compression
of our  net  interest  margin  depending  upon  the  timing  and  amount  of any
reductions,  as it is possible  that  interest  rates paid on some  deposits and
borrowings may not decline as quickly,  or to the same extent, as the decline in
the yield on interest-rate-sensitive  assets such as commercial and other loans.
Competition for checking,  savings and money market deposits,  important sources
of lower cost funds for us, is intense.  We could also  experience  net interest
margin  compression if rates paid on deposits and borrowings  increase,  or as a
result of new pricing  strategies  and lower rates  offered on loan  products in
response  to  competitive  pressures,  rates  on  interest-bearing   liabilities
increase  faster,  or to a greater  extent,  than the  increase  in the yield on
interest-rate-sensitive  assets.  The level and nature of the  impact  cannot be
precisely   ascertained.   Federal  Reserve  actions  in  response  to  economic
developments  can vary  causing  prime and other  rates to adjust  and,  in some
cases,  immediately  impact our  interest-earning  assets  and  interest-bearing
liabilities.

These factors,  including the competitive environment in the markets in which we
operate,  the multitude of financial and  investment  products  available to the
public and the monetary  policies of the Federal Reserve,  can materially impact
our  operating  results.  Therefore,  we  cannot  predict,  with any  degree  of
certainty,  prospects for net interest  income and net interest margin in future
periods.  See  "Supervision  and  Regulation,  Economic  Conditions and Monetary
Policy-Economic Conditions and Monetary Policy" included under Item 1 of Part I.
See also Item 7A, "Quantitative and Qualitative  Disclosures About Market Risk,"
for  information  relating to the impact of  fluctuating  interest  rates on our
future net interest income prospects.

Year ended  December 31, 2001  compared to year ended  December  31,  2000.  Net
interest  income  increased $1.6 million,  or 11.6 percent,  to $14.9 million as
compared to $13.4 million. Net interest spread and net interest margin were 2.40
and 2.90  percent,  respectively  as compared  to 2.40 and 2.73  percent for the
prior period.

Net  interest  income  for the  twelve-month  period  ended  December  31,  2001
reflected  mark-to-market  losses on the value of derivative  contracts totaling
($184,000). Without the mark-to-market adjustments on these derivative contracts
net interest  margin for the period would have been 2.94  percent.  Net interest
income  for  the   twelve-month   period  ended   December  31,  2000  reflected
amortization  of an interest rate floor contract  totaling  ($224,000).  Without
this  amortization  expense net  interest  margin for the period would have been
2.78 percent.  The cost of the interest rate floor contract was being  amortized
during  2000  because  Statement  of  Financial  Accounting  Standards  No. 133,
"Accounting  for Derivatives  and Hedging  Activities"  ("SFAS 133"), as amended
relating to the accounting for derivatives, was not yet effective.

The following  condensed  information  summarizes the major factors combining to
create  the  changes  to  net  interest  income,  spread  and  margin.  Lettered
explanations following the summary describe causes of the changes in these major
factors:
<PAGE>
<TABLE>
<CAPTION>
                      Net Interest Income Analysis - 2001 vs. 2000 (1)
                                                   For the Years
                                               Ended December 31,        Change
                                               --------------------  ----------------
                                                  2001      2000
                                               ---------  ---------
                                               (amounts in millions)
<S>                                            <C>        <C>        <C>         <C>
Total interest income decreased.............   $  37.6    $  40.7    $   (3.1)   (8)%
  Due to:
    Decrease in yield on interest-
     earnings assets........................     7.31%      8.30%       (.99)%  (12)%
  Driven by:
    Decrease in yield on loans (a)..........     8.17%      9.58%      (1.41)%  (15)%
    Decrease in yield on investments (b)....     6.07%      6.99%      (0.92)%  (13)%
  The decreases in yield on
   interest-earning assets were
   Offset by:
   Increase in average earning assets.......   $ 514.4    $ 490.0    $    24.4     5%
  Driven by:
    Increase in average loans (c)...........   $ 293.7    $ 244.5    $    49.2    20%
    Offset by:
    Decrease in average investments (d).....   $ 223.0    $ 243.2    $  (20.2)   (8)%
Total interest expense decreased............   $  22.7    $  27.3    $   (4.6)  (17)%
  Due to:
    Decrease in cost of
     interest-bearing liabilities...........     4.91%      5.90%      (0.99)%  (17)%
  Driven by:
    Decrease in cost of
     interest-bearing deposits (e)..........     4.40%      5.52%      (1.12)%  (20)%
    Decrease in cost of borrowings (f)......     6.12%      6.55%      (0.43)%   (7)%
  These decreases were coupled with:
    Decrease in average
     interest-bearing liabilities...........   $ 461.3    $ 462.0    $   (0.7)     --
  Driven by:
    Decrease in average borrowings (g)......   $ 137.3    $ 171.7    $  (34.4)  (20)%
  Offset by:
    Increase in average interest-bearing
     deposits (h)...........................   $ 324.0    $ 290.3    $    33.7    12%
--------------------
(1)  From continuing operations for all periods presented.

(a)  The decreased loan yield is reflective of a 475 basis point decrease in the
     prime rate over the course of 2001 as monetary  policy eased in response to
     weakening national economic  conditions.  Floating rate loans tied to prime
     repriced lower and new loans originated  during 2001 came on at lower rates
     than those originated during 2000.

(b)  The decreased  investment yield reflects the lower rate environment in 2001
     as well as the reduction in the size of the  investment  portfolio in order
     to shift the earning asset mix toward loans.

(c)  Loan  growth was  attributable  to  increases  in loans  originated  in our
     Arizona, Minnesota and North Dakota markets.

(d)  Average  investments  decreased due to the strategic shift in earning asset
     mix from investment  securities to loans as lending  opportunities arose in
     the Arizona, Minnesota and North Dakota markets.

(e)  Decreased  cost of  interest-bearing  deposits is reflective of the rise in
     volume of Wealthbuilder interest checking and money market accounts and the
     associated  decreases in cost as interest rates  declined  during 2001. The
     Wealthbuilder  accounts  carry  rates  that are  variable  at  management's
     discretion. Management lowered the rates paid on these deposits in response
     to the monetary  easing that took place during 2001 while  maintaining  the
     competitive  nature of the Wealthbuilder  products in the Company's various
     markets.   Additionally,   in  a  lower  rate  environment,   the  cost  of
     certificates of deposit also decreases with renewals and new accounts.

(f)  Rates are reflective of the overall  decreased rate  environment in 2001 as
     compared to 2000.

(g)  We  decreased  our volume of FHLB  advances  due to greater use of national
     market  certificates  of deposit as a wholesale  funding source in order to
     maintain borrowing capacity at the FHLB, support the earning asset base and
     take  advantage  of  favorable  costs of national  market  certificates  of
     deposit  relative  to FHLB  advances.  In  addition,  on August 31, 2001 we
     redeemed $12.6 million of our 8 5/8 percent  subordinated notes due May 31,
     2004 through the exercise of our call option.

(h)  Deposit growth was primarily  attributable to the continued  success of the
     Wealthbuilder  family of interest  checking  and money  market  accounts in
     addition  to  increased  use  of  direct   non-brokered   national   market
     certificates  of deposit  obtained via posting rates on national  networks.
     National  market  certificates of deposit were $34.0 million as of December
     31, 2001 compared to $9.0 on December 31, 2000.
</TABLE>
<PAGE>

Provision for Credit Losses. We determine a provision for credit losses which we
consider  sufficient  to maintain  our  allowance  for credit  losses at a level
considered  adequate to provide for an  estimate of probable  losses  related to
specifically  identified  loans as well as probable losses in the remaining loan
and lease  portfolio  that have been incurred as of each balance sheet date. The
provision  for  credit  losses  for the year ended  December  31,  2002 was $1.2
million as compared to $1.7 million in 2001 and $1.2  million in 2000.  Net loan
and lease charge-offs were $521,000, or 0.17 percent of average loans and leases
in 2002 compared with  $962,000,  or 0.33 percent in 2001 and $486,000,  or 0.20
percent in 2000. The increase in provision and net-charge-offs in 2001 primarily
reflected  the  impact  of  developments  in our  truck  leasing  portfolio  and
deterioration in performance of a number of our contracting customers.

The provision for credit  losses is calculated as part of the  determination  of
the allowance for credit losses and the related provision for credit losses is a
critical  accounting policy which involves  consideration of a number of factors
such as loan growth,  net  charge-offs,  changes in the  composition of the loan
portfolio,  delinquencies  in  the  loan  and  lease  portfolio,  the  value  of
underlying  collateral on problem  loans,  general  economic  conditions and our
assessment  of credit risk in the  current  loan and lease  portfolio.  Periodic
fluctuations  in the provision  for credit losses result from our  assessment of
the adequacy of the allowance for credit losses; however, actual loan losses may
vary from current estimates.

The allowance for loan losses totaled $5.0 million at December 31, 2002 compared
with $4.3 and $3.6 million at December 31, 2001 and 2000, respectively. See Note
1 to the Consolidated  Financial  Statements  included under Item 8, "-Financial
Condition-Loan  Portfolio-Allowance for Credit Losses" and "-Critical Accounting
Policies" for further  discussion of the  components of the allowance for credit
losses, our systematic methodology for determining the adequacy of the allowance
and  additional  data  pertaining to  charge-offs,  recoveries and other related
information.

Noninterest Income.  Noninterest income is becoming a more significant source of
revenues  for us as we  continue  to  emphasize  our goal of  focusing  on local
relationship  banking  and  providing a broad range of  financial  products  and
services  that  will  meet  the  needs of our  customers,  both  commercial  and
consumer.  Our noninterest income increased  approximately  $7.6 million,  or 87
percent,  in 2002 largely due to insurance  commission income generated by Milne
Scali,  which we  acquired in April  2002.  Fees on loans,  net gain on sales of
securities  and service  charges  also  increased  in 2002.  Noninterest  income
increased  approximately  $1.0 million,  or 13 percent,  in 2001  primarily as a
result of increases in net gains on sales of securities.

The following table presents, for the periods indicated, the major categories of
our noninterest  income as well as the amount and percent of change between each
of the  periods  presented.  Related  information  and  significant  changes are
discussed in lettered explanations following the table:
<TABLE>
<CAPTION>
                             Noninterest Income (1)
                                                                Increase (Decrease)
                                                       --------------------------------------
                             For the Years Ended
                                December 31,              2002 - 2001         2001 - 2000
                         ----------------------------  -----------------   ------------------
                          2002      2001      2000        $        %          $        %
                         --------  --------  --------  --------  -------   --------  --------
                            (in thousands)
<S>                      <C>       <C>       <C>       <C>         <C>     <C>         <C>
Insurance commissions... $ 8,981   $ 1,891   $ 2,003   $ 7,090     375%    $  (112)    (6)% (a)
Fees on loans...........   2,169     1,936     1,848       233      12%         88       5% (b)
Net gain on sales of
  securities ...........   1,870     1,396       276       474      34%      1,120     406% (c)
Brokerage income........   1,094     1,407     1,466      (313)   (22)%        (59)    (4)% (d)
Service charges.........     755       636       581       119      19%         55       9% (e)
Trust and financial
 services...............     751       899     1,064      (148)   (16)%       (165)   (16)% (f)
Rental income...........      89        54        27        35      65%         27     100%
Other...................     587       495       418        92      19%         77      18%
                         --------  --------  --------  --------            --------
Total noninterest
 income................. $16,296   $ 8,714   $ 7,683   $ 7,582      87%    $ 1,031      13%
                         ========  ========  ========  ========            ========
<FN>
--------------------

(1)  From continuing operations for all periods presented.


(a)  Insurance   commissions.   In   2002,   insurance   commissions   increased
     dramatically due to the April 16, 2002 acquisition of Milne Scali. In 2001,
     insurance  commissions  declined  in the  face  of a  challenging  economic
     environment  and  catastrophic  weather-related  events in the North Dakota
     market during 2000 that reduced and/or eliminated  contingency fees paid by
     insurance  companies  in 2001.  We expect  insurance  commission  income to
     increase  during 2003 due to a full year of production by Milne Scali along
     with  contingency  fees  generally  received  by Milne  Scali in the  first
     quarter of each year.
<PAGE>

(b)  Fees on loans.  The increase in loan fees for 2002 is largely  attributable
     to  loans  originated  and  sold  on  the  secondary  market.  Loan  volume
     generation  and the  related  loan fees  associated  with such loans can be
     subject to significant  fluctuations  making it difficult to anticipate the
     amount of loans that will be  originated  or placed and  related  loan fees
     that will be recognized in future periods.

(c)  Net gain on sales of  securities.  Net gain on sales of  securities in 2002
     was  primarily  a  result  of  repositioning  the  investment   portfolio's
     forward-looking  risk/reward  profile.  Net gain on sales of  securities in
     2001 was a function  of selling  investment  securities  in the  process of
     shifting  the  earning  asset  mix  from  investment   securities  to  loan
     opportunities available in new and existing markets. In addition, given the
     significant  decline in interest  rates  during 2001,  sales of  investment
     securities   were   necessary  in  order  to  adjust  the   forward-looking
     risk/reward  profile of the investment  portfolio.  We cannot guarantee our
     ability to generate  realized gains in the future such as those  recognized
     during the most recent two years given the  current  absolute  low level of
     interest  rates.  In  the  future,  the  investment  portfolio  risk/reward
     management process may require us to recognize net realized losses in order
     to optimize the forward-looking profile of the portfolio.

(d)  Brokerage  income.  In 2002 brokerage income declined as a result of market
     conditions  and a decrease  in the number of brokers at BNC AMI,  including
     the  closing of BNC AMI's Fargo  office in  September.  In 2001,  brokerage
     income  was  relatively  stable  in  the  face  of a  challenging  economic
     environment and a prolonged period of soft conditions in equity markets.

(e)  Service charges.  Service charges increased in 2002 and 2001 as the Company
     continued to increase its Wealthbuilder  interest checking and money market
     account  volume  along with an increase in  non-interest  bearing  deposits
     which are primarily  business deposit  relationships that tend to utilize a
     greater level of fee-based deposit services.

(f)  Trust and  financial  services.  The 2002 and 2001  decreases  in trust and
     financial  services  revenue are  attributable to reduced fees from the BNC
     U.S.  Opportunities  Fund LLC as such fees are  primarily a function of the
     asset size of the fund and the fund has decreased over the two periods. The
     fund's size has been  negatively  impacted by the overall decline in equity
     markets in both years.
</FN>
</TABLE>

Noninterest Expense.  Noninterest expense increased  approximately $7.6 million,
or 39 percent,  in 2002 primarily as a result of the Milne Scali acquisition and
our expanding  presence in the Arizona  market.  Noninterest  expense  increased
approximately  $3.3  million,  or 21  percent,  in 2001 due to  several  factors
including our entry into the Arizona market.

The following table presents, for the periods indicated, the major categories of
our noninterest expense as well as the amount and percent of change between each
of the periods presented. Related information and significant changes are
discussed in lettered explanations below the table:
<PAGE>
<TABLE>
<CAPTION>
                             Noninterest Expense (1)
                                                                  Increase (Decrease)
                                                          --------------------------------------
                                 For the Years Ended
                                    December 31,              2002 - 2001         2001 - 2000
                             ----------------------------  -------------------  -----------------
                               2002      2001     2000       $          %         $        %
                             --------  -------   --------  ---------  --------  --------  -------
                                 (in thousands)
<S>                          <C>       <C>      <C>       <C>        <C>       <C>       <C>
 Salaries and employee
  benefits.................. $14,723   $ 9,911   $ 8,266   $  4,812       49%  $  1,645      20% (a)
 Occupancy..................   2,235     1,661     1,187        574       35%       474      40% (b)
 Interest on subordinated
  debentures................   1,829     1,377       399        452       33%       978     245% (c)
 Professional services......   1,495     1,326     1,278        169       13%        48       4% (d)
 Depreciation and
  amortization..............   1,320     1,123       993        197       18%       130      13% (e)
 Office supplies,
  telephone and postage.....   1,106       940       863        166       18%        77       9% (f)
 Amortization of
  intangible assets.........     881       482       527        399       83%       (45)    (9)% (g)
 Marketing and promotion....     749       709       488         40        6%       221      45% (h)
 FDIC and other assessments.     214       193       200         21       11%        (7)    (4)%
 Repossessed and impaired
  asset expenses /
  write-offs................     142        40       470        102      255%      (430)   (91)% (i)
 Other......................   2,464     1,797     1,549        667       37%       248      16% (j)
                             --------  --------  --------  ---------           --------
 Total noninterest expense.. $27,158   $19,559   $16,220   $  7,599       39%  $  3,339      21%
                             ========  ========  ========  =========           ========
 Efficiency ratio...........  87.03%    82.72%    77.01%      4.31%               5.71%          (k)
 Adjusted efficiency ratio
  excluding impact of
  derivative contracts and
  dividends paid on
  subordinated debentures...  79.19%    76.34%    76.20%      2.85%               0.14%
 Total operating expenses
  as a percent of average
  assets....................   4.77%     3.58%     3.11%      1.19%               0.47%          (l)

--------------------
<FN>
(1)  From continuing operations for all periods presented.

(a)  Salaries and employee benefits.  The 2002 increase  represents the addition
     of approximately 85 Milne Scali employees  effective April 16, 2002 as well
     as  additional  employees  added in the Arizona  market.  The 2001 increase
     reflects  additions to personnel  associated  with our  establishment  of a
     banking  subsidiary  in Arizona  along  with  additional  personnel  in the
     Minneapolis  market.  Average  full time  equivalents  for each year in the
     three-year   period  ended  December  31,  2002  were  253,  189  and  163,
     respectively.

(b)  Occupancy.  The 2002 increase reflects the addition of Milne Scali in April
     2002.  The increase in 2001 was primarily  associated  with newly  occupied
     facilities due to the establishment of a banking subsidiary in Arizona.

(c)  Interest  on  subordinated   debentures.   This  is  the  interest  expense
     associated with our fixed rate subordinated  debentures  (commonly referred
     to as trust  preferred  securities)  issued in July 2000 and the additional
     interest expense from our floating rate  subordinated  debentures issued in
     July 2001. The 2002 increase is primarily attributable to the $15.0 million
     of subordinated debentures issued in July 2001 being outstanding for a full
     year during 2002.  The increase in 2001 reflects a the full year expense of
     the July 2000  issuance  along with five  months of expense  related to the
     July 2001 issuance.  See Note 14 to the Consolidated  Financial  Statements
     included under Item 8 for further  information  related to our subordinated
     debentures.

(d)  Professional   services.   The  2002  increase  in  professional   services
     represents  increases  in legal fees  (including  those  incurred  by Milne
     Scali),  software support fees and other consulting and investment  banking
     fees.

(e)  Depreciation  and  amortization.  Depreciation  and  amortization  expenses
     increased  in 2002 due to the Milne  Scali  acquisition  along  with  costs
     associated  with additional  expansion in the Arizona market.  Depreciation
     and  amortization  in  2001  increased  over  2000  due  primarily  to  the
     initiation of activities in the Arizona market.

(f)  Office supplies, telephone and postage. Increases in this line item in 2002
     are associated  with the Milne Scali  acquisition  and additional  expenses
     associated with expansion in the Arizona market.

(g)  Amortization  of  intangible   assets.   The  increase  in  2002  primarily
     represents the amortization of the insurance books of business  intangibles
     acquired in the Milne Scali acquisition in April 2002.
<PAGE>
(h)  Marketing and promotion.  Increased  marketing  costs in 2001 resulted from
     promotions in various markets  including those  associated with development
     of our Arizona market.

(i)  Repossessed   and  impaired  asset   expenses/write-offs.   These  expenses
     represent  write-downs  to  estimated  net  realizable  value of other real
     estate owned and repossessed assets and related collection expenses. We had
     no other real estate owned at December 31, 2002 and repossessed assets were
     valued at $8,000.

(j)  Other. The 2002 increase represents increases in several miscellaneous line
     items  included in this  category  (some of which are  associated  with the
     acquisition  of  Milne  Scali in  April  2002)  and  include  increases  in
     insurance   premiums,   OCC   assessments,   travel   expenses,   dues  and
     publications,  data  processing  fees and expenses  associated with winding
     down the BNC AMI operations in Fargo. The 2001 increase represents a number
     of increases in various expense categories including travel expenses, meals
     and entertainment,  correspondent bank charges and expenses associated with
     the resignation of two brokers in BNC AMI's Minneapolis office.

(k)  Noninterest  expense divided by an amount equal to net interest income plus
     noninterest income.

(l)  Total  operating  expenses as a percent of average assets have increased as
     our profile has changed from that of a traditional banking  organization to
     an  organization  with a broader  base of  financial  product  and  service
     offerings the revenues and expenses of which are generally not asset-based.
</FN>
</TABLE>
Income  taxes.  We recorded  income tax expense of  $822,000,  $691,000 and $1.2
million for the years ended December 31, 2002, 2001 and 2000, respectively.  Our
effective  tax rates were 28.87,  28.96 and 32.51  percent for the  twelve-month
periods ended December 31, 2002, 2001 and 2000, respectively.  The effective tax
rates were lower than the statutory rates  principally due to tax-exempt  income
on municipal securities.

The determination of current and deferred income taxes is a critical  accounting
policy  which  is  based  on  complex   analyses  of  many   factors   including
interpretations  of Federal and state income tax laws, the  differences  between
tax  and  financial  reporting  basis  of  assets  and  liabilities   (temporary
differences), estimates of amounts due or owed such as the timing of reversal of
temporary differences and current financial accounting standards. Actual results
could  differ  significantly  from the  estimates  and  interpretations  used in
determining the current and deferred income tax liabilities.  Additional  detail
on income taxes is provided in Note 24 to the Consolidated  Financial Statements
included under Item 8.

Financial Condition

Overview.  Although  subsequent  sections  of this  discussion  and  analysis of
financial  condition address certain aspects of our major assets and liabilities
in  significant  detail,  the  following  two tables are  presented as a general
overview of the financial condition of the Company.

Total  assets  increased  approximately  $17.2  million,  or 3 percent,  between
December 31, 2001 and December 31, 2002 and  approximately  $15.0 million,  or 3
percent,  between  December 31, 2000 and December 31, 2001.  Our total assets at
December 31, 2002 were $602.2 million.
<PAGE>

The  following  table  presents  our assets by category as of December 31, 2002,
2001 and 2000,  as well as the amount and  percent of change  between the dates.
Significant changes are discussed in lettered notes following the table (amounts
are in thousands):
<TABLE>
<CAPTION>
                                     Assets
                                                              Increase (Decrease)
                                                      ---------------------------------------
                          As of December 31,            2002 - 2001          2001 - 2000
                     -------------------------------  ------------------   ------------------
                       2002       2001      2000         $         %          $         %
                     ---------  ---------  ---------  --------  --------   ---------  -------

<S>                  <C>        <C>        <C>        <C>       <C>        <C>        <C>
Cash and due from
 banks...............$  16,978  $  16,346  $  14,988  $     632       4%   $   1,358       9%
Interest-bearing
 deposits with banks.      159        126        595         33      26%        (469)   (79)%
Federal funds sold...       --      7,500         --     (7,500)  (100)%       7,500     100% (a)
Investment securities
 available for sale..  208,072    211,801    253,566     (3,729)    (2)%     (41,765)   (16)% (b)
Federal Reserve
 Bank and Federal
 Home Loan Bank
 stock...............    7,071      7,380      9,619       (309)    (4)%      (2,239)   (23)%
Loans and leases,
 net.................  330,788    293,599    249,165     37,189      13%      44,434      18% (c)
Premises and
 equipment, net......   11,100      9,180      8,477      1,920      21%         703       8%
Interest receivable..    2,856      3,008      3,854       (152)    (5)%        (846)   (22)%
Other assets.........    4,119      4,856      4,465       (737)   (15)%         391       9%
Goodwill.............   12,210        437        561     11,773   2,694%        (124)   (22)% (d)
Other intangible
 assets, net.........    8,875      1,734      2,158      7,141     412%        (424)   (20)% (e)
Assets of
 discontinued Fargo
 operations..........       --     29,090     22,568    (29,090)  (100)%       6,522      29% (f)
                     ---------  ---------  ---------  ---------            ---------
    Total assets.... $ 602,228  $ 585,057  $ 570,016  $  17,171       3%   $  15,041       3%
                     =========  =========  =========  =========            =========
<FN>

(a)  Federal  funds  sold.  Federal  funds sold can  fluctuate  on a daily basis
     depending upon our liquidity management activities.

(b)  Investment  securities  available for sale. We  implemented a balance sheet
     leveraging  strategy  beginning  late in 1999  whereby  the  earning  asset
     portfolio  was  increased  through the  purchase of  additional  investment
     securities  funded primarily by borrowings from the FHLB. In 2001, we began
     to  strategically  shift  the  larger  earning  asset  base to  loans  from
     investment securities.

(c)  Loans and  leases.  In 2001,  we  increased  our net  loans  and  leases by
     strategically  shifting our earning asset mix toward loans from  investment
     securities.  The increase in net loans and leases reflected commercial real
     estate and real estate construction loans arising from opportunities in the
     Arizona,  Minnesota  and North Dakota  markets.  The 2002 increase in loans
     represented loan growth primarily in the Arizona and Minnesota markets.

(d)  Goodwill.  Goodwill increased  significantly in 2002 due to the acquisition
     of Milne Scali in April 2002.

(e)  Other  intangible  assets.  The 2002  increase in other  intangible  assets
     represents  insurance books of business  intangibles  acquired in the Milne
     Scali acquisition of April 2002.

(f)  Assets of discontinued  Fargo operations.  The Fargo branch of the Bank was
     sold on September 30, 2002. The assets  indicated for December 31, 2001 and
     2000 represent the assets attributable to that branch as of those dates.
</FN>
</TABLE>
<PAGE>
Our total  liabilities  increased  approximately  $10.0  million,  or 2 percent,
between  December 31, 2001 and December 31, 2002 and decreased  $819,000 between
December 31, 2000 and December 31, 2001. Total  liabilities at December 31, 2002
were approximately $542.2 million. Stockholders' equity was approximately $37.7,
$30.7 and $29.5 million at December 31, 2002, 2001 and 2000, respectively.

The following table presents our liabilities,  guaranteed  preferred  beneficial
interests in subordinated  debentures and stockholders' equity by category as of
December  31, 2002,  2001 and 2000,  as well as the amount and percent of change
between the dates. Significant changes are discussed in lettered notes following
the table (amounts are in thousands):
<TABLE>
<CAPTION>
          Liabilities, Subordinated Debentures and Stockholders' Equity

                                                                 Increase (Decrease)
                                                        --------------------------------------
                              As of December 31,           2002 - 2001         2001 - 2000
                         -----------------------------  ------------------  ------------------
                           2002       2001      2000        $         %         $         %
                         --------  ---------  --------  --------  --------  --------- --------
Deposits:
<S>                      <C>       <C>        <C>        <C>      <C>       <C>       <C>
Noninterest-bearing..... $ 44,362  $ 30,521   $ 26,931   $13,841       45%  $  3,590     13% (a)
Interest-bearing -
 Savings, interest
   checking and
   money market.........  187,531   160,721    150,584    26,810       17%    10,137      7% (b)
 Time deposits
   $100,000 and over....   64,905    78,969     59,086  (14,064)     (18)%    19,883     34% (c)
 Other time deposits....  101,447   105,066     94,293   (3,619)        3%    10,773     11% (d)
Short-term  borrowings..   28,120       760     33,228    27,360    3,600%  (32,468)   (98)% (e)
FHLB advances...........   97,200   117,200    117,200  (20,000)     (17)%         0      0% (f)
Long-term borrowings....    8,561        13     12,642     8,548   65,754%  (12,629)  (100)% (g)
Other liabilities.......   10,053     6,192      7,419     3,861       62%   (1,227)   (17)%
Liabilities of
 discontinued Fargo
 operations.............       --    32,692     31,570  (32,692)    (100)%     1,122      4% (h)
                         --------  ---------  --------  --------            ---------
   Total liabilities....  542,179   532,134    532,953    10,045        2%     (819)      --
Guaranteed preferred
 beneficial interests in
 Company's subordinated
 debentures.............   22,326    22,244      7,606        82        0%    14,638    192% (i)
Stockholders' equity....   37,723    30,679     29,457     7,044       23%     1,222      4% (j)
                         --------  ---------  --------  --------            ---------
    Total..............  $602,228  $585,057   $570,016  $ 17,171        3%  $ 15,041      3%
                         ========  =========  ========  ========            =========
------------------------
</TABLE>
(a)  Noninterest-bearing  deposits.  Noninterest-bearing  deposits can fluctuate
     significantly  on a daily basis due to  transactions  associated  primarily
     with  commercial  customers.   The  increase  in  2002  also  reflects  new
     commercial  and retail  customer  activity  in the  Arizona  and  Minnesota
     markets.

(b)  Savings, interest checking and money market. Increases in this category are
     attributable  to the continued  popularity  of the Company's  Wealthbuilder
     deposit  products and reflect  deposit growth  primarily in the Arizona and
     Minnesota markets.

(c)  Time deposits $100,000 and over. Brokered deposits totaled $31.4 million at
     December 31, 2002  compared to $34.4 and $30.7 million at December 31, 2001
     and 2000,  respectively.  National certificates of deposit acquired through
     national  networks  totaled  $27.1 million at December 31, 2002 compared to
     $34.0  million at December  31, 2001 and $9.0 million at December 31, 2000.
     In 2002, we allowed national market  certificates of deposit to run off and
     be  replaced by growth in the  Wealthbuilder  interest  checking  and money
     market account  categories.  The increase in 2001 was due to greater use of
     national  certificates of deposit as a wholesale funding source in order to
     maintain  borrowing  capacity at the FHLB and take  advantage  of favorable
     costs of national certificates of deposits relative to FHLB advances.

(d)  Other time deposits.  During 2001,  this category  increased due to certain
     special promotions in select markets.

(e)  Short-term  borrowings.  The  increase  in short  term  borrowings  in 2002
     reflects  $15.0  million of Federal  funds  purchased  at December 31, 2002
     coupled with $13.1 million of repurchase  agreements with customers.  These
     repurchase  agreements  are  renewable  daily.  The decrease in  short-term
     borrowings between December 31, 2000 and 2001 was a result of a decrease in
     Federal funds  purchased at December 31, 2001.  Federal funds purchased can
     fluctuate daily based on the funds management activities of the Bank.

(f)  FHLB advances.  $20 million of FHLB advances matured in early 2002 and were
     not replaced due to the availability of other funding sources.
<PAGE>
(g)  Long-term borrowings. The 2002 increase reflects the $8.5 million long-term
     note  originated at the time of the Milne Scali  acquisition in April 2002.
     The 2001 decrease represents the fact that, on August 31, 2001, the Company
     retired its  remaining 8 5/8  percent  subordinated  notes due May 31, 2004
     through the  exercise of its call option by using a portion of the proceeds
     from the issuance of floating rate trust preferred securities in July 2001.

(h)  Liabilities of discontinued Fargo operations.  The Fargo branch of the Bank
     was sold on September 30, 2002. The liabilities  indicated for December 31,
     2001 and 2000 represent the  liabilities  attributable to that branch as of
     those dates.

(i)  Guaranteed  preferred   beneficial  interests  in  Company's   subordinated
     debentures.  We issued  $15.0  million of  floating  rate  trust  preferred
     securities  in  July  2001.  See  Note  14 to  the  consolidated  financial
     statements  included  under Item 8 for further  information  related to our
     trust preferred securities.

(j)  Stockholders'  equity.  The  increase  in 2002  reflects  $1.5  million  of
     preferred  stock  issued in 2002,  $2.5  million of common  stock issued in
     conjunction with the Milne Scali acquisition in April 2002, $2.0 million of
     earnings recorded in 2002 and $1.1 million in after-tax  unrealized holding
     gains on securities available for sale arising during the period.


Investment  Securities  Available for Sale. Our investment policy is designed to
enhance  net income and return on equity  through  prudent  management  of risk,
ensure  liquidity for cash-flow  requirements,  help manage  interest rate risk,
ensure  collateral is available  for public  deposits,  advances and  repurchase
agreements and manage asset diversification.  In managing the portfolio, we seek
a balance  between  current income  (yield) and future market value  volatility,
while  simultaneously  managing  credit and  liquidity  risks.  The goal of this
process is to maximize  our  longer-term  profitability  as well as the economic
performance of the portfolio over the long-term.

Investments are centrally managed in order to maximize  compliance (Federal laws
and  regulations  place  certain  restrictions  on  the  amounts  and  types  of
investments we may hold) and effectiveness of overall investing activities.  The
primary  goal  of  our  investment  policy  is  to  contribute  to  our  overall
profitability.  The objective is to purchase and own securities and combinations
of  securities  with  good  risk/reward   characteristics.   "Good"  risk/reward
securities are those identified  through thorough analysis of the cash flows and
potential  cash flows as well as market value and potential  future market value
of the security in question given various  interest rate  scenarios.  Investment
strategies   are   developed  in  light  of  a  constant  view  of  our  overall
asset/liability  position. As it relates to investment strategies,  the focus of
our Asset/Liability  management committee ("ALCO") is to determine the impact of
interest-rate  changes on both future  income and market value of  securities in
the portfolio.  See Item 7A,  "Quantitative  and Qualitative  Disclosures  about
Market Risk," for additional  information  relating to the impact of fluctuating
interest rates on our net interest  income,  including  income  generated by our
investment securities portfolio.

The  following  table  presents  the   composition  of  the   available-for-sale
investment portfolio by major category as of the dates indicated:
<TABLE>
<CAPTION>
                      Investment Portfolio Composition (1)

                                                 December 31,
                      --------------------------------------------------------------------
                              2002                    2001                   2000
                      ---------------------   ---------------------   --------------------
                                   Estimated              Estimated              Estimated
                                     fair                   fair                   fair
                      Amortized     market     Amortized   market      Amortized   market
                         cost       value        cost       value        Cost      value
                      ---------   ---------   ---------   ---------   ---------  ---------
                                                 (in thousands)
<S>                   <C>         <C>         <C>         <C>         <C>        <C>
U.S. government agency
  mortgage-backed
  securities......... $  47,072   $  47,576   $  42,027   $  41,946   $  44,272  $  44,468
U.S. government
  agency securities..     4,608       5,203       4,396       4,495       4,880      4,890
Collateralized
  mortgage
  obligations........   122,795     124,480     135,423     137,268     164,221    165,404
State and municipal
  bonds..............    27,276      28,815      16,952      17,481      20,782     20,905
Corporate bonds......     1,938       1,998      10,329      10,611      16,968     17,899
                      ---------   ---------   ---------   ---------   ---------  ---------
Total investments.... $ 203,689   $ 208,072   $ 209,127   $ 211,801   $ 251,123  $ 253,566
                      =========   =========   =========   =========   =========  =========
----------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>
<PAGE>

The following  table presents  maturities for all securities  available for sale
(other than equity  securities)  and yields for all securities in our investment
portfolio at December 31, 2002:
<TABLE>
<CAPTION>
                                      Investment Portfolio - Maturity and Yields
                                                      Maturing
                       ----------------------------------------------------------------------------
                                             After 1 but        After 5 but
                         Within 1 year     within 5 years     within 10 years     After 10 years            Total
                       -----------------  -----------------  -----------------   ------------------   ------------------
                       Amount   Yield(1)   Amount  Yield(1)   Amount  Yield(1)    Amount   Yield(1)    Amount    Yield(1)
                       -------  --------  -------  --------  -------- --------   -------- ---------   --------  ---------
<S>                    <C>      <C>       <C>      <C>       <C>      <C>        <C>      <C>         <C>       <C>
U.S. government
 agency
 mortgage-backed
 securities (2)(3).... $   --        --   $     --       --  $     972    5.97%   $ 46,100    5.70%    $ 47,072     5.70%
U.S. government
 agency
 securities (2).......     --        --        944    11.07%        --       --      3,664    6.03%       4,608     7.06%
Collateralized
 mortgage
 obligations (2)(3)...     --        --      1,864     7.36%     2,892    5.98%    118,039    4.94%     122,795     5.00%
State and municipal
 bonds (2)............      5    13.49%         --        --       501    6.91%     26,770    7.22%      27,276     7.22%
Corporate bonds (2)...     --        --         --        --        --       --      1,938    3.61%       1,938     3.61%
                      -------              -------             -------            --------             --------
Total book value
 of investment
 securities........... $    5    13.49%    $ 2,808     8.61%  $  4,365    6.09%   $196,511    5.44%     203,689     5.49%
                      =======              =======            ========            ========             --------
Unrealized holding
 gain on securities
 available for sale..                                                                                     4,383
                                                                                                       --------
Total investment in
 securities available
 for sale (4)........                                                                                  $208,072     5.38%
                                                                                                       ========
--------------------
<FN>

(1)  Yields include  adjustments  for tax-exempt  income;  yields do not reflect
     changes  in fair  value  that are  reflected  as a  separate  component  of
     stockholders' equity (except as noted in (4) below).

(2)  Based on amortized cost/book value.

(3)  Maturities  of  mortgage-backed   securities  and  collateralized  mortgage
     obligations ("CMOs") are based on contractual maturities. Actual maturities
     may vary because obligors may have the right to call or prepay  obligations
     with or without call or prepayment penalties.

(4)  Yield  reflects  changes  in fair value  that are  reflected  as a separate
     component of stockholders' equity.
</FN>
</TABLE>

As of December 31, 2002, we had $208.1 million of available-for-sale  securities
in the investment portfolio as compared to $211.8 and $253.6 million at December
31, 2001 and 2000, respectively,  based on fair value of the securities on those
dates. In the process of carrying out the portfolio management process objective
to  purchase  securities  and  combinations  of  securities  with good  economic
risk/reward characteristics, we increased U.S. government agency mortgage-backed
securities,  U.S.  government agency securities and state and municipal bonds by
$5.6 million,  $708,000 and $11.3 million,  respectively  and decreased CMOs and
corporate  debt  securities  by $12.8 and $8.6 million,  respectively.  The $8.6
million  reduction in corporate debt securities during 2002 allowed us to better
manage our risk-based capital ratios as such securities are risk-weighted at 100
percent for risk-based  capital  purposes.  Given our earnings in the 2002 third
and fourth quarters,  and the forecasted level of future earnings,  we increased
our holdings of state and municipal  bonds by $11.3 million in order to increase
our level of tax-exempt  income in the future. In addition to the role state and
municipal  bonds play in managing our tax position,  state and  municipal  bonds
offer  an  attractive   risk/reward  profile  particularly  when  considered  in
combination with other securities in the portfolio.
<PAGE>

In addition,  during 2002,  mortgage  rates  declined to their lowest  levels in
decades.  This  decrease  in  mortgage  rates  increased  the level of  mortgage
refinancing  and  prepayments  for  U.S.   government   agency   mortgage-backed
securities and CMOs.  The ongoing  portfolio  management  process and individual
security  risk/reward  analysis  described  above led to the sale of  individual
securities whose  forward-looking  risk/reward profiles given the lower interest
rate and increased  prepayment  environment  were  inferior to other  securities
available for purchase.  This analysis and ongoing management of the portfolio's
forward looking  risk/reward profile resulted in transactions that generated net
realized  securities  gains of $1.9 million during 2002. We cannot guarantee our
ability to generate realized gains in the future such as those recognized during
the most recent year given the current  absolute low level of interest rates. In
the future,  the risk/reward  management process may require us to recognize net
realized  losses  in  order  to  optimize  the  forward-looking  profile  of the
portfolio.

As  part of the  strategic  shift  in the  earning  asset  mix  from  investment
securities to loans in 2001, we decreased our holdings in CMOs,  corporate bonds
and state and municipal bonds by $28.1, $7.3 and $3.4 million, respectively.

In addition,  as a result of 475 basis points of monetary easing over the course
of 2001, the yield curve  experienced a significant  downward shift and increase
in  slope  relative  to 2000.  The  ongoing  portfolio  management  process  and
individual  security  risk/reward  analysis  described  above led to the sale of
individual  securities whose  forward-looking  risk/reward profile given various
interest rate scenarios was inferior to other securities available for purchase.
The need to optimize  the  risk/reward  profile of the  portfolio  as a whole in
addition to the  reduction in the  portfolio  size as more  earning  assets were
shifted to loans resulted in transactions that generated net realized securities
gains of $1.4  million.  We cannot  guarantee  our ability to generate  realized
gains in the future  such as those  recognized  during the most recent two years
given the current  absolute  low level of  interest  rates.  In the future,  the
risk/reward  management  process may require us to recognize net realized losses
in order to optimize the forward-looking profile of the portfolio.

During 2000,  we had  increased  our holdings in CMOs,  U.S.  government  agency
mortgage-backed  securities  and  corporate  bonds by  $70.4,  $18.2  and  $17.9
million,  respectively  as part of our  strategy to increase  our earning  asset
portfolio by purchasing  investment  securities  primarily  funded  through FHLB
borrowings.  The  portfolio  management  process,   investment  objectives,  and
risk/reward  analysis  described  above  led  the  increase  in  the  investment
portfolio   to  be   over-weighted   toward   CMOs  due  to  their   risk/reward
characteristics. In addition, over the course of 2000, principal cash flows were
primarily  reinvested in CMOs because they offered a better risk/reward  profile
(due to the  structure  of the  CMO  cash  flows)  relative  to  mortgage-backed
securities.

At December 31, 2002,  we held no securities  of any single  issuer,  other than
U.S.  government  agency  securities and agency  mortgage-backed  securities and
CMOs, that exceeded ten percent of stockholders'  equity. A significant  portion
of our investment securities portfolio (approximately 85 percent at December 31,
2002) was pledged as collateral for public  deposits and  borrowings,  including
borrowings with the FHLB.

Federal  Reserve  Bank and Federal Home Loan Bank Stock.  Our equity  securities
consisted of $1.2 million, $849,000 and $759,000 of Federal Reserve Bank ("FRB")
stock at December 31, 2002, 2001 and 2000,  respectively and $5.8, $6.5 and $8.9
million of FHLB stock at December 31,  2002,  2001 and 2000,  respectively.  Our
holdings in FRB stock have  increased  due to the amount of capital stock issued
by the Bank.  Our  holdings  in FHLB  stock  fluctuate  due to the level of FHLB
advances  outstanding.  From  2000 to 2002,  our  investment  in FHLB  stock has
decreased as we reduced our usage of FHLB advances.
<PAGE>
Loan  Portfolio.  The  banking  segment's  primary  source of income is interest
earned on loans.  Net loans  increased $37.2 million,  or 13 percent,  to $330.8
million at December 31, 2002 as compared to $293.6 million at December 31, 2001.
In 2001,  net loans  increased  $44.4  million,  or 18  percent,  as compared to
December 31, 2000.  The following  table  presents the  composition  of our loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
                            Loan Portfolio Composition (1)
                                                       December 31,
                        -------------------------------------------------------------------------------------
                            2002            2001             2000                1999             1998
                        ---------------- ---------------- ----------------- ---------------- ----------------
                         Amount     %     Amount     %     Amount     %      Amount     %     Amount     %
                        -------- ------- -------- ------- -------- -------- -------- ------- -------- -------
                                               (dollars in thousands)
<S>                     <C>      <C>     <C>      <C>     <C>      <C>      <C>      <C>     <C>      <C>
Commercial and
 industrial ........... $ 94,075   28.4  $103,883   35.4  $109,335    43.9  $108,593   43.2  $107,886   44.2
Real estate mortgage...  147,825   44.7   123,727   42.1    85,082    34.1    88,251   35.1    76,692   31.4
Real estate
 construction..........   62,926   19.0    34,225   11.7    21,879     8.8    15,684    6.3    20,831    8.5
Agricultural...........   18,023    5.5    19,069    6.5    15,016     6.0    15,906    6.3    19,777    8.1
Consumer/other.........    8,227    2.5     9,953    3.4    11,552     4.6    14,559    5.8    14,761    6.1
Lease financing........    5,584    1.7     7,578    2.6    10,154     4.1    11,214    4.5     7,422    3.0
                        -------- ------- -------- ------- -------- -------- -------- ------- -------- -------
Total principal
 amount of loans.......  336,660  101.8   298,435  101.7   253,018   101.5   254,207  101.2   247,369  101.3
Unearned income and
 net unamortized
 deferred fees and
 costs.................    (866)  (0.3)     (511)  (0.2)     (265)   (0.1)     (198)  (0.1)     (188)  (0.1)
                        -------- ------- -------- ------- -------- -------- -------- ------- -------- -------
Loans, net of
 unearned income
 and unamortized
 fees and costs......... 335,794  101.5   297,924  101.5   252,753   101.4   254,009  101.1   247,181  101.2
Less allowance for
  credit losses......... (5,006)  (1.5)   (4,325)  (1.5)   (3,588)   (1.4)   (2,872)  (1.1)   (2,854)  (1.2)
                        -------- ------- -------- ------- -------- -------- -------- ------- -------- -------
Net loans...........    $330,788 100.00  $293,599 100.00  $249,165  100.00  $251,137  100.0  $244,327  100.0
                        ======== ======= ======== ======= ======== ======== ======== ======= ======== =======
---------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>

The following table presents, for the periods indicated, the amount and percent
of change in each category of loans in our loan portfolio. Significant changes
are discussed in lettered explanations below the table:
<TABLE>
<CAPTION>
                    Change in Loan Portfolio Composition (1)

                                            Increase (Decrease)
                               -----------------------------------------------
                                    2002 - 2001              2001 - 2000
                               ----------------------    ---------------------
                                   $           %             $          %
                               -----------  ---------    ----------  ---------
                                           (dollars in thousands)
<S>                            <C>          <C>          <C>         <C>
Commercial and industrial.....  $ (9,808)       (9)%     $ (5,452)       (5)% (a)
Real estate mortgage..........     24,098        19%        38,645        45% (b)
Real estate construction......     28,701        84%        12,346        56% (c)
Agricultural..................    (1,046)       (5)%         4,053        27%
Consumer/other................    (1,726)      (17)%       (1,599)      (14)%
Lease financing...............    (1,994)      (26)%       (2,576)      (25)%
                               -----------               ----------
Total principal amount of
  loans.......................     38,225        13%        45,417        18%
Unearned income/unamortized
  fees and costs..............      (355)      (69)%         (246)      (93)%
                               -----------               ----------
Loans, net of unearned
  income/unamortized fees
  and costs................        37,870        13%        45,171        18%
Allowance for credit losses         (681)      (16)%         (737)      (21)%
                               -----------               ----------
Net Loans..................      $ 37,189        13%      $ 44,434        18% (d)
                               ===========               ==========
--------------------
<FN>
(1)  From continuing operations for all periods presented.
<PAGE>
(a)  Commercial and industrial  loans. In addition to general  pay-down of loans
     in the  ordinary  course of  business,  the  decreases in 2002 and 2001 are
     attributable  to a number of commercial loan pay-offs in the portfolio of a
     former loan officer operating in the Minneapolis market.

(b)  Real  estate  mortgage  loans.  The  increase  in 2002 is  attributable  to
     continued  commercial real estate loan growth  primarily in the Arizona and
     Minnesota markets.  The increase in 2001 is attributable to commercial real
     estate loan volume generated out of the Arizona, Minnesota and North Dakota
     markets.

(c)  Real estate  construction  loans.  The increase in 2002 is  attributable to
     continued  commercial real estate construction loan growth primarily in the
     Arizona and Minnesota markets. The increase in 2001 is also attributable to
     real  estate  construction  loans  generated  primarily  in the Arizona and
     Minnesota markets.

(d)  Net loans. During 2002, we increased net loans $37.2 million or 13 percent.
     We  were  able  to  fund  these  loans  primarily  due  to  deposit  growth
     originating  from the  Arizona  and  Minnesota  markets.  During  2001,  we
     increased  our net loans $44.4 million or 18 percent as part of a strategic
     shift  in the  earning  asset  mix from  investment  securities  to  loans,
     primarily commercial real estate and construction loans.
</FN>
</TABLE>

While  prospects  for  continued  loan growth  appear  favorable  in some of our
markets,  future  loan  growth  potential  is  subject to  volatility.  Our loan
portfolio is concentrated in commercial, industrial and real estate loans and we
have  credit  concentrations  in certain  industries  (see  "-Concentrations  of
Credit")  and  certain  geographical  concentrations  that relate to our primary
market  areas.  A downturn  in certain  sectors of the economy  could  adversely
impact  our  borrowers.  This  could,  in turn,  reduce the demand for loans and
impact the borrowers'  abilities to repay their loans, while also decreasing our
net  interest  margin.   Taking  a  conservative   posture  relative  to  credit
underwriting,  we  believe,  is a prudent  course of action,  especially  during
slowing  economic  times.  We  believe  it is in our  best  interest  and in the
interest  of  our  shareholders  to  focus  attention  on our  quality  customer
relationships and to avoid growth in other than high-quality credit during these
uncertain  times. We cannot predict with any degree of certainty the full impact
of current or future economic  conditions on our ability to generate loan volume
or  the  ultimate  impact  of  economic  conditions  on our  currently  existing
portfolio of loans.  See "Factors That May Affect Future  Results of Operations"
included under Item 1 of Part I.

Credit Policy, Underwriting, Approval and Review Procedures. We follow a uniform
credit policy that sets forth underwriting and loan administration criteria. The
Board of Directors (the "Board") establishes our loan policy,  including lending
guidelines   for  the   various   types  of  credit  we  offer  based  upon  the
recommendations  of  senior  lending   management.   Credit  committees  may  be
established at either the Bank or corporate  level.  Our loan policy is reviewed
and reaffirmed by the Board at least annually.

We delegate  lending  decision  authority among various lending officers and the
credit committees based on the size of the customer's  credit  relationship with
BNC. All loans and  commitments  approved in excess of $300,000 are presented to
the Board on a  quarterly  basis for  summary  review.  Any  exceptions  to loan
policies and guidelines,  to the extent the credit  relationship  amount exceeds
individual loan officer lending authorities,  are subject to special approval by
the Bank's Chief Credit Officer or the appropriate credit committee.

Underwriting  criteria  are based  upon the risks  associated  with each type of
credit offered,  the related borrowers and types of collateral.  In underwriting
commercial loans, we emphasize the borrower's  earnings history,  capitalization
and secondary  sources of repayment.  In most instances,  we require third party
guarantees or highly liquid collateral.

Our credit  administration  function includes an internal loan review department
that reviews  established  levels of our loan  portfolio on a continuous  basis.
Loan review personnel are not involved in any way in the credit  underwriting or
approval process.  Additionally,  our lenders,  loan review staff,  Chief Credit
Officer,   loan   committees   and  various   management   team  members  review
credit-related  information monthly. Such information  includes,  but may not be
limited  to,  delinquencies,  classified  and  nonperforming  assets,  and other
information, in order to evaluate credit risk within our credit portfolio and to
review and establish the adequacy of the allowance for credit losses.
<PAGE>

Loan  Participations.  Pursuant to our lending  policy,  loans may not exceed 85
percent of the Bank's legal lending  limit (except to the extent  collateralized
by U.S. Treasury securities or Bank deposits and, accordingly, excluded from the
Bank's legal lending  limit).  To accommodate  customers  whose  financing needs
exceed  lending  limits and internal  loan  restrictions  relating  primarily to
industry   concentration,   the  Bank  sells  loan   participations  to  outside
participants  without recourse.  Loan participations sold on a nonrecourse basis
to outside financial institutions were as follows as of the dates indicated:
<TABLE>
<CAPTION>
        Loan Participations Sold (1)

                December 31,
     -----------------------------------
               (in thousands)
        <S>                   <C>
        2002...........       173,895
        2001...........       208,975
        2000...........       187,773
        1999...........       118,463
        1998...........        56,700

----------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>

The Bank  generally  retains the right to service the loans as well as the right
to receive a portion of the interest income on the loans. Many of the loans sold
by the Bank are  commercial  lines of credit  for  which  balances  and  related
payment  streams  cannot be reasonably  estimated in order to determine the fair
value of the  servicing  rights and/or future  interest  income  retained by the
Bank.  We cannot  reliably  predict  our ability to continue to generate or sell
loan participations in future periods or the terms of any such sales.

Concentrations of Credit. Our credit policies emphasize  diversification of risk
among industries,  geographic areas and borrowers.  For purposes of the analysis
of  concentrations of credit as of December 31, 2002 the total outstanding loans
as well as all outstanding loan  commitments  were included.  As of December 31,
2002, we identified three concentrations of loans exceeding ten percent of total
loans  and  loan  commitments  outstanding.  These  concentrations  were in real
estate,  construction and lodging places,  which represented 26.7, 15.8 and 11.7
percent, respectively, of total loans and loan commitments outstanding.

The real estate loans and  commitments  were  extended to 138  customers who are
diversified  across our market  areas and who can be  generally  categorized  as
indicated below:
<TABLE>
<CAPTION>
                                                      Percent of total
                                                         outstanding
                                         Number of     loans and loan
                                         customers      commitments
                                       -------------   --------------
<S>                                    <C>             <C>
Non-residential and apartment
  building operators,
  developers and lessors of
  real property....................             75            17.8%
Real estate holding companies......             63             8.9%
                                       -------------   --------------
     Total.........................            138            26.7%
                                       =============   ==============
</TABLE>

Loans and commitments in the construction category were extended to 58 customers
who are located primarily in Minnesota,  Iowa, North Dakota and South Dakota and
who can be generally categorized as indicated below:
<TABLE>
<CAPTION>
                                                      Percent of total
                                                        outstanding
                                         Number of     loans and loan
                                         customers       commitments
                                       --------------  --------------
<S>                                    <C>             <C>
General building contractors.......             30            13.6%
Heavy construction, excluding
  building.........................             10              .8%
Special trade contractors..........             18             1.4%
                                       -------------   --------------
     Total.........................             58            15.8%
                                       =============   ==============
</TABLE>
<PAGE>
The contractors are involved in various  aspects of the  construction  industry,
including  highway  and street  construction,  water/sewer  drilling,  plumbing,
heating and air  conditioning,  commercial  painting,  electrical,  concrete and
excavating and foundation  contractors.  Loans in this category are secured,  in
many cases, by construction equipment.

The lodging loans and commitments were extended to 18 customers whose properties
are  located  throughout  the United  States.  Loans in this  category  are made
primarily to borrowers  that have seasoned  hotel  portfolios  and that are well
diversified by location, property type and chain.

We continually  monitor industry and other credit  concentrations as part of our
credit risk management  strategies.  In cases where  significant  concentrations
exist  without  sufficient  diversification  and other  mitigating  factors,  we
generally sell loans without  recourse to outside  financial  institutions  (see
"-Loan Participations").

Agricultural  Loans. Our agricultural loan portfolio totals  approximately $18.0
million,  or 5.5  percent  of total  loans.  Within  the  portfolio,  loans  are
diversified  by type and  include  loans to grain  and/or  livestock  producers,
agricultural  real estate  loans,  machinery  and  equipment  and other types of
loans. The majority of our agricultural  loans are extended to borrowers located
in North Dakota,  and are diversified over several counties.  As of December 31,
2002, there were no agricultural loans classified as nonperforming.

Loan  Maturities.  The following  table sets forth the  remaining  maturities of
loans in each major  category of our  portfolio as of December 31, 2002.  Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments.  Loan renewals are evaluated in the same manner as new
credit applications:
<TABLE>
<CAPTION>
                             Maturities of Loans (1)

                                          Over 1 year
                                         through 5 years       Over 5 years
                                       -------------------  ------------------
                              One
                              year       Fixed    Floating   Fixed    Floating
                            or less      rate       rate      rate      rate     Total
                           ---------   --------  ---------  --------- -------- ---------
                                               (in thousands)
<S>                        <C>         <C>       <C>        <C>       <C>      <C>
Commercial and
  industrial.............. $  65,493   $ 11,248  $  14,388  $  2,158  $   788  $  94,075
Real estate mortgage......    40,402     16,947     51,331    19,701   19,444    147,825
Real estate construction..    48,557      1,895     12,474        --       --     62,926
Agricultural..............    10,159      2,981      2,298       418    2,167     18,023
Consumer/other............     4,412      2,942        625       248       --      8,227
Lease financing...........       646      4,938         --        --       --      5,584
                           ---------   --------  --------- --------- --------  ---------
Total principal amount of
  loans................... $ 169,669   $ 40,951  $  81,116  $ 22,525 $ 22,399  $ 336,660
                           =========   ========  ========= ========= ========  =========
--------------------
<FN>

(1)  Maturities  are based  upon  contractual  maturities.  Floating  rate loans
     include  loans that would  reprice  prior to maturity if base rates change.
     See Item 7A, "Quantitative and Qualitative  Disclosures about Market Risk,"
     for further discussion regarding repricing of loans and other assets.
</FN>
</TABLE>

Interest  Rate Caps and Floors.  From time to time we may use  off-balance-sheet
instruments,  principally  interest rate caps and floors, to adjust the interest
rate sensitivity of on-balance-sheet items, including loans. At January 1, 2001,
we had an interest rate floor  contract  that  qualified as a cash flow hedge of
interest rate risk  associated  with floating rate  commercial  loans under SFAS
133. The floor contract was sold during 2001. See -"Liquidity, Market and Credit
Risk," Item 7A,  "Quantitative  and Qualitative  Disclosures about Market Risk,"
and Notes 1 and 17 to the Consolidated  Financial Statements included under Item
8 for further  discussion  about  accounting  policies  applicable to derivative
financial instruments and currently outstanding instruments.

Nonperforming Loans and Assets. Nonperforming loans consists of loans 90 days or
more delinquent and still accruing interest,  nonaccrual and restructured loans.
Other  nonperforming  assets  includes  other real estate owned and  repossessed
assets.  Our lending personnel are responsible for continuous  monitoring of the
quality of the loan  portfolio.  Officers are expected to maintain  loan quality
and deal with credit issues in a timely and proactive manner.  Loan officers are
responsible  for  regular  reviews  of  past  due  loans  in  their   respective
portfolios.  The loan portfolio is also monitored  regularly and examined by our
loan review personnel. Loans demonstrating weaknesses are downgraded in a timely
fashion and the Board receives a listing of all such loans on a quarterly basis.
<PAGE>

The  following  table sets  forth,  as of the dates  indicated,  the  amounts of
nonperforming  loans and other  assets,  the  allowance  for  credit  losses and
certain related ratios:
<TABLE>
<CAPTION>
                            Nonperforming Assets (1)

                                                      December 31,
                                     ------------------------------------------------
                                       2002      2001      2000      1999     1998
                                     --------  --------  --------  --------  --------
                                                 (dollars in thousands)
<S>                                  <C>       <C>       <C>       <C>       <C>
Nonperforming loans:
   Loans 90 days or more delinquent
     and still accruing interest.... $  5,081  $    983  $    221  $     22  $    307
   Nonaccrual loans (2) (3).........    2,549     3,391       343     1,620     2,042
   Restructured loans (2) (3).......       --         5        16        16        44
                                     --------  --------  --------  --------  --------
      Total nonperforming loans.....    7,630     4,379       580     1,658     2,393
   Other real estate owned and
     repossessed assets.............        8        70        84     1,207     2,112
                                     --------  --------  --------  --------  --------
      Total nonperforming assets.... $  7,638  $  4,449  $    664  $  2,865  $  4,505
                                     ========  ========  ========  ========  ========
Allowance for credit losses......... $  5,006  $  4,325  $  3,588  $  2,872  $  2,854
                                     ========  ========  ========  ========  ========
Ratio of total nonperforming loans
 to total loans......................   2.27%     1.47%      .23%      .65%      .97%
Ratio of total nonperforming assets
 to total assets.....................   1.27%      .80%      .12%      .64%     1.21%
Ratio of allowance to nonperforming
 loans...............................     66%       99%      619%      173%      119%

--------------------
<FN>
(1)  From continuing operations for all periods presented.

(2)  If the  Company's  nonaccrual  and  restructured  loans had been current in
     accordance with their original  terms, we would have recognized  additional
     interest income of $236,000, $84,000, $29,000, $112,000 and $49,000 for the
     years ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively.

(3)  The interest income on nonaccrual and restructured  loans actually included
     in our net income was $1,000,  $3,000, $6,000, $29,000 and $175,000 for the
     years ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively.
</FN>
</TABLE>

Loans 90 days or more delinquent and still accruing  interest include loans over
90 days past due which we believe,  based on our specific analysis of the loans,
do not  present  doubt  about  the  collection  of  interest  and  principal  in
accordance  with the loan contract.  Loans in this category must be well secured
and in the process of collection.  Our lending and management  personnel monitor
these loans  closely.  Included in this category at December 31, 2002 was a $5.0
million loan which was past due 91 days and still accruing interest. See further
discussion of this credit below.

Nonaccrual  loans  include  loans on which  the  accrual  of  interest  has been
discontinued.  Accrual  of  interest  is  discontinued  when we  believe,  after
considering  economic and business conditions and collection  efforts,  that the
borrower's  financial  condition  is such that the  collection  of  interest  is
doubtful.  A delinquent  loan is generally  placed on nonaccrual  status when it
becomes  90 days or more past due  unless  the loan is  well-secured  and in the
process of collection.  When a loan is placed on nonaccrual status,  accrued but
uncollected  interest  income  applicable  to the  current  reporting  period is
reversed against interest income of the current period.  Accrued but uncollected
interest income applicable to previous  reporting periods is charged against the
allowance  for credit  losses.  No  additional  interest  is accrued on the loan
balance until the collection of both principal and interest  becomes  reasonably
certain.  When a problem loan is finally  resolved,  there may  ultimately be an
actual write down or charge-off  of the principal  balance of the loan which may
necessitate  additional  charges  to  earnings.  Of the  $2.5  million  of loans
included in the  nonaccrual  loan  category at December 31,  2002,  $2.3 million
relates to two  commercial  customers.  One of these  relationships,  with total
outstanding  loans of $528,000,  is partially  guaranteed by the Small  Business
Administration.

Restructured loans are those for which concessions, including a reduction of the
interest rate or the deferral of interest or principal, have been granted due to
the borrower's weakened financial  condition.  Interest on restructured loans is
accrued  at the  restructured  rates  when  it is  anticipated  that  no loss of
original  principal will occur. We had no restructured loans in our portfolio at
December 31, 2002.
<PAGE>

Other real estate owned and repossessed  assets represents  properties and other
assets acquired through,  or in lieu of, loan  foreclosure.  Such properties and
assets are included in other assets in the consolidated balance sheets. They are
initially  recorded at fair value at the date of acquisition  establishing a new
cost basis.  Write-downs to fair value at the time of acquisition are charged to
the  allowance  for credit  losses.  After  foreclosure,  we perform  valuations
periodically  and the real estate or assets are carried at the lower of carrying
amount or fair  value  less cost to sell.  Write-downs,  revenues  and  expenses
incurred    subsequent   to   foreclosure   are   charged   to   operations   as
recognized/incurred.

Our ratios of total  nonperforming  loans to total loans and total nonperforming
assets to total  assets  increased  between  December  31, 2001 and December 31,
2002.  The ratio of the  allowance  for  credit  losses to  nonperforming  loans
decreased  between  December  31,  2001 and  December  31,  2002.  This ratio at
December 31, 2002 was 66 percent as compared to 99 percent at December 31, 2001.
This  decrease  (and the increase in the other asset  quality  ratios  mentioned
above) is primarily  attributable to the $5.0 million  commercial  credit in the
category  loans past due 90 days and still  accruing  interest at  December  31,
2002.  Subsequent  to December  31,  2002,  this loan was placed on  nonaccrual;
however,  at  December  31,  2002,  and  currently,  based on the  most  current
appraisal of the property,  the loan appears to be sufficiently  collateralized.
Based on appraised value combined with additional  guarantor support,  we expect
to collect  the full  principal  balance  outstanding.  On April 24,  2003,  the
Company  expects to take title of the  property  and will  thereafter  begin the
process  of  selling  the  property.  Allowing  for  timing  required  for  full
resolution  of the credit,  we feel that the amount of the  allowance for credit
losses  allocated to this loan is sufficient  given the facts and  circumstances
surrounding  the status of the credit both at December  31, 2002 and at present.
Without this credit in the  nonperforming  category,  the ratio of the allowance
for credit  losses to  nonperforming  loans at December 31, 2002 would have been
190 percent.

Potential  Problem Loans. In accordance with accounting  standards,  we identify
loans  considered  impaired and the valuation  allowance  attributable  to these
loans.  Impaired  loans  generally  include loans on which we believe,  based on
current  information  and  events,  it is  probable  that we will not be able to
collect all amounts due in accordance  with the terms of the loan  agreement and
which are analyzed for a specific reserve  allowance.  We generally consider all
loans   risk-graded   substandard   and  doubtful  as  well  as  nonaccrual  and
restructured  loans as  impaired.  Impaired  loans at  December  31,  2002,  not
including  the past due,  nonaccrual  and  restructured  loans  reported  above,
totaled $5.8 million.  A  significant  portion of these loans are not in default
but may have  characteristics  such as recent  adverse  operating  cash flows or
general risk  characteristics  that the loan officer feels might  jeopardize the
future  timely  collection  of  principal  and interest  payments.  The ultimate
resolution  of these  credits is subject to changes in economic  conditions  and
other factors.  These loans are closely monitored to ensure that our position as
creditor is protected to the fullest extent possible.

Allowance  for Credit  Losses.  Credit  risk is the risk of loss from a customer
default.  We have in place a process to identify and manage our credit risk. The
process  includes  initial  credit review and approval,  periodic  monitoring to
measure compliance with credit agreements and internal credit policies, internal
credit  review,  monitoring  changes in the risk  ratings  of loans and  leases,
identification of problem loans and leases and special procedures for collection
of problem  loans and leases.  The risk of loss is  difficult to quantify and is
subject to  fluctuations  in values and general  economic  conditions  and other
factors. As discussed previously,  the determination of the allowance for credit
losses  is a  critical  accounting  policy,  which  involves  estimates  and our
judgment on a number of factors such as net  charge-offs,  delinquencies  in the
loan and lease  portfolio and general and economic  conditions.  We consider the
allowance for credit losses of $5.0 million adequate to cover losses inherent in
the loan and lease portfolio as of December 31, 2002.  However, no assurance can
be given that we will not,  in any  particular  period,  sustain  loan and lease
losses that are sizable in relation to the amount  reserved,  or that subsequent
evaluations  of  the  loan  and  lease  portfolio,  in  light  of  factors  then
prevailing, including economic conditions and our ongoing credit review process,
will not require  significant  increases in the allowance for credit  losses.  A
protracted economic slowdown and/or a decline in commercial,  industrial or real
estate  segments may have an adverse impact on the adequacy of the allowance for
credit  losses by  increasing  credit risk and the risk of potential  loss.  See
Notes 1 and 7 to the Consolidated Financial Statements included under Item 8 and
"-Critical  Accounting Policies" for further information  concerning  accounting
policies associated with the allowance for credit losses.


<PAGE>

We maintain our allowance for credit  losses at a level  considered  adequate to
provide for an estimate of probable  losses related to  specifically  identified
loans as well as probable  losses in the remaining loan and lease portfolio that
have been incurred as of each balance sheet date.  The loan and lease  portfolio
and other credit  exposures  are reviewed  regularly to evaluate the adequacy of
the allowance for credit losses.  In determining the level of the allowance,  we
evaluate  the  allowance  necessary  for specific  nonperforming  loans and also
estimate  losses  in other  credit  exposures.  The  resultant  three  allowance
components  are specific  reserves,  reserves for  homogeneous  loan pools and a
qualitative  reserve.  These  components  are fully  described  under  "Critical
Accounting Policies."

Continuous  credit  monitoring  processes and the analysis of loss components is
the  principal  method we rely upon to ensure that changes in  estimated  credit
loss levels are  reflected in our allowance for credit losses on a timely basis.
We also consider  experience of peer  institutions  and  regulatory  guidance in
addition to our own experience.

Loans, leases and other extensions of credit deemed uncollectible are charged to
the allowance. Subsequent recoveries, if any, are credited to the allowance. The
amount of the allowance for credit losses is highly dependent upon our estimates
of variables  affecting  valuation,  appraisals of  collateral,  evaluations  of
performance and status, and the amounts and timing of future cash flows expected
to be received on impaired loans.  Such estimates,  appraisals,  evaluations and
cash flows may be subject  to  frequent  adjustments  due to  changing  economic
prospects of  borrowers,  lessees or  properties.  These  estimates are reviewed
periodically.  Actual  losses may vary from current  estimates and the amount of
the  provision may be either  greater than or less than actual net  charge-offs.
The related  provision  for credit  losses,  which is charged to income,  is the
amount  necessary to adjust the  allowance to the level  determined  appropriate
through the  application of the above processes and those discussed below in the
"Critical Accounting Policies" section.

At year end  2002,  our  total  allowance  was $5.0  million  which  equates  to
approximately  5.6 and 4.6 times the average  charge-offs for the last three and
five years, respectively,  and 7.6 and 5.7 times the average net charge-offs for
the  same  three-and   five-year  periods,   respectively.   Because  historical
charge-offs are not necessarily  indicative of future charge-off levels, we also
give  consideration  to other risk indicators  when  determining the appropriate
allowance level.  Those risk factors have been summarized  above. Our charge-off
policy is generally consistent with regulatory standards.

Our Chief Credit Officer and Vice  President-Internal  Audit/Credit  Review have
the primary  responsibility of affirming our systematic  allowance  methodology,
performing credit loss migration analyses and assessing the allowance components
in  relation  to  estimated  and actual  charge-off  trends.  This  analysis  is
presented  to  members of  management  who are  responsible  for  assessing  and
reporting on the  appropriateness  of the allowance for credit losses as well as
recommending  revisions to our  methodology  for determining the adequacy of the
allowance as they become necessary.

Concentrations of credit risk are discussed under  "-Concentrations  of Credit."
Concentrations  exist in real estate,  construction and lodging places loans and
commitments. Additionally, a geographic concentration of credit risk also arises
because we have  historically  operated  primarily in the upper  Midwest with 69
percent of loans  outstanding  as of December  31, 2002 having been  extended to
customers in Minnesota,  North Dakota and South Dakota. As of December 31, 2002,
26 percent of our loans had been extended to customers in Arizona.  Other groups
of credit risk may not constitute a significant concentration,  but are analyzed
based on other evident risk factors for the purpose of  determining  an adequate
allowance level.

Nonperforming  and  potential  problem  loans are  defined and  discussed  under
"-Nonperforming  Loans and Assets" and "-Potential Problem Loans." Many of these
loans are specifically  analyzed for purposes of determining the adequacy of the
allowance for credit losses.

Estimating  the risk and amount of loss on any loan is  subjective  and ultimate
losses may vary from current  estimates.  Although we believe that the allowance
for credit  losses is  adequate to cover  probable  losses in the loan and lease
portfolio, there can be no assurance that the allowance will prove sufficient to
cover  actual  credit  losses in the future.  In  addition,  various  regulatory
agencies, as an integral part of their examination process,  periodically review
the adequacy of our allowance for credit losses. Such agencies may require us to
make  additional  provisions to the allowance  based upon their  judgments about
information available to them at the time of their examination.
<PAGE>

The  following  table  summarizes,  for the periods  indicated,  activity in the
allowance for credit losses, including amounts of loans charged-off,  amounts of
recoveries,  additions to the allowance charged to operating expense,  the ratio
of net  charge-offs to average total loans,  the ratio of the allowance to total
loans at the end of each period and the ratio of the allowance to  nonperforming
loans:
<TABLE>
<CAPTION>
                   Analysis of Allowance for Credit Losses (1)
                                              For the Years ended December 31,
                                       ----------------------------  --------  --------
                                         2002      2001      2000      1999      1998
                                       --------  --------  --------  --------  --------
                                                  (dollars in thousands)
<S>                                    <C>       <C>       <C>       <C>       <C>
Balance of allowance for credit
 losses, beginning of period.......... $  4,325  $  3,588  $  2,872  $  2,854  $  2,919
                                       --------  --------  --------  --------  --------
Charge-offs:
   Commercial and industrial..........      408       542       574     1,090     1,316
   Real estate mortgage...............        9        99        58        10        66
   Agricultural.......................       --        --        16        35        --
   Consumer/other.....................       75       213        39       137        73
   Lease financing....................      165       411        68        18        --
                                       --------  --------  --------  --------  --------
      Total charge-offs...............      657     1,265       755     1,290     1,455
                                       --------  --------  --------  --------  --------
Recoveries:
   Commercial and industrial..........       86       140       100        86       151
   Real estate mortgage...............        8        30        96         1        26
   Agricultural.......................        4         1        33        --        --
   Consumer/other.....................       11       132        25        71        12
   Lease financing....................       27        --        15        12        --
                                       --------  --------  --------  --------  --------
      Total recoveries................      136       303       269       170       189
                                       --------  --------  --------  --------  --------
Net charge-offs.......................    (521)     (962)     (486)   (1,120)   (1,266)
Provision for credit losses charged
 to operations........................    1,202     1,699     1,202     1,138     1,201
                                       --------  --------  --------  --------  --------
Balance of allowance for credit
 losses, end of period................ $  5,006  $  4,325  $  3,588  $  2,872  $  2,854
                                       ========  ========  ========  ========  ========
Ratio of net charge-offs to average
 loans...............................    (.17%)    (.33%)    (.20%)    (.46%)    (.54%)
                                       ========  ========  ========  ========  ========
Average gross loans outstanding
 during the period.................... $307,227  $293,716  $244,526  $246,148  $234,342
                                       ========  ========  ========  ========  ========
Ratio of allowance for credit losses
 to total loans.......................    1.49%     1.45%     1.42%     1.13%     1.15%
                                       ========  ========  ========  ========  ========
Ratio of allowance for credit losses
 to nonperforming loans...............      66%       99%      619%      173%      119%
                                       ========  ========  ========  ========  ========
--------------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>

Our ratio of allowance for credit losses to  nonperforming  loans decreased from
99  percent  at  December  31,  2001 to 66 percent at  December  31,  2002.  See
"-Nonperforming  Loans  and  Assets"  for a  discussion  of  the  specific  loan
responsible  for this decrease and the facts and  circumstances  surrounding the
status of the loan.
<PAGE>

The table  below  presents,  for the periods  indicated,  an  allocation  of the
allowance for credit losses among the various loan categories and sets forth the
percentage  of loans in each  category to gross  loans.  The  allocation  of the
allowance for credit losses as shown in the table should  neither be interpreted
as an indication of future charge-offs, nor as an indication that charge-offs in
future  periods  will  necessarily  occur in these  amounts or in the  indicated
proportions.
<TABLE>
<CAPTION>
                                 Allocation of the Allowance for Loan Losses (1)
                                                     December 31,
               -------------------------------------------------------------------------------------------------------------------
                         2002                   2001                    2000                  1999                    1998
               ----------------------- ---------------------- ---------------------- ---------------------- ----------------------
                          Loans in                Loans in               Loans in               Loans in              Loans in
                         category as a          category as a          category as a           category as a         category as a
                Amount    percentage    Amount   percentage    Amount    percentage   Amount    percentage   Amount   percentage
                  of       of total      of       of total      of       of total      of       of total      of      of total
               Allowance  gross loans  Allowance gross loans  Allowance gross loans  Allowance gross loans Allowance gross loans
               --------- ------------- --------- ------------ --------- ------------ --------- ----------- --------- -------------
                                        (dollars in thousands)
<S>            <C>       <C>           <C>       <C>          <C>       <C>          <C>       <C>         <C>       <C>
Commercial
 and
 industrial....$  2,344         28%    $   2,586       34%    $   2,066       42%    $   1,356        43%   $  1,155       44%
Real estate
 mortgage......   1,836         44%        1,038       42%          702       34%          712        35%        667       31%
Real estate
construction...     398         19%          137       11%          112       10%          151         6%        129        8%
Agricultural...     231          5%          267        6%          342        6%          220         6%        252        8%
Consumer/other.      85          2%          118        5%          128        5%          138         6%        217        6%
Lease
 financing.....     112          2%          179        2%          145        3%           88         4%        133        3%
Unallocated....      --          0%           --        0%           93        0%          207         0%        301        0%
               --------- ------------- --------- ------------ --------- ------------ --------- ----------- --------- -----------
Total..........$  5,006        100%    $   4,325      100%    $   3,588      100%    $   2,872       100%  $   2,854      100%
               ========= ============= ========= ============ ========= ============ ========= =========== ========= ===========
-----------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>

Deposits. Our core deposits consist of noninterest- and interest-bearing  demand
deposits,  savings  deposits,  money market deposit  accounts,  certificates  of
deposit under $100,000, certain certificates of deposit of $100,000 and over and
public funds.  Total  deposits were $398.2 million at December 31, 2002 compared
with $375.3 and $330.9 million at December 31, 2001 and 2000,  respectively.  We
use these deposits, along with other borrowed funds, to support our asset base.

The following table sets forth, for the periods  indicated,  the distribution of
our average  deposit  account  balances  and average cost of funds rates on each
category of deposits.  See "Results of  Operations-Net  Interest  Income" for an
explanation of changes in deposit volume and costs during the periods presented:
<TABLE>
<CAPTION>
                     Average Deposits and Deposit Costs (1)

                                          For the Years Ended December 31,
                       -------------------------------------------------------------------------------
                                2002                        2001                        2000
                       ------------------------  -------------------------  --------------------------
                                Percent   Wgtd.            Percent   Wgtd.            Percent   Wgtd.
                        Average   of      avg.    Average    of      avg.    Average    of      avg.
                        balance deposits  rate    balance  deposits  rate    balance  deposits  rate
                       -------- --------  -----  --------  --------  -----  --------  --------  ------
                                               (dollars in thousands)
<S>                    <C>      <C>       <C>    <C>       <C>       <C>    <C>       <C>       <C>
Interest checking and
 MMDAs................ $174,108   44.51%  1.64%  $147,775    41.92%  3.16%  $130,007    40.98%   5.37%
Savings deposits......    4,511    1.15%  0.86%     3,758     1.07%  1.49%     4,042     1.27%   2.08%
Time deposits (CDs):
CDs under $100,000....  104,964   26.83%  3.88%    98,639    27.99%  5.35%   101,624    32.04%   5.68%
CDs $100,000 and over.   73,639   18.83%  4.46%    73,806    20.94%  5.76%    54,592    17.21%   5.98%
                       -------- --------         --------  --------         --------  --------
Total time deposits...  178,603   45.66%  4.12%   172,445    48.93%  5.52%   156,216    49.25%   5.78%
                       -------- --------         --------  --------         --------  --------
Total interest-bearing
 deposits.............. 357,222   91.32%  2.87%   323,978    91.92%  4.40%   290,265    91.50%   5.52%
Noninterest-bearing
  demand deposits.....   33,951    8.68%     --    28,474     8.08%     --    26,953     8.50%      --
                       -------- --------         --------  --------         --------  --------
Total deposits........ $391,173  100.00%  2.62%  $352,452   100.00%  4.04%  $317,218    100.0%   5.07%
                       ======== ========         ========  ========         ========  ========
--------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>
<PAGE>

At times earning asset growth can outpace core deposit  growth  resulting in the
use of brokered  and out of market  certificates  of deposit and other  borrowed
funds. See "-Borrowed Funds." This trend has been common in the banking industry
because of the  proliferation  of  non-bank  competitors  and the  multitude  of
financial and investment  products available to customers as well as the need to
utilize such funds in the process of our overall  balance sheet  management.  At
times,  access to brokered and out of market deposits is available at maturities
and rates  more  favorable  than those  available  in our local  markets.  As of
December  31,  2002,  we  held a total  of  $27.3  million  of  national  market
certificates of deposit and $31.4 million of  certificates  of deposit  acquired
through  brokers.  Under  current  FDIC  regulations,  only  "well  capitalized"
financial  institutions may fund themselves with brokered deposits without prior
approval of regulators.  Our Bank was well capitalized at December 31, 2002. See
"Capital  Resources and Expenditures" and Note 18 to the Consolidated  Financial
Statements  included  under  Item 8 for a summary of the  capital  status of the
Bank.

Time  deposits in  denominations  of $100,000 and more totaled  $64.9 million at
December  31, 2002 as compared to $79.0 and $59.1  million at December  31, 2001
and 2000, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 2002:
<TABLE>
<CAPTION>
                               Time Deposits of $100,000 and Over
                                         (in thousands)
        <S>                                 <C>
        Maturing in:
        3 months or less.................... $    9,655
        Over 3 months through 6 months......     11,725
        Over 6 months through 12 months.....     15,797
        Over 12 months......................     27,728
                                             ----------
           Total............................ $   64,905
                                             ==========
</TABLE>

Borrowed  Funds.  We use  short-term  borrowings,  FHLB  advances and  long-term
borrowings  to support our asset base.  Short-term  borrowings  include  Federal
funds  purchased  and  U.S.  Treasury  tax and loan  note  option  accounts  and
securities sold under agreements to repurchase. At December 31, 2002, short-term
borrowings  were $28.1  million  compared to  $760,000 at December  31, 2001 and
$33.2 million at December 31, 2000.

The following table provides a summary of our short-term  borrowings and related
cost information as of, or for the periods ended, December 31:
<TABLE>
<CAPTION>

                            Short-Term Borrowings (1)

                                                      2002      2001      2000
                                                    --------  --------  --------
                                                         (dollars in thousands)
<S>                                                 <C>       <C>
Short-term borrowings outstanding
  at period end....................................  $28,120   $   760   $33,228
Weighted average interest rate at period end.......    1.48%     2.53%     6.45%
Maximum month-end balance during the period........  $28,120   $39,924   $37,324
Average borrowings outstanding for the period......  $ 7,799   $10,206   $ 3,459
Weighted average interest rate for the period......    1.81%     4.32%     6.76%
<FN>
---------------------
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>

Note  11  to  the  Consolidated  Financial  Statements  included  under  Item  8
summarizes  the  general  terms  of our  short-term  borrowings  outstanding  at
December 31, 2002 and 2001, including interest rates,  maturity dates,  weighted
average yields and other applicable terms.

FHLB advances  totaled  $97.2,  $117.2 and $117.2  million at December 31, 2002,
2001 and 2000,  respectively  while long-term  borrowings  totaled $8.6 million,
$13,000 and $12.6 million, respectively, for the same periods.

Notes 12 and 13 to the Consolidated  Financial  Statements included under Item 8
summarize the general  terms of our FHLB  advances and  long-term  borrowings at
December 31, 2002 and 2001, including interest rates,  maturity dates,  weighted
average yields and other applicable terms.

During 2002,  $20.0 million of our FHLB  advances  matured and were not replaced
due to the availability of other funding sources.  Also during 2002, we incurred
$8.5 million of long-term  debt in  conjunction  with the  acquisition  of Milne
Scali.
<PAGE>

During 2001, we purchased and retired $82,000 of our 8 5/8 percent  subordinated
notes due May 31, 2004 ("the Notes") at a discount using cash generated from the
sale of our asset-based  lending  subsidiary,  BNC Financial  Corporation,  Inc.
which was sold on  December  31,  1999.  On August 31,  2001,  we  redeemed  the
remaining $12.6 million of the Notes at par through  exercise of our call option
on the Notes.  The remaining  $12.6  million of the Notes were redeemed  using a
portion of the cash  generated  from the  issuance  of  subordinated  debentures
through the  establishment of BNC Statutory Trust II (see "Guaranteed  Preferred
Beneficial  Interests in Company's  Subordinated  Debentures" and Note 14 to the
Consolidated  Financial  Statements included under Item 8 for further discussion
of our subordinated debenture issuances). The transactions and redemption of the
Notes  during 2001  resulted  in an  extraordinary  loss of $134,000  ($0.06 per
diluted share) net of income taxes of ($70,000).

Interest  Rate Caps and Floors.  From time to time we may use  off-balance-sheet
instruments,  principally  interest rate caps and floors, to adjust the interest
rate sensitivity of on-balance-sheet items, including borrowings. During May and
June 2001, we  purchased,  for $1.2  million,  interest rate cap contracts  with
notional  amounts  totaling  $40.0  million to  mitigate  interest  rate risk in
rising-rate  scenarios.  The referenced  interest rate is three-month LIBOR with
$20.0 million of 4.50 percent  contracts having three-year  original  maturities
and  $20.0  million  of  5.50  percent   contracts  having  five-year   original
maturities.  The  contracts,  classified as other  assets,  are reflected in our
December 31, 2002  consolidated  balance sheet at their then combined fair value
of $136,000. The contracts are not being accounted for as hedges under SFAS 133.
As a result,  the impact of marking the  contracts  to fair value has been,  and
will  continue to be,  included in net interest  income.  During the years ended
December  31,  2002 and 2001,  the impact of  marking  the  contracts  to market
(reflected  in the  consolidated  income  statements  as an increase in interest
expense on borrowings) was $779,000 and $331,000,  respectively.  The fair value
of $136,000 as of December 31, 2002  reflects  the full extent of the  potential
loss on the contracts should further write downs to fair value be required.  See
-"Liquidity,  Market and Credit Risk," Item 7A,  "Quantitative  and  Qualitative
Disclosures about Market Risk," and Notes 1 and 17 to the Consolidated Financial
Statements  included  under  Item  8 for  further  discussion  about  accounting
policies applicable to derivative financial instruments.

Guaranteed Preferred Beneficial Interests in Company's Subordinated  Debentures.
In July 2000, we established a special  purpose trust for the purpose of issuing
$7.5 million of fixed rate subordinated debentures.  The subordinated debentures
qualify as Tier 1 capital up to certain  limits with the balance  qualifying  as
Tier 2 capital up to certain limits.  See Note 14 to the Consolidated  Financial
Statements  included  under Item 8 for a complete  description of the fixed rate
subordinated debentures.

In July 2001, we established an additional special purpose trust for the purpose
of  issuing  $15.0  million  of  floating  rate  subordinated  debentures.   The
subordinated  debentures qualify as Tier 1 capital up to certain limits with the
balance qualifying as Tier 2 capital up to certain limits. We used $12.6 million
of the proceeds from the  subordinated  debentures  issued in 2001 to retire the
remaining $12.6 million of our 8 5/8 percent subordinated notes due May 31, 2004
through  the  exercise  of the  call  option  on the  notes.  See Note 14 to the
Consolidated   Financial  Statements  included  under  Item  8  for  a  complete
description of the floating rate subordinated debentures.

Capital  Resources and  Expenditures.  We actively monitor  compliance with bank
regulatory  capital  requirements,  including  risk-based  and leverage  capital
measures. Under the risk-based capital method of capital measurement,  the ratio
computed is dependent on the amount and  composition  of assets  recorded on the
balance sheet,  and the amount and  composition of off-balance  sheet items,  in
addition  to  the  level  of  capital.  Note  18 to the  Consolidated  Financial
Statements  included  under  Item 8 includes  a summary  of the  risk-based  and
leverage  capital ratios of BNCCORP and its subsidiary  banks as of December 31,
2002 and 2001,  including the capital ratios and capital amounts necessary to be
considered  "well   capitalized"   under  prompt  corrective  action  regulatory
provisions and adequately  capitalized for capital adequacy purposes. As of each
of those dates,  BNCCORP and the Bank(s) exceeded capital adequacy  requirements
and the Bank(s) were  considered  "well  capitalized"  under  prompt  corrective
action provisions.

The capital  ratios of the  Company and the Bank(s)  were as follows as of those
dates:
<TABLE>
<CAPTION>
                                  Tier 1        Total
                                  Risk-         Risk-        Tier 1
                                  Based         Based       Leverage
      As of December 31, 2002     Ratio         Ratio        Ratio
                                -----------   -----------  -----------
<S>                                <C>           <C>          <C>
BNCCORP, consolidated.........      5.92%         9.53%        4.46%
BNC National Bank.............      9.29%        10.45%        7.00%

     As of December 31, 2001

BNCCORP, consolidated.........      8.87%        12.96%        6.33%
BNC National Bank.............      9.96%        11.01%        6.96%
BNC National Bank of Arizona..     21.70%        22.93%       20.10%
<PAGE>
</TABLE>

Our consolidated  capital ratios declined from December 31, 2001 to December 31,
2002  largely  due  to  the  intangible  assets  acquired  in  the  Milne  Scali
acquisition.  Intangible assets are direct  deductions from Tier 1 capital.  Our
equity  capital  increased  from $29.0  million at  December  31,  2001 to $35.0
million at December 31, 2002. This increase was  attributable to the issuance of
$2.5  million of common  stock in the Milne Scali  acquisition,  the issuance of
$1.5 million of  noncumulative  perpetual  preferred  stock and earnings of $2.0
million.  Additionally,  as Tier 1 capital increases, a larger proportion of our
subordinated debentures qualify for Tier 1 capital ($9.7 million at December 31,
2001 and $11.7  million  at  December  31,  2002).  The  remaining  subordinated
debentures  qualify as Tier 2 capital.  The  increase in equity  capital and the
resultant  increase in Tier 1 capital  was more than  offset by the  increase in
intangible  assets of $18.9 million  between  December 31, 2001 and December 31,
2002. In spite of this increase in intangible  assets, our consolidated and bank
capital ratios at December 31, 2002 met all regulatory requirements.

During 2002, the Company  initiated  construction of an office building at 17045
North  Scottsdale  Road,  Scottsdale,  Arizona.  Total  cost  for the  building,
including  furniture  and  equipment  is estimated  at $1.8  million.  We expect
construction to be completed during 2003 and the project is being funded through
cash  generated  from  operations.  The Company also plans to purchase the Milne
Scali building at 1750 East Glendale Avenue, Phoenix,  Arizona for its appraised
price of $3.9 million  during the first  quarter of 2003.  The purchase  will be
funded through cash generated from operations.  There are no other major capital
expenditures  anticipated  during the remainder of 2003 as we expect our current
facilities,  along with the  construction  of the facility in Scottsdale,  to be
sufficient for operating purposes.

Off-Balance Sheet Arrangements. In the normal course of business, we are a party
to various financial  instruments with off-balance sheet risk, primarily to meet
the needs of our  customers as well as to manage our interest  rate risk.  These
instruments,  which we issue for  purposes  other than  trading,  carry  varying
degrees  of  credit,  interest  rate or  liquidity  risk in excess of the amount
reflected in the consolidated  balance sheets. We also have entered into certain
guarantee  arrangements that are also not reflected in the consolidated  balance
sheets. Notes 20 and 21 to the Consolidated  Financial Statements included under
Item 8 of Part II include a summary of our off-balance  sheet  arrangements  and
guarantees.

Contractual Obligations, Contingent Liabilities and Commitments. As disclosed in
the Notes to the  Consolidated  Financial  Statements  included under Item 8, we
have  certain   obligations  and  commitments  to  make  future  payments  under
contracts.   At  December  31,  2002,  the  aggregate  contractual   obligations
(excluding  bank  deposits)  and  commercial  commitments  were as  follows  (in
thousands):
<TABLE>
<CAPTION>
                                                  Payments due by period
                                   ---------------------------------------------------
                                     Less
Contractual Obligations:             than 1    1 to 3     4 to 5    After 5
                                     year      years      years     years      Total
                                   --------  ---------  --------  ---------  ---------

<S>                                <C>       <C>        <C>       <C>        <C>
Total borrowings.................. $43,127   $ 28,554   $    --   $ 62,200   $133,881
Annual rental commitments
 under non-cancelable
 operating leases.................   1,421      2,428     1,874      2,025      7,748 (a)
                                   --------  ---------  --------  ---------  ---------
Total............................. $44,548   $ 30,982   $ 1,874   $ 64,225   $141,629
                                   ========  =========  ========  =========  =========

                                       Amount of Commitment - Expiration by Period
                                   ---------------------------------------------------
                                    Less
Other Commercial Commitments:      than 1    1 to 3     4 to 5    After 5
                                    year      years      years     years       Total
                                   --------  ---------  --------  ---------  ---------

Commitments to lend............... $72,405   $ 25,861   $  4,097   $    653  $ 103,016
Standby and commercial letters of
   credit.........................   1,109        143      7,666         --      8,918
                                   --------  ---------  --------  ---------  ---------
Total............................. $73,514   $ 26,004   $ 11,763   $    653  $ 111,934
                                   ========  =========  ========  =========  =========
<FN>
(a) If the Milne Scali building is purchased during the first quarter of 2003 as
anticipated,  the  amounts  presented  in this line  item  would be  reduced  by
$295,000 for the less than 1 year  column,  $786,000 for the 1 to 3 year column,
$786,000  for the 4 to 5 year  column  and  $1.7  million  for the  after 5 year
column.
</FN>
</TABLE>
<PAGE>

Liquidity, Market and Credit Risk

Our  business  activities  generate,  in  addition to other  risks,  significant
liquidity,  market and credit risks.  Liquidity risk is the possibility of being
unable to meet all present and future financial  obligations in a timely manner.
Market risk arises from changes in interest  rates,  exchange  rates,  commodity
prices and equity prices and represents the  possibility  that changes in future
market rates or prices will have a negative impact on our earnings or value. Our
principal  market risk is interest  rate risk.  See Item 7A,  "Quantitative  and
Qualitative Disclosures about Market Risk" for further discussion about interest
rate risk and its impact on net interest income.  Credit risk is the possibility
of loss from the  failure of a customer to perform  according  to the terms of a
contract.  We are a party to transactions  involving financial  instruments that
create risks that may or may not be reflected on a  traditional  balance  sheet.
These financial instruments can be subdivided into three categories:

     Cash financial  instruments,  generally  characterized as  on-balance-sheet
     items, include investments, loans, mortgage-backed securities, deposits and
     debt obligations.

     Credit-related   financial   instruments,    generally   characterized   as
     off-balance-sheet  items, include such instruments as commitments to extend
     credit,  commercial letters of credit and performance and financial standby
     letters of credit.

     Derivative financial  instruments,  on-balance-sheet items as of January 1,
     2001,   include  such  instruments  as  interest  rate,  foreign  exchange,
     commodity price and equity price contracts,  including forwards,  swaps and
     options.

Our risk  management  policies  are  intended to monitor  and limit  exposure to
liquidity,  market  and credit  risks  that  arise from each of these  financial
instruments.  See  "-Loan  Portfolio"  for  a  discussion  of  our  credit  risk
management strategies.

Liquidity Risk Management.  Liquidity risk management encompasses our ability to
meet all  present  and future  financial  obligations  in a timely  manner.  The
objectives  of liquidity  management  policies are to maintain  adequate  liquid
assets,  liability  diversification among instruments,  maturities and customers
and a  presence  in both the  wholesale  purchased  funds  market and the retail
deposit market.

The  Consolidated  Statements  of  Cash  Flows  in  the  Consolidated  Financial
Statements  included  under  Item 8 of Part II  present  data on cash  and  cash
equivalents  provided  by  and  used  in  operating,   investing  and  financing
activities.  In addition to liquidity  from core deposit  growth,  together with
repayments  and  maturities  of  loans  and  investments,  we  utilize  brokered
deposits,  sell securities  under  agreements to repurchase and borrow overnight
federal  funds.  The  Bank  is a  member  of  the  FHLB,  which  affords  it the
opportunity  to borrow funds in terms  ranging  from  overnight to ten years and
beyond.  Borrowings  from the FHLB are  generally  collateralized  by the Bank's
mortgage loans and various investment securities.  See "-Investment  Securities"
and Note 12 to the Consolidated  Financial  Statements  included under Item 8 of
Part II. We have also  obtained  funding  through the  issuance of  Subordinated
Notes, subordinated debentures and long-term borrowings.  See "-Borrowed Funds,"
"Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures"
and Notes 13 and 14 to the Consolidated Financial Statements included under Item
8 of Part II for further information on these instruments.

The  following  table sets forth,  for the periods  indicated,  a summary of our
major sources and (uses) of funds. This summary  information is derived from the
Consolidated Statements of Cash Flows included under Item 8 of Part II:
<TABLE>
<CAPTION>
                         Major Sources and Uses of Funds

                                                    For the Years Ended December 31,
                                                   -----------------------------------
                                                       2002      2001         2000
                                                   ----------  ----------  -----------
                                                             (in thousands)
<S>                                                <C>         <C>         <C>
Proceeds from sales of investment securities...... $ 100,651   $ 119,394   $     23,789
Proceeds from maturities of investment
 securities.......................................    50,984      86,414         48,345
Net increase (decrease) in short-term borrowings..    27,360    (32,467)         31,028
Net increase in deposits..........................    21,293      45,505         37,753
Net increase (decrease) in long-term borrowings...     8,548    (13,000)        (1,921)
Proceeds from issuance of preferred stock.........     1,500          --             --
Proceeds from issuance of subordinated
 debentures.......................................        --      14,429          7,220
Proceeds from FHLB advances.......................        --          --      1,159,700
Purchases of investment securities................ (146,985)   (162,321)      (178,827)
Net increase in loans.............................  (35,144)    (53,132)        (7,630)
Repayments of FHLB advances.......................  (20,000)          --    (1,129,000)
Cash paid for acquisition of insurance
 subsidiary.......................................  (13,964)          --             --
Disposition of discontinued Fargo branch..........   (4,365)          --             --
</TABLE>
<PAGE>

Our  liquidity  is  measured  by our  ability to raise cash when we need it at a
reasonable  cost and with a minimum of loss.  Given the uncertain  nature of our
customers'  demands  as  well  as our  desire  to  take  advantage  of  earnings
enhancement opportunities,  we must have adequate sources of on- and off-balance
sheet funds that can be acquired  in time of need.  Accordingly,  in addition to
the liquidity  provided by balance sheet cash flows,  liquidity is  supplemented
with  additional  sources such as credit lines with the FHLB,  credit lines with
correspondent   banks  for  federal  funds,   wholesale  and  retail  repurchase
agreements,  brokered  certificates of deposit and direct non-brokered  national
certificates of deposit through national deposit networks.

We measure our liquidity position on a monthly basis. Key factors that determine
our  liquidity  are the  reliability  or  stability  of our  deposit  base,  the
pledged/non-pledged  status of our  investments  and potential loan demand.  Our
liquidity  management  system divides the balance sheet into liquid assets,  and
short-term  liabilities  that are assumed to be  vulnerable  to  non-replacement
under  abnormally  stringent  conditions.  The  excess  of  liquid  assets  over
short-term  liabilities is measured over a 30-day planning horizon.  Assumptions
for  short-term  liabilities  vulnerable  to  non-replacement  under  abnormally
stringent  conditions are based on a historical  analysis of the  month-to-month
percentage  changes in  deposits.  The excess of liquid  assets over  short-term
liabilities and other key factors such as expected loan demand as well as access
to other  sources of liquidity  such as lines with the FHLB,  federal  funds and
those other  supplemental  sources  listed above are tied  together to provide a
measure of our  liquidity.  We have a targeted  range and manage our  operations
such that these targets can be achieved.  We believe that our prudent management
policies  and  guidelines  will  ensure  adequate  levels of  liquidity  to fund
anticipated needs of on- and off-balance-sheet items. In addition, a contingency
funding  policy  statement  identifies  actions  to be taken in  response  to an
adverse liquidity event.

As of December 31, 2002, we had  established  two revolving lines of credit with
banks  totaling  $5.5 million that were not drawn on. The lines,  if drawn upon,
mature  daily with  interest  rates that float at the  Federal  funds  rate.  At
December 31, 2002, we also had the ability to draw  additional  FHLB advances of
$61.2  million  based  upon the  mortgage  loans and  securities  that were then
pledged, subject to a requirement to purchase additional FHLB stock.

Forward-Looking Statements

Statements  included  in  Item  7,  "Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations"  which are not  historical  in
nature  are  intended  to be,  and are  hereby  identified  as  "forward-looking
statements"  for  purposes  of the safe  harbor  provided  by Section 27A of the
Securities  Act, as amended and Section 21E of the Exchange Act, as amended.  We
caution  readers  that  these  forward-looking  statements,   including  without
limitation,  those relating to our future business prospects,  revenues, working
capital,  liquidity,  capital needs,  interest costs and income,  are subject to
certain  risks and  uncertainties  that  could  cause  actual  results to differ
materially from those indicated in the forward-looking statements due to several
important factors. These factors include, but are not limited to: 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 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.  For a
discussion of some of the additional  factors that might cause such differences,
see Item 1 of Part I, "-Factors That May Affect Future Results of Operations."

Effects of Inflation

Unlike  most  industrial  companies,  the assets and  liabilities  of  financial
institutions are primarily monetary in nature. Therefore,  banking organizations
do not  necessarily  gain or lose due to the  effects of  inflation.  Changes in
interest  rates,   which  are  a  major   determinant  of  a  financial  service
organization's  profitability,  do not necessarily  correspond to changes in the
prices of goods and services;  however, interest rates may change in response to
changes  in  expectations  of  future  inflation.   An  analysis  of  a  banking
organization's asset and liability structure provides the best indication of how
the  organization  is  positioned  to respond  to  changing  interest  rates and
maintain profitability.

The financial  statements and  supplementary  financial data have been prepared,
primarily,  on a historical  basis,  which is mandated by accounting  principles
generally  accepted in the United States.  Fluctuations in the relative value of
money due to inflation or recession are generally not considered.

Recently Issued and Adopted Accounting Pronouncements

Note 1 to the Consolidated Financial Statements included under Item 8 includes a
summary of  recently  issued and  adopted  accounting  pronouncements  and their
related or anticipated impact on the Company.
<PAGE>

Critical Accounting Policies

Critical  accounting  policies are dependent on estimates that are  particularly
susceptible to significant change and include the determination of the allowance
for credit  losses and income  taxes.  The  following  have been  identified  as
"critical accounting policies."

Allowance  for Credit  Losses.  We maintain our allowance for credit losses at a
level considered  adequate to provide for an estimate of probable losses related
to  specifically  identified  loans as well as probable  losses in the remaining
loan and lease  portfolio that have been incurred as of each balance sheet date.
The loan and lease portfolio and other credit  exposures are reviewed  regularly
to evaluate the adequacy of the allowance for credit losses.  In determining the
level of the  allowance,  we  evaluate  the  allowance  necessary  for  specific
nonperforming  loans and also  estimate  losses in other credit  exposures.  The
resultant three allowance components are as follows:

     Specific Reserves.  The amount of specific reserves is determined through a
     loan-by-loan  analysis of problem loans over a minimum size that  considers
     expected future cash flows,  the value of collateral and other factors that
     may impact the  borrower's  ability to make payments when due.  Included in
     this  group  are  those  nonaccrual  or  renegotiated  loans  that meet the
     criteria as being "impaired" under the definition in Statement of Financial
     Accounting  Standards No. 114, "Accounting by Creditors for Impairment of a
     Loan," ("SFAS 114"). A loan is impaired when, based on current  information
     and events,  it is probable  that a creditor  will be unable to collect all
     amounts  due  according  to the  contractual  terms of the loan  agreement.
     Problem  loans  also  include  those  credits  that  have  been  internally
     classified as credits  requiring  management's  attention due to underlying
     problems in the borrower's business or collateral concerns. Under SFAS 114,
     any allowance on impaired loans is generally based on one of three methods.
     It requires that impaired  loans be measured at either the present value of
     expected  cash  flows at the loan's  effective  interest  rate,  the loan's
     observable market price or the fair value of the collateral of the loan.

     Reserves for Homogeneous Loan Pools. We make a significant  number of loans
     and leases  that,  due to their  underlying  similar  characteristics,  are
     assessed for loss as "homogeneous" pools. Included in the homogeneous pools
     are consumer  loans and commercial  loans under a certain size,  which have
     been excluded from the specific reserve allocation previously discussed. We
     segment  the  pools  by type of loan or lease  and  using  historical  loss
     information estimate a loss reserve for each pool.

     Qualitative  Reserve. Our senior lending management also allocates reserves
     for special situations,  which are unique to the measurement period.  These
     include,  among other things,  prevailing and anticipated  economic trends,
     such as economic conditions in certain geographical or industry segments of
     the  portfolio  and  economic   trends  in  the  retail   lending   sector,
     management's  assessment  of credit risk  inherent  in the loan  portfolio,
     delinquency trends, historical loss experience, peer-group loss history and
     other factors.

Continuous  credit  monitoring  processes and the analysis of loss components is
the  principal  method we rely upon to ensure that changes in  estimated  credit
loss levels are  reflected in our allowance for credit losses on a timely basis.
We also consider  experience of peer  institutions  and  regulatory  guidance in
addition to our own experience. In addition,  various regulatory agencies, as an
integral part of their examination  process,  periodically  review the allowance
for credit losses. Such agencies may require additions to the allowance based on
their  judgment  about  information  available  to  them at the  time  of  their
examination.

Loans, leases and other extensions of credit deemed uncollectible are charged to
the allowance. Subsequent recoveries, if any, are credited to the allowance. The
amount of the allowance for credit losses is highly dependent upon our estimates
of variables  affecting  valuation,  appraisals of  collateral,  evaluations  of
performance and status, and the amounts and timing of future cash flows expected
to be received on impaired loans.  Such estimates,  appraisals,  evaluations and
cash flows may be subject  to  frequent  adjustments  due to  changing  economic
prospects of  borrowers,  lessees or  properties.  These  estimates are reviewed
periodically.  Actual  losses may vary from current  estimates and the amount of
the  provision may be either  greater than or less than actual net  charge-offs.
The related  provision  for credit  losses,  which is charged to income,  is the
amount  necessary to adjust the  allowance to the level  determined  appropriate
through application of the above processes.
<PAGE>

As indicated  above,  we employ a systematic  methodology  for  determining  our
allowance  for credit  losses  that  includes  an  ongoing  review  process  and
quarterly   adjustment  of  the  allowance.   Our  process   includes   periodic
loan-by-loan review for loans that are individually  evaluated for impairment as
well as detailed reviews of other loans (either  individually or in pools). This
includes an assessment of known problem loans, potential problem loans and other
loans that exhibit indicators of deterioration.

Our methodology incorporates a variety of risk considerations, both quantitative
and qualitative,  in establishing an allowance for credit losses that we believe
is  appropriate  at  each  reporting  date.  Quantitative  factors  include  our
historical  loss  experience,  delinquency  and  charge-off  trends,  collateral
values, changes in non-performing loans and other factors.  Quantitative factors
also incorporate known information about individual loans,  including borrowers'
sensitivity   to  interest  rate   movements  and   borrowers'   sensitivity  to
quantifiable  external factors including  commodity and finished goods prices as
well as acts of nature (violent weather, fires, etc.) that occur in a particular
period.

Qualitative factors include the general economic environment in our markets and,
in  particular,  the state of certain  industries in our market areas.  Size and
complexity of individual credits in relation to lending officers' background and
experience levels, loan structure, extent and nature of waivers of existing loan
policies and pace of  portfolio  growth are other  qualitative  factors that are
considered in our methodology.

Our methodology is, and has been,  consistently applied.  However, as we add new
products,  increase in complexity and expand our geographical  coverage, we will
enhance our  methodology  to keep pace with the size and  complexity of the loan
and lease  portfolio.  In this  regard,  we may, if deemed  appropriate,  engage
outside firms to independently  assess our  methodology.  On an ongoing basis we
perform  independent  credit reviews of our loan portfolio.  We believe that our
systematic  methodology  continues to be appropriate given our size and level of
complexity.

While our methodology utilizes historical and other objective  information,  the
establishment of the allowance for credit losses and the classification of loans
is, to some extent,  based on our judgment and  experience.  We believe that the
allowance  for credit  losses is adequate as of December 31, 2002 to cover known
and inherent risks in the loan and lease portfolio.  However,  future changes in
circumstances,  economic  conditions or other factors could cause us to increase
or decrease the allowance for credit losses as necessary.

Income Taxes. We file consolidated federal and state income tax returns.

Income taxes are accounted for using the asset and liability method.  Under this
method,  deferred tax assets and  liabilities  are recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Such  differences  can relate to  differences  in accounting  for credit
losses,  depreciation  timing  differences,   unrealized  gains  and  losses  on
investment  securities,  deferred  compensation and leases, which are treated as
operating  leases for tax purposes and loans for financial  statement  purposes.
Deferred  tax  assets and  liabilities  are  measured  using  enacted  tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date.

The  determination  of current  and  deferred  income  taxes is based on complex
analyses of many factors  including  interpretation  of federal and state income
tax laws, the difference between tax and financial reporting basis of assets and
liabilities  (temporary  differences),  estimates of amounts due or owed such as
the  timing  of  reversals  of  temporary   differences  and  current  financial
accounting  standards.  Actual  results  could  differ  significantly  from  the
estimates  and  interpretations  used in  determining  the current and  deferred
income tax liabilities.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk arises from changes in interest rates, exchange rates, and commodity
prices and equity prices and represents the  possibility  that changes in future
market rates or prices will have a negative impact on our earnings or value. Our
principal market risk is interest rate risk.
<PAGE>

Interest rate risk arises from changes in interest rates. Interest rate risk can
result from: (1) Re-pricing risk - timing differences in the maturity/re-pricing
of assets, liabilities,  and off-balance sheet contracts; (2) Options risk - the
effect of embedded options, such as loan prepayments, interest rate caps/floors,
and deposit withdrawals; (3) Basis risk - risk resulting from unexpected changes
in the spread between two or more different rates of similar  maturity,  and the
resulting  impact on the  behavior of lending and funding  rates;  and (4) Yield
curve risk - risk resulting from unexpected changes in the spread between two or
more rates of different  maturities  from the same type of  instrument.  We have
risk management policies to monitor and limit exposure to interest rate risk. To
date we have not conducted  trading  activities as a means of managing  interest
rate risk.  Our  asset/liability  management  process is  utilized to manage our
interest  rate risk.  The  measurement  of interest  rate risk  associated  with
financial  instruments is meaningful only when all related and offsetting on-and
off-balance-sheet  transactions are aggregated,  and the resulting net positions
are  identified.  Our interest rate risk  exposure is actively  managed with the
objective of managing the level and potential  volatility of net interest income
in  addition  to the  long-term  growth of equity,  bearing in mind that we will
always be in the business of taking on rate risk and that rate risk immunization
is not entirely  possible.  Also, it is recognized  that as exposure to interest
rate risk is reduced,  so too may the overall  level of net interest  income and
equity.  In  general,  the assets and  liabilities  generated  through  ordinary
business activities do not naturally create offsetting positions with respect to
repricing or maturity  characteristics.  Access to the derivatives market can be
an important  element in  maintaining  our interest  rate risk  position  within
policy  guidelines.  Using  derivative  instruments,  principally  interest rate
floors and caps, the interest rate sensitivity of specific transactions, as well
as pools of assets or liabilities,  is adjusted to maintain the desired interest
rate  risk  profile.  See  "-Loan   Portfolio-Interest  Rate  Caps  and  Floors"
"-Borrowings-Interest  Rate  Caps  and  Floors"  and  Notes  1  and  17  to  the
Consolidated  Financial  Statements  included  under Item 8 for a summary of our
accounting policies pertaining to such instruments.

Our primary tool in measuring  and managing  interest  rate risk is net interest
income simulation. This exercise includes our assumptions regarding the level of
interest rate or balance  changes on  indeterminate  maturity  deposit  products
(savings, interest checking, money market and demand deposits) for a given level
of  market  rate  changes.  These  assumptions  have  been  developed  through a
combination  of  historical  analysis  and  future  expected  pricing  behavior.
Interest rate caps and floors are included to the extent that they are exercised
in the 12-month simulation period. Additionally,  changes in prepayment behavior
of the residential mortgage, CMOs, and mortgage-backed  securities portfolios in
each rate environment are captured using industry estimates of prepayment speeds
for various coupon segments of the portfolio.  For purposes of this  simulation,
projected  month-end balances of the various balance sheet planning accounts are
held  constant  at their  December  31,  2002  levels.  Cash  flows from a given
planning  account are  reinvested  back into the same planning  account so as to
keep the month-end balance constant. The static balance sheet assumption is made
so as to project the interest rate risk to net interest  income  embedded in the
existing  balance  sheet.  With  knowledge of the balance  sheet's  existing net
interest income profile,  more informed  strategies and tactics may be developed
as it relates to the structure/mix of growth.

We monitor the results of net interest income simulation on a quarterly basis at
regularly scheduled ALCO meetings. Each quarter net interest income is generally
simulated for the upcoming  12-month  horizon in seven interest  scenarios.  The
scenarios generally modeled are parallel interest ramps of +/- 100bp, 200bp, and
300bp along with a rates unchanged  scenario.  The parallel movement of interest
rates  means all  projected  market  interest  rates move up or down by the same
amount.  A ramp in  interest  rates  means that the  projected  change in market
interest rates occurs over the 12-month horizon projected.  For example,  in the
-100bp scenario,  the projected prime rate will decrease from its starting point
at December 31, 2002 of 4.25 percent to 3.25 percent 12 months later.  The prime
rate in this example will decrease  1/12th of the overall  decrease of 100 basis
points each month.  Given the historically low absolute level of market interest
rates as of December 31, 2002, the declining rate scenario  analysis was limited
to -100bp for the summary table presented below and a +400bp scenario was added.
<PAGE>

The net interest  income  simulation  result for the  twelve-month  horizon that
covers the  calendar  year of 2003 is shown below.  The impact of each  interest
rate scenario on projected net interest income is displayed before and after the
impact of the $20.0 million  cumulative  notional  original 3-year interest rate
cap positions on 3-month LIBOR with a 4.50 percent  strike and the $20.0 million
cumulative notional original 5-year interest rate cap positions on 3-month LIBOR
with a 5.50 percent  strike.  The impact of the cap  positions is  calculated by
determining  the fair value of the contracts at the end of the 12-month  horizon
using an interest rate option valuation model. The change in fair value plus any
expected  cash flow in the various rate  scenarios  is summed to  determine  the
total net  benefit/(cost)  of the portfolio of interest rate cap contracts.  See
Notes 1 and 17 to the Consolidated Financial Statements included under Item 8 of
Part II for further  discussion related to our interest rate caps and accounting
policies related to these derivative instruments.
<TABLE>
<CAPTION>
                         Net Interest Income Simulation
                             (amounts in thousands)

Movement in interest rates      -100bp   Unchanged    +100bp     +200bp     +300bp    +400bp
                                ------   ---------   --------   --------   --------  --------

<S>                             <C>      <C>         <C>        <C>        <C>       <C>
Projected 12-month net
 interest income..............  $ 14,740  $ 16,820   $ 17,255   $ 17,640   $ 18,016  $ 18,133
Dollar change from rates
 unchanged scenario...........  $(2,080)        --   $    435   $    820   $  1,196  $  1,313
Percentage change from rates
 unchanged scenario...........  (12.37)%        --      2.59%      4.88%      7.11%     7.81%

Net benefit/(cost) of
  cumulative $40.0 million
  interest rate caps (1)......  $  (108)  $   (51)   $     48   $    196   $    404  $    706

Total net interest income
 impact with caps.............  $ 14,632  $ 16,769    $17,303   $ 17,836   $ 18,421  $ 18,839
Dollar change from unchanged
 w/caps.......................  $(2,137)        --   $    534   $  1,067   $  1,652  $  2,070
Percentage change from
 unchanged w/caps.............  (12.74)%        --      3.18%      6.36%      9.85%    12.34%
Policy guidelines (decline
 limited to)..................     5.00%        --      5.00%     10.00%     15.00%    20.00%
<FN>

(1) In May and June 2001,  we  purchased  four  interest  rate cap  contracts on
3-month  LIBOR with  strikes at 4.50  percent each in the amount of $5.0 million
notional with original terms of three years for total notional of $20.0 million.
We also purchased four interest rate cap contracts on 3-month LIBOR with strikes
at 5.50 percent each in the amount of $5.0 million  notional with original terms
of five years for total  notional  of $20.0  million.  See Notes 1 and 17 to the
Consolidated  Financial Statements included under Item 8 for further information
on accounting policies related to derivative financial investments.
</FN>
</TABLE>

Our rate sensitivity  position over the projected  twelve-month horizon is asset
sensitive. This is evidenced by the projected increase in net interest income in
the rising interest rate  scenarios,  and the decrease in net interest income in
falling rate scenarios.

Because one of the  objectives  of  asset/liability  management is to manage net
interest income over a one-year planning  horizon,  policy guidelines are stated
in terms of maximum  potential  reduction in net interest income  resulting from
changes in interest rates over the twelve-month period. It is no less important,
however,  to give  attention  to the  absolute  dollar  level of  projected  net
interest income over the twelve-month  period.  For example,  even though in the
-100bp  scenario,  net interest income declines $2.1 million,  or 12.74 percent,
from the unchanged  scenario,  the level of net interest income of $14.6 million
is only 1.9 percent below the $14.9 million of net interest  income recorded for
the year ended December 31, 2002.
<PAGE>

Our general policy is to limit the percentage decrease in projected net interest
income to 5, 10, 15 and 20 percent from the rates unchanged scenario for the +/-
100bp, 200bp, 300bp and 400bp interest rate ramp scenarios, respectively. If the
projected dollars of net interest income over the next  twelve-month  period are
in excess of the Board and ALCO established targets,  then the above percentages
decline do not apply.  However, if the projected  percentage declines are within
the above  guidelines but the projected  dollars of net interest income are less
than the Board and ALCO established targets, then the ALCO will consider tactics
to increase the projected  level of dollars of net interest  income.  A targeted
level of net interest  income is established and approved by the Board and ALCO.
This target is reevaluated and reset at each quarterly ALCO meeting.

The  methodology  used in the above net interest  income  simulation has changed
from that we used in 2001.  For the  simulation  presented at December 31, 2001,
the  projected  net  interest  income in the  various  interest  rate  scenarios
included  planned  growth  assumptions  applied  to the  various  balance  sheet
planning  accounts.  The  above  simulation  does  not  include  planned  growth
assumptions  but,  rather,  assumes a static  balance sheet so as to project the
interest rate risk to net interest income embedded in the balance sheet existing
at December 31, 2002.

Net interest income under the various interest rate scenarios, if presented with
planned  growth  assumptions  for 2003  applied  to the  various  balance  sheet
planning accounts (the methodology presented at December 31, 2001), would result
in the following:
<TABLE>
<CAPTION>

                         Net Interest Income Simulation
                             (amounts in thousands)

Movement in interest rates       -100bp   Unchanged   +100bp    +200bp    +300bp    +400bp
                                --------  ---------  --------  --------  --------  --------

<S>                             <C>       <C>        <C>       <C>       <C>       <C>
Projected 12-month net
 interest income..............  $ 14,771  $ 17,104   $ 17,460  $ 17,813  $ 18,137  $ 18,168

Dollar change from rates
 unchanged scenario...........  $(2,333)        --   $    356  $    709  $  1,033  $  1,064
Percentage change from rates
 unchanged scenario...........  (13.64)%        --      2.08%     4.15%     6.04%     6.22%

Net benefit/(cost) of
 cumulative $40.0 million
 interest rate caps (1).......  $  (108)  $   (51)   $     48  $    196  $    404  $    706

Total net interest income
 impact with caps.............  $ 14,663  $ 17,053   $ 17,508  $ 18,009  $ 18,541  $ 18,874
Dollar change from unchanged
 w/caps.......................  $(2,390)        --   $    455  $    956  $  1,488  $  1,821
Percentage change from
 unchanged w/caps.............  (14.02)%        --      2.67%     5.61%     8.73%    10.68%
Policy guidelines (decline
 limited to)..................     5.00%        --      5.00%    10.00%    15.00%    20.00%

<FN>
(1) In May and June 2001,  we  purchased  four  interest  rate cap  contracts on
3-month  LIBOR with  strikes at 4.50  percent each in the amount of $5.0 million
notional with original terms of three years for total notional of $20.0 million.
We also purchased four interest rate cap contracts on 3-month LIBOR with strikes
at 5.50 percent each in the amount of $5.0 million  notional with original terms
of five years for total  notional  of $20.0  million.  See Notes 1 and 17 to the
Consolidated  Financial Statements included under Item 8 for further information
on accounting policies related to derivative financial investments.
</FN>
</TABLE>
<PAGE>

Static gap  analysis  is another  tool that may be used for  interest  rate risk
measurement.  The net  differences  between  the amount of assets,  liabilities,
equity and off-balance-sheet  instruments repricing within a cumulative calendar
period is  typically  referred  to as the "rate  sensitivity  position"  or "gap
position." The following  table sets forth our rate  sensitivity  position as of
December  31,  2002.  Assets and  liabilities  are  classified  by the  earliest
possible repricing date or maturity, whichever occurs first:
<TABLE>
<CAPTION>
                        Interest Sensitivity Gap Analysis

                                       Estimated maturity or repricing at December 31, 2002
                                       ----------------------------------------------------
                                         0-3        4-12       1-5        Over
                                        months     months     years     5 Years     Total
                                       ---------  ---------  --------  ---------  ---------
                                                     (dollars in thousands)
<S>                                    <C>        <C>        <C>       <C>        <C>
Interest-earning assets:
  Interest-bearing deposits with
   banks............................   $     159  $      --  $     --   $      --        159
  Investment securities (1).........      12,952     30,903     89,877     74,340    208,072
  FRB and FHLB Stock................       7,071         --         --         --      7,071
  Fixed rate loans (2)..............      20,389     30,375     34,489     15,774    101,027
  Floating rate loans (2)...........     229,586        624      5,423         --    235,633
                                       ---------  ---------  ---------  ---------  ---------
    Total interest-earning assets...   $ 270,157  $  61,902  $ 129,789  $  90,114  $ 551,962
                                       =========  =========  =========  =========  =========
Interest-bearing liabilities:
  Interest checking and money
   market accounts..................   $ 182,490  $      --  $      --  $      --  $ 182,490
  Savings...........................       5,041         --         --         --      5,041
  Time deposits under $100,000......      15,777     44,528     40,540        602    101,447
  Time deposits $100,000 and over...       9,655     27,522     27,728         --     64,905
  Borrowings........................      38,124      5,003     28,554     62,200    133,881
                                       ---------  ---------  ---------  ---------  ---------
    Total interest-bearing
     liabilities....................   $ 251,087  $  77,053  $  96,822  $  62,802  $ 487,764
                                       =========  =========  =========  =========  =========
Interest rate gap...................
                                       $  19,070  $(15,151)  $  32,967  $  27,312  $  64,198
                                       =========  =========  =========  =========  =========
Cumulative interest rate gap at
 December 31, 2002..................   $  19,070  $   3,919  $  36,886  $  64,198
                                       =========  =========  =========  =========
Cumulative interest rate gap to
total assets........................       3.17%      0.65%      6.12%     10.66%
--------------------
<FN>

(1)  Investment securities are generally reported in the timeframe  representing
     the  earliest  of  repricing  date,  call date (for  callable  securities),
     estimated  life  or  maturity  date.  Estimated  lives  of  mortgage-backed
     securities and CMOs are based on published  industry  prepayment  estimates
     for  securities  with  comparable   weighted  average  interest  rates  and
     contractual maturities.

(2)  Loans are stated gross of the allowance for credit losses and are placed in
     the earliest timeframe in which maturity or repricing may occur.
</FN>
</TABLE>

The table assumes that all savings and interest-bearing  demand deposits reprice
in the earliest period presented,  however,  we believe a significant portion of
these accounts constitute a core component and are generally not rate sensitive.
Our  position is supported by the fact that  aggressive  reductions  in interest
rates paid on these deposits  historically have not caused notable reductions in
balances.

The table does not  necessarily  indicate the future impact of general  interest
rate  movements  on our net  interest  income  because the  repricing of certain
assets and liabilities is discretionary  and is subject to competitive and other
pressures. As a result, assets and liabilities indicated as repricing within the
same period may in fact reprice at different times and at different rate levels.

Static gap  analysis  does not fully  capture  the impact of  embedded  options,
lagged interest rate changes,  administered  interest rate products,  or certain
off-balance-sheet sensitivities to interest rate movements. Therefore, this tool
generally  cannot be used in isolation to determine  the level of interest  rate
risk exposure in banking institutions.

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 of changes in market  interest  rates such as
those indicated above on the Company.  Further,  these analyses are based on our
assets and liabilities as of December 31, 2002 (without forward  adjustments for
planned growth and anticipated  business  activities) and do not contemplate any
actions we might undertake in response to changes in market interest rates.
<PAGE>

Item 8. Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:                             Page

Independent Auditors' Report..................................  59

Consolidated Balance Sheets as of
  December 31, 2002 and 2001..................................  60

Consolidated Statements of Income for the years
  ended December 31, 2002, 2001 and 2000......................  61

Consolidated Statements of Comprehensive Income
 for the years ended December 31, 2002, 2001, and 2000........  63

Consolidated Statements of Stockholders' Equity for
 the years ended December 31, 2002, 2001, and 2000............  64

Consolidated Statements of Cash Flows for the
 years ended December 31, 2002, 2001, and 2000................  65

Notes to Consolidated Financial Statements....................  66


<PAGE>

                          Independent Auditors' Report


The Board of Directors and Stockholders
BNCCORP, Inc.:

We have audited the accompanying  consolidated  balance sheets of BNCCORP,  Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related  consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the years in the three-year  period ended  December 31, 2002.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of BNCCORP,  Inc. and
subsidiaries  as of  December  31,  2002  and  2001,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2002, in conformity  with  accounting  principles  generally
accepted in the United States of America.

As discussed in note 1 to the  consolidated  financial  statements,  the Company
adopted the  provisions of the Financial  Accounting  Standards  Board's  (FASB)
Statement  of  Financial  Accounting  Standards  No.  142,  Goodwill  and  Other
Intangible Assets, and FASB Statement No. 144,  Accounting for the Impairment or
Disposal of Long-Lived Assets, as of January 1, 2002.


KPMG LLP


Minneapolis, Minnesota
January 29, 2003




<PAGE>
<TABLE>

                         BNCCORP, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                As of December 31
                 (In thousands, except share and per share data)

<CAPTION>
                                       ASSETS
                                                        2002            2001
                                                  --------------    ------------
<S>                                               <C>              <C>
CASH AND DUE FROM BANKS..........................   $    16,978      $   16,346
INTEREST-BEARING DEPOSITS WITH BANKS.............           159             126
FEDERAL FUNDS SOLD...............................            --           7,500
                                                  --------------    ------------
     Cash and cash equivalents...................        17,137          23,972
INVESTMENT SECURITIES AVAILABLE FOR SALE.........       208,072         211,801
FEDERAL RESERVE BANK AND FEDERAL HOME
  LOAN BANK STOCK................................         7,071           7,380
LOANS AND LEASES, net............................       335,794         297,924
ALLOWANCE FOR CREDIT LOSSES......................        (5,006)         (4,325)
                                                  --------------    ------------
     Net loans and leases........................       330,788         293,599

PREMISES AND EQUIPMENT, net......................        11,100           9,180
INTEREST RECEIVABLE..............................         2,856           3,008
OTHER ASSETS.....................................         4,119           4,856
GOODWILL.........................................        12,210             437
OTHER INTANGIBLE ASSETS, net.....................         8,875           1,734
ASSETS OF DISCONTINUED FARGO OPERATIONS..........            --          29,090
                                                  --------------    ------------
                                                    $   602,228      $  585,057
                                                  ==============   =============

                        LIABILITIES AND STOCKHOLDERS' EQUITY

DEPOSITS:

   Noninterest-bearing...........................   $    44,362      $   30,521
   Interest-bearing -
       Savings, interest checking and
         money market............................       187,531         160,721
       Time deposits $100,000 and over...........        64,905          78,969
       Other time deposits.......................       101,447         105,066
                                                  --------------    ------------
   Total deposits................................       398,245         375,277

SHORT-TERM BORROWINGS............................        28,120             760
FEDERAL HOME LOAN BANK ADVANCES..................        97,200         117,200
LONG-TERM BORROWINGS.............................         8,561              13
OTHER LIABILITIES................................        10,053           6,192
LIABILITIES OF DISCONTINUED FARGO OPERATIONS.....            --          32,692
                                                  --------------    ------------
              Total liabilities..................       542,179         532,134

COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
        COMPANY'S SUBORDINATED DEBENTURES........        22,326          22,244

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value - 2,000,000
      shares authorized; 150 shares issued and
      outstanding as of December 31, 2002........            --              --
   Capital surplus - preferred stock.............         1,500              --
   Common stock, $.01 par value - 10,000,000
       shares authorized; 2,700,929 and 2,399,170
       shares issued and outstanding (excluding
       42,880 shares held in treasury)...........            27              24
   Capital surplus - common stock................        16,614          14,084
   Retained earnings.............................        17,395          15,435
   Treasury stock (42,880 shares)................          (513)           (513)
     Accumulated other comprehensive income, net
       of income taxes...........................         2,700           1,649
                                                  --------------    ------------
              Total stockholders' equity.........        37,723          30,679
                                                  --------------    ------------
                                                    $   602,228      $  585,057
                                                  ==============   =============

See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>

<TABLE>

                         BNCCORP, INC. AND SUBSIDIARIES
                        Consolidated Statements of Income
                         For the Years Ended December 31
                      (In thousands, except per share data)
<CAPTION>

                                                 2002           2001          2000
                                              ------------   ------------  ------------
<S>                                           <C>            <C>           <C>
INTEREST INCOME:
   Interest and fees on loans................   $ 20,778       $ 23,991      $ 23,422
   Interest and dividends on investments -
     Taxable.................................      9,774         12,354        15,420
     Tax-exempt..............................        977            829           940
     Dividends...............................        223            362           634
   Other.....................................         66             50           242
                                              ------------  -------------  ------------
              Total interest income..........     31,818         37,586        40,658
                                              ------------  -------------  ------------
INTEREST EXPENSE:
   Deposits..................................     10,242         14,253        16,028
   Short-term borrowings.....................        141            441           234
   Federal Home Loan Bank advances...........      6,214          7,185         9,766
   Long-term borrowings......................        310            777         1,252
                                              ------------  -------------  ------------
              Total interest expense.........     16,907         22,656        27,280
                                              ------------  -------------  ------------
              Net interest income............     14,911         14,930        13,378
PROVISION FOR CREDIT LOSSES..................      1,202          1,699         1,202
                                              ------------  -------------  ------------
NET INTEREST INCOME AFTER PROVISION
          FOR CREDIT LOSSES..................     13,709         13,231        12,176
                                              ------------  -------------  ------------
NONINTEREST INCOME:
   Insurance commissions.....................      8,981          1,891         2,003
   Fees on loans.............................      2,169          1,936         1,848
   Net gain on sales of securities...........      1,870          1,396           276
   Brokerage income..........................      1,094          1,407         1,466
   Service charges...........................        755            636           581
   Trust and financial services..............        751            899         1,064
   Rental income.............................         89             54            27
   Other.....................................        587            495           418
                                              ------------  -------------  ------------
              Total noninterest income.......     16,296          8,714         7,683
                                              ------------  -------------  ------------
NONINTEREST EXPENSE:
   Salaries and employee benefits............     14,723          9,911         8,266
   Occupancy.................................      2,235          1,661         1,187
   Interest on subordinated debentures.......      1,829          1,377           399
   Professional services.....................      1,495          1,326         1,278
   Depreciation and amortization.............      1,320          1,123           993
   Office supplies, telephone and postage....      1,106            940           863
   Amortization of intangible assets.........        881            482           527
   Marketing and promotion...................        749            709           488
   FDIC and other assessments................        214            193           200
   Repossessed and impaired asset
        expenses/write-offs..................        142             40           470
   Other.....................................      2,464          1,797         1,549
                                              ------------  -------------  ------------
              Total noninterest expense......     27,158         19,559        16,220
                                              ------------  -------------  ------------
Income from continuing operations before
        income taxes.........................      2,847          2,386         3,639
Income tax provision.........................        822            691         1,183
                                              ------------  -------------  ------------
Income from continuing operations............      2,025          1,695         2,456
                                              ------------  -------------  ------------
<FN>

See accompanying notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
                         BNCCORP, INC. AND SUBSIDIARIES
                  Consolidated Statements of Income, continued
                         For the Years Ended December 31
                      (In thousands, except per share data)
<CAPTION>
                                                 2002            2001         2000
                                              ------------    -----------  ------------
<S>                                           <C>             <C>          <C>
Discontinued Operations:
 Gain on disposal of asset-based lending
    subsidiary, net of income taxes
    of $82...................................         --             --           159
 Gain (loss) from operations of
    discontinued Fargo branch (including
    net loss on sale of $49 for 2002),
    net of income taxes of $6, $(83) and
    $(277)...................................         14           (203)         (575)
                                              ------------    -----------  ------------
 Income before extraordinary item and
    cumulative effect of change in
    accounting principle.....................      2,039          1,492         2,040
 Extraordinary item - gain (loss) on early
    extinguishment of debt, net of
    income taxes of  $(70) and $132..........         --           (134)          257
Cumulative effect of change in accounting
    principle, net of income taxes
    of $(66) ................................         --           (113)           --
                                              ------------    -----------  ------------
NET INCOME...................................   $  2,039        $ 1,245       $ 2,297
                                              ============    ===========  ============

Dividends on preferred stock.................   $    (79)       $    --       $    --
                                              ------------    -----------  ------------
Income available to common stockholders......   $  1,960        $ 1,245       $ 2,297
                                              ============    ===========  ============

BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations............   $   0.74        $  0.71       $  1.02
Gain on disposal of asset-based
  lending subsidiary, net of income taxes....         --             --          0.07
Gain (loss) from discontinued Fargo branch,
  net of income taxes........................       0.01          (0.08)        (0.24)
Extraordinary item - gain (loss) on early
  extinguishment of debt, net of
  income taxes...............................         --          (0.06)         0.11
Cumulative effect of change in accounting
    principle, net of income taxes...........         --           (0.05)          --
                                              ------------    -----------  ------------
Basic earnings per common share..............    $  0.75        $  0.52       $  0.96
                                              ============    ===========  ============

DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations............    $  0.74        $  0.70       $  1.02
Gain on disposal of asset-based lending
    subsidiary, net of income taxes..........         --             --          0.07
Gain (loss) from discontinued Fargo
    branch, net of income taxes..............       0.01          (0.08)        (0.24)
Extraordinary item - gain (loss) on
    early extinguishment of debt, net of
    income taxes.............................         --          (0.06)         0.11
Cumulative effect of change in
    accounting principle, net of
    income taxes.............................
                                                      --          (0.05)           --
                                              ------------    -----------  ------------
Diluted earnings per common share............    $  0.75        $  0.51       $  0.96
                                              ============    ===========  ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                         BNCCORP, INC. AND SUBSIDIARIES
                 Consolidated Statements of Comprehensive Income
                         For the Years Ended December 31
                                 (In thousands)
<CAPTION>
                                              2002         2001        2000
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
NET INCOME..............................   $  2,039     $  1,245      $ 2,297
OTHER COMPREHENSIVE INCOME (LOSS) -
  Unrealized gains on securities:
     Unrealized holding gains
     arising during the period,
     net of income taxes of $1,197,
     $283, and $2,022...................      2,381          885        4,123

     Less: reclassification adjustment
     for gains included in net income,
     net of income taxes................     (1,330)        (942)        (186)
                                          -----------  -----------  -----------
OTHER COMPREHENSIVE INCOME (LOSS).......      1,051          (57)       3,937
                                          -----------  -----------  -----------
COMPREHENSIVE INCOME....................    $ 3,090     $  1,188      $ 6,234
                                          ===========  ===========  ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                                        BNCCORP, INC. AND SUBSIDIARIES
                                                   Consolidated Statement of Stockholders' Equity
                                                      (In thousands, except share data)
<CAPTION>
                                             Capital                        Capital                         Accumulated
                            Preferred Stock  Surplus      Common Stock      Surplus                            Other
                            ---------------  Preferred  ------------------   Common   Retained   Treasury  Comprehensive
                            Shares   Amount   Stock      Shares    Amount    Stock    Earnings    Stock       Income       Total
                            ------- -------  ---------  ---------  ------- --------- ---------  ---------  ------------  ---------
<S>                         <C>     <C>      <C>        <C>        <C>     <C>       <C>        <C>        <C>           <C>
BALANCE, December 31, 1999..    --  $   --   $    --    2,442,860   $   24  $ 13,976  $ 11,893   $  (513)    $  (2,231)  $ 23,149
  Net income................    --      --        --           --       --        --     2,297        --            --      2,297
  Other comprehensive
   income -
    Change in unrealized
     holding losses on
     securities available
     for sale, net of
     income taxes and
     reclassification
     adjustment.............    --      --        --           --       --        --        --        --         3,937      3,937
   Other....................    --      --        --       (4,950)      --        74        --        --            --         74
                            ------- -------  ---------  ---------  ------- --------- ---------  ---------  ------------  ---------

BALANCE, December 31, 2000..    --      --        --    2,437,910       24    14,050    14,190      (513)        1,706     29,457
  Net income................    --      --        --           --       --        --     1,245        --            --      1,245
  Other comprehensive loss -
   Change in unrealized
    holding gains on
    securities available
    for sale, net of
    income taxes and
    reclassification
    adjustment..............    --      --        --           --       --        --        --        --           (57)       (57)
   Other....................    --      --        --        4,140       --        34        --        --            --         34
                            ------- -------  ---------  ---------  ------- --------- ---------  ---------  ------------  ---------

BALANCE, December 31, 2001..    --      --        --    2,442,050       24    14,084    15,435      (513)        1,649     30,679
   Net income...............    --      --        --           --       --        --     2,039        --            --      2,039
   Other comprehensive
    income -
     Change in unrealized
     holding gains on
     securities available
     for sale, net of
     income taxes and
     reclassification
     adjustment.............    --      --        --           --       --        --        --        --         1,051      1,051
  Issuance of preferred
    stock...................   150      --     1,500           --       --        --        --        --            --      1,500
  Preferred stock dividends.    --      --        --           --       --        --      (79)        --            --        (79)
  Issuance of common stock..    --      --        --      297,759        3     2,497        --        --            --      2,500
  Other ....................    --      --        --        4,000       --        33        --        --            --         33
                            ------- -------  ---------  ---------  ------- --------- ---------  ---------  ------------  ---------
    December 31, 2002.......   150   $  --   $ 1,500    2,743,809    $  27  $ 16,614  $ 17,395   $  (513)     $  2,700   $ 37,723
                            ======= =======  =========  =========  ======= ========= =========  =========  ============  =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                         BNCCORP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                         For the Years Ended December 31
                                 (In thousands)
<CAPTION>
                                                      2002          2001          2000
                                                   ----------    ----------    -----------
<S>                                                <C>           <C>           <C>
OPERATING ACTIVITIES:
 Net income....................................... $  2,039      $  1,245      $    2,297
 Adjustments to reconcile net income to net
  cash provided by operating activities -
    Provision for credit losses...................    1,202         1,699           1,202
    Depreciation and amortization.................    1,489         1,364           1,131
    Amortization of intangible assets.............      881           482             508
    Net premium amortization on
     investment securities........................    2,966         2,144             737
    Proceeds from loans recovered.................      136           303             269
    Write down of other real estate
     owned and repossessed assets.................      142            40             470
    Change in interest receivable
     and other assets, net........................    2,308           541          (1,843)
    Gain on disposal of asset-based
     lending subsidiary...........................       --            --            (159)
    Loss on sale of bank premises and equipment...        5             5              57
    Net realized gains on sales of
     investment securities........................   (1,870)       (1,396)           (276)
    Deferred income taxes.........................     (269)         (342)            603
    Change in dividend distribution payable.......       (4)          413             398
    Change in other liabilities, net..............   (2,965)       (1,233)          1,572
    Originations of loans to be sold..............  (92,004)     (122,180)       (130,563)
    Proceeds from sale of loans...................   92,004       122,180         130,563
                                                   ----------    -----------    ----------
      Net cash provided by operating activities...    6,060         5,265           6,966
                                                   ----------    -----------    ----------
INVESTING ACTIVITIES:
 Purchases of investment securities............... (146,985)     (162,321)       (178,827)
 Proceeds from sales of investment securities.....  100,651       119,394          23,789
 Proceeds from maturities of
  investment securities...........................   50,984        86,414          48,345
 Net increase in loans............................  (35,144)      (53,132)         (7,630)
 Additions to premises and equipment..............   (2,974)       (1,965)         (4,296)
 Proceeds from sale of premises and equipment.....      161            66             241
 Cash paid for acquisition of
  insurance subsidiary............................  (13,964)           --              --
 Disposition of discontinued
  asset-based lending subsidiary..................       --            --             159
 Disposition of discontinued Fargo branch.........   (4,365)           --              --
                                                   ----------   -----------    -----------
      Net cash used in investing activities.......  (51,636)      (11,544)       (118,219)
                                                   ----------   -----------    -----------
FINANCING ACTIVITIES:
 Net increase in demand, savings, interest
  checking and money market accounts..............   36,723        12,824          43,632
 Net increase (decrease) in time deposits.........  (15,430)       32,681          (5,879)
 Net increase (decrease) in
  short-term borrowings...........................   27,360       (32,467)         31,028
 Repayments of FHLB advances......................  (20,000)           --      (1,129,000)
 Proceeds from FHLB advances......................       --            --       1,159,700
 Repayments of long-term borrowings...............      (62)      (13,000)         (2,009)
 Proceeds from long-term borrowings...............    8,610            --              88
 Amortization of discount on subordinated notes...       --           371              93
 Amortization of deferred charges.................       --            --              20
 Proceeds from issuance of
  subordinated debentures.........................       --        14,429           7,220
 Proceeds from issuance of preferred stock........    1,500            --              --
 Payment of preferred stock dividends.............      (79)           --              --
 Amortization of discount on
  subordinated debentures.........................       86           (50)            (12)
 Other, net.......................................       33          (120)             74
                                                   ----------   -----------   ------------
      Net cash provided by financing activities...   38,741        14,668         104,955
                                                   ----------   -----------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS.....................................   (6,835)        8,389          (6,298)
CASH AND CASH EQUIVALENTS, beginning of year......   23,972        15,583          21,881
                                                   ----------   -----------   ------------
CASH AND CASH EQUIVALENTS, end of year............ $ 17,137     $  23,972     $    15,583
                                                   ==========   ===========   ============
SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid.................................. $ 19,481     $  24,601     $    27,431
                                                   ==========   ===========   ============
   Income taxes paid.............................. $    912     $     920     $       541
                                                   ==========   ===========   ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
                         BNCCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 2002 and 2001


1. Description of Business and Summary of Significant Accounting Policies

Description of Business.  BNCCORP, Inc. ("BNCCORP") is a registered bank holding
company incorporated under the laws of Delaware. It is the parent company of BNC
National Bank (together with its wholly-owned subsidiaries, BNC Insurance, Inc.,
Milne  Scali &  Company,  Inc.  and BNC Asset  Management,  Inc.,  the  "Bank").
BNCCORP, through these wholly owned subsidiaries,  which operate from twenty-one
locations  in Arizona,  Minnesota  and North  Dakota,  provides a broad range of
banking,  insurance,  brokerage, trust and other financial services to small and
mid-size businesses and individuals.

The  accounting  and  reporting   policies  of  BNCCORP  and  its   subsidiaries
(collectively,   the  "Company")  conform  to  accounting  principles  generally
accepted  in the  United  States and  general  practices  within  the  financial
services  industry.  The more  significant  accounting  policies are  summarized
below.

Principles of Consolidation.  The accompanying consolidated financial statements
include  the  accounts  of  BNCCORP  and  its  wholly  owned  subsidiaries.  All
significant  intercompany  transactions  and balances  have been  eliminated  in
consolidation.

Use of  Estimates.  The  preparation  of  consolidated  financial  statements in
conformity with accounting  principles  generally  accepted in the United States
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting period. Ultimate results could differ
from those estimates.

Critical Accounting Policies

Critical  accounting  policies are dependent on estimates that are  particularly
susceptible to significant change and include the determination of the allowance
for credit  losses and income  taxes.  The  following  have been  identified  as
"critical accounting policies."

Allowance  for Credit  Losses.  The Company  maintains  its allowance for credit
losses at a level  considered  adequate  to provide  for an estimate of probable
losses related to  specifically  identified  loans as well as probable losses in
the  remaining  loan and lease  portfolio  that have  been  incurred  as of each
balance sheet date. The loan and lease portfolio and other credit  exposures are
reviewed  regularly to evaluate the adequacy of the allowance for credit losses.
In determining the level of the allowance,  the Company  evaluates the allowance
necessary for specific  nonperforming  loans and also estimates  losses in other
credit exposures. The resultant three allowance components are as follows:

     Specific Reserves.  The amount of specific reserves is determined through a
     loan-by-loan  analysis of problem loans over a minimum size that  considers
     expected future cash flows,  the value of collateral and other factors that
     may impact the  borrower's  ability to make payments when due.  Included in
     this  group  are  those  nonaccrual  or  renegotiated  loans  that meet the
     criteria as being "impaired" under the definition in Statement of Financial
     Accounting  Standards No. 114, "Accounting by Creditors for Impairment of a
     Loan" ("SFAS 114"). A loan is impaired when,  based on current  information
     and events,  it is probable  that a creditor  will be unable to collect all
     amounts  due  according  to the  contractual  terms of the loan  agreement.
     Problem  loans  also  include  those  credits  that  have  been  internally
     classified as credits  requiring  management's  attention due to underlying
     problems in the borrower's business or collateral concerns. Under SFAS 114,
     any allowance on impaired loans is generally based on one of three methods.
     It requires that impaired  loans be measured at either the present value of
     expected  cash  flows at the loan's  effective  interest  rate,  the loan's
     observable market price or the fair value of the collateral of the loan.

     Reserves for Homogeneous Loan Pools. The Company makes a significant number
     of loans and leases that, due to their underlying similar  characteristics,
     are assessed for loss as "homogeneous"  pools.  Included in the homogeneous
     pools are consumer loans and commercial  loans under a certain size,  which
     have  been  excluded  from  the  specific  reserve  allocation   previously
     discussed.  The  Company  segments  the  pools by type of loan or lease and
     using historical loss information estimates a loss reserve for each pool.

     Qualitative Reserve. The Company's senior lending management also allocates
     reserves  for  special  situations,  which are  unique  to the  measurement
     period.  These  include,  among other things,  prevailing  and  anticipated
     economic  trends,  such as economic  conditions in certain  geographical or
     industry  segments  of the  portfolio  and  economic  trends in the  retail
     lending sector, management's assessment of credit risk inherent in the loan
     portfolio, delinquency trends, historical loss experience,  peer-group loss
     history and other factors.
<PAGE>

Continuous  credit  monitoring  processes and the analysis of loss components is
the  principal  method  relied  upon by  management  to ensure  that  changes in
estimated credit loss levels are reflected in the Company's allowance for credit
losses  on  a  timely  basis.  Management  also  considers  experience  of  peer
institutions   and  regulatory   guidance  in  addition  to  the  Company's  own
experience.  In addition,  various regulatory  agencies,  as an integral part of
their examination process,  periodically review the allowance for credit losses.
Such  agencies may require  additions to the allowance  based on their  judgment
about information available to them at the time of their examination.

Loans, leases and other extensions of credit deemed uncollectible are charged to
the allowance. Subsequent recoveries, if any, are credited to the allowance. The
amount of the allowance for credit losses is highly dependent upon  management's
estimates  of  variables   affecting   valuation,   appraisals  of   collateral,
evaluations of performance and status, and the amounts and timing of future cash
flows expected to be received on impaired  loans.  Such  estimates,  appraisals,
evaluations  and cash  flows  may be  subject  to  frequent  adjustments  due to
changing economic prospects of borrowers, lessees or properties. These estimates
are reviewed periodically. Actual losses may vary from current estimates and the
amount of the  provision  may be either  greater  than or less than  actual  net
charge-offs.  The  related  provision  for  credit  losses,  which is charged to
income,  is the amount necessary to adjust the allowance to the level determined
appropriate through application of the above processes.

Income  Taxes.  The Company  files  consolidated  federal  and state  income tax
returns.

Income taxes are accounted for using the asset and liability method.  Under this
method,  deferred tax assets and  liabilities  are recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Such  differences  can relate to  differences  in accounting  for credit
losses,  depreciation  timing  differences,   unrealized  gains  and  losses  on
investment  securities,  deferred  compensation and leases, which are treated as
operating  leases for tax purposes and loans for financial  statement  purposes.
Deferred  tax  assets and  liabilities  are  measured  using  enacted  tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date.

The  determination  of current  and  deferred  income  taxes is based on complex
analyses of many factors  including  interpretation  of federal and state income
tax laws, the difference between tax and financial reporting basis of assets and
liabilities  (temporary  differences),  estimates of amounts due or owed such as
the  timing  of  reversals  of  temporary   differences  and  current  financial
accounting  standards.  Actual  results  could  differ  significantly  from  the
estimates  and  interpretations  used in  determining  the current and  deferred
income tax liabilities.

Other Significant Accounting Policies

Business Combinations.  Business combinations that have been accounted for under
the  purchase  method of  accounting  include the results of  operations  of the
acquired  businesses from the date of  acquisition.  Net assets of the companies
acquired  were  recorded  at  their  estimated  fair  value  as of the  date  of
acquisition.  Effective  with the issuance of Statement of Financial  Accounting
Standards  No.  141,   "Business   Combinations"   ("SFAS  141"),  all  business
combinations are required to be accounted for by the purchase method.  Note 2 to
these  consolidated  financial  statements  includes a summary  of all  business
combinations completed during the three-year period ended December 31, 2002.

Discontinued Operations. The results of the discontinued operations and any gain
or loss on disposal are reported  separately from continuing  operations.  Prior
period   financial   statements  have  been  restated  to  give  effect  to  the
discontinued operations accounted for under this method.

Cash and Cash  Equivalents.  For purposes of  presentation  in the  consolidated
statements  of  cash  flows,  the  Company  considers  amounts  included  in the
consolidated balance sheet captions "cash and due from banks," "interest-bearing
deposits with banks" and "federal funds sold"  (summarized  in the  consolidated
balance sheet as "cash and cash equivalents") to be cash equivalents.

Investment  Securities.  Investment  and  mortgage-backed  securities  which the
Company  intends  to  hold  for  indefinite  periods  of  time  as  part  of its
asset/liability strategy, or that may be sold in response to changes in interest
rates,  changes in prepayment risk, the need to increase  regulatory  capital or
similar  factors  are  classified  as  available  for  sale.  Available-for-sale
securities are carried at market value. Net unrealized gains and losses,  net of
deferred income taxes, on investments and mortgage-backed  securities  available
for sale are  reported as a separate  component  of  stockholders'  equity until
realized (see "Comprehensive Income"). All securities, other than the securities
of the Federal  Reserve Bank  ("FRB") and the Federal  Home Loan Bank  ("FHLB"),
were  classified  as  available  for sale as of  December  31,  2002  and  2001.
Investment and mortgage-backed securities that the Company intends to hold until
maturity  are  carried  at cost,  adjusted  for  amortization  of  premiums  and
accretion of  discounts  using a method that  approximates  level yield over the
period to maturity.  The Company did not have any securities  classified as held
to maturity as of December 31, 2002 or 2001.

Premiums and  discounts  are  amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method. Dividend
and interest income is recognized when earned.  Realized gains and losses on the
sale of investment  securities are determined using the  specific-identification
method and recognized in noninterest income on the trade date.

Declines in the fair value of individual  available-for-sale or held-to-maturity
securities below their cost, which are deemed other than temporary, could result
in a charge to earnings and the corresponding  establishment of a new cost basis
for the  security.  Such  write-downs,  should they occur,  would be included in
noninterest  income as realized losses.  There were no such  write-downs  during
2002, 2001 or 2000.

Federal  Reserve Bank and Federal Home Loan Bank Stock.  Investments  in FRB and
FHLB stock are carried at cost, which approximates fair value.

Loans and  Leases.  Loans and  leases  held for  investment  are stated at their
outstanding  principal amount net of unearned income,  net unamortized  deferred
fees and costs and an allowance for credit losses. Interest income is recognized
on an accrual basis using the interest  method  prescribed in the loan agreement
except when collectibility is in doubt.

Loans and  leases,  including  loans that are  considered  to be  impaired,  are
reviewed  regularly by management  and are placed on nonaccrual  status when the
collection of interest or principal is 90 days or more past due, unless the loan
or lease is adequately secured and in the process of collection. Past due status
is based on payments as they relate to contractual  terms.  When a loan or lease
is placed on nonaccrual status,  unless collection of all principal and interest
is  considered  to be assured,  uncollected  interest  accrued in prior years is
charged off against the allowance  for credit  losses.  Interest  accrued in the
current year is reversed against interest income of the current period. Interest
payments  received  on  nonaccrual  loans and  leases are  generally  applied to
principal unless the remaining principal balance has been determined to be fully
collectible.  Accrual of interest is resumed when it can be determined  that all
amounts due under the contract  are  expected to be  collected  and the loan has
exhibited a sustained level of performance, generally at least six months.

All impaired loans, including all loans that are restructured in a troubled debt
restructuring  involving a  modification  of terms,  are measured at the present
value of expected future cash flows  discounted at the loan's initial  effective
interest rate. The fair value of collateral of an impaired  collateral-dependent
loan or an  observable  market  price,  if one is  available,  may be used as an
alternative to discounting. If the measure of the impaired loan is less than the
recorded  investment in the loan,  impairment will be recognized as a charge off
through the allowance for credit  losses.  A loan is considered  impaired  when,
based on current  information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. All loans are reviewed for impairment on an individual basis.

Loan  Origination  Fees and Costs.  Loan  origination fees and costs incurred to
extend  credit are deferred and  amortized  over the term of the loan as a yield
adjustment.  Loan fees representing  adjustments of yield are generally deferred
and amortized into interest  income over the term of the loan using the interest
method or a method that approximates a level yield over the estimated  remaining
lives of the loans.  Loan commitment  fees are generally  deferred and amortized
into  noninterest  income on a straight-line  basis over the commitment  period.
Loan fees not representing adjustments of yield are also included in noninterest
income.

Mortgage  Servicing and Transfers of Financial Assets.  The Bank regularly sells
loans to others on a  non-recourse  basis.  Sold loans are not  included  in the
accompanying  consolidated  balance sheets. The Bank generally retains the right
to service  the loans as well as the right to receive a portion of the  interest
income on the loans. At December 31, 2002 and 2001, the Bank was servicing loans
for the benefit of others with aggregate unpaid principal balances of $194.7 and
$235.8 million, respectively.  Many of the loans sold by the Bank are commercial
lines of  credit  for which  balances  and  related  payment  streams  cannot be
reasonably  estimated  in order to  determine  the fair  value of the  servicing
assets or liabilities  and/or future  interest income retained by the Bank. Upon
sale, any unearned net loan fees or costs are recognized in noninterest  income.
Gains on sales of loans were $0,  $22,000 and  $71,000 for 2002,  2001 and 2000,
respectively,  and are  included in  noninterest  income as fees on loans in the
consolidated statements of income.

Premises and  Equipment.  Land is carried at cost.  Premises and  equipment  are
reported at cost less accumulated  depreciation and  amortization.  Depreciation
and  amortization  for  financial  reporting  purposes  is charged to  operating
expense using the  straight-line  method over the estimated  useful lives of the
assets. Estimated useful lives are up to 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the  improvement.  The
costs of improvements are capitalized. Maintenance and repairs, as well as gains
and  losses  on  dispositions  of  premises  and  equipment,   are  included  in
noninterest income or expense as incurred.
<PAGE>

Other Real Estate Owned and  Repossessed  Property.  Real estate  properties and
other assets acquired  through,  or in lieu of, loan foreclosure are included in
other assets in the balance sheet and are stated at the lower of carrying amount
or fair value less estimated costs to sell at the date of transfer to other real
estate owned or repossessed property.  When an asset is acquired,  the excess of
the recorded  investment  in the asset over fair value less  estimated  costs to
sell, if any, is charged to the allowance for credit losses. Management performs
valuations   periodically.   Fair  value  is  generally  determined  based  upon
appraisals of the assets  involved.  Subsequent  declines in the estimated  fair
value,  net operating  results and gains and losses on  disposition of the asset
are included in other  noninterest  expense.  The  Company's  investment in such
assets at December 31, 2002 and 2001 was $8,000 and $70,000, respectively.

Goodwill.  Goodwill  represents  the aggregate  excess of the cost of businesses
acquired over the fair value of their net assets at dates of acquisition.  Prior
to the  adoption  of  Statement  of  Financial  Accounting  Standards  No.  142,
"Goodwill and Other Intangible Assets" ("SFAS 142") on January 1, 2002, goodwill
was  amortized  over  its  estimated  useful  life of 15 to 25 years  using  the
straight-line method. The Company reviewed goodwill for impairment  periodically
or whenever changes in  circumstances  indicated that the carrying amount of the
goodwill may not have been recoverable.  With the adoption of SFAS 142, goodwill
is no longer  amortized,  but instead is tested for impairment  annually or when
impairment  indicators  are  present.  Note 9 to  these  consolidated  financial
statements includes transition disclosures related to the adoption of SFAS 142.

Other  Intangible  Assets.  Other  intangible  assets include  premiums paid for
deposits   assumed,   insurance   books  of  business   intangibles   and  other
miscellaneous  intangibles.  Deposit  premiums  are being  amortized  over their
estimated  lives of ten years using the  straight-line  method.  Such accounting
treatment  is  consistent  with  the  recently  issued  Statement  of  Financial
Accounting Standards No. 147, "Acquisition of Certain Financial Institutions, an
Amendment to FASB Statements No. 72 ("SFAS 72") and 144 and FASB  Interpretation
No. 9 ("FIN  9")"  ("SFAS  147"),  which  became  effective  on October 1, 2002.
Insurance books of business intangibles are being amortized over their estimated
lives of 12.5 years for commercial lines and 9.8 years for personal lines. Under
SFAS 142, the Company's  other  intangible  assets with  identifiable  lives are
amortized  over  those  lives and are  monitored  to assess  recoverability  and
determine  whether events and circumstances  require  adjustment to the recorded
amounts or amortization periods.  Intangible assets with indefinite lives are no
longer  amortized  but are tested for  impairment  annually  or when  impairment
indicators  are  present.  Prior to the adoption of SFAS 142,  other  intangible
assets were amortized  over their expected lives using either the  straight-line
or effective interest method (for debt-related  costs) as deemed appropriate for
such  assets.  Note  9  to  these  consolidated  financial  statements  includes
additional information related to the Company's other intangible assets.

Impairment  of  Long-Lived   Assets.  The  Company  reviews  long-lived  assets,
including property and equipment,  certain identifiable intangibles and goodwill
for  impairment  periodically  or  whenever  events or changes in  circumstances
indicate that the carrying amount of any such asset may not be  recoverable.  If
impairment  is  identified,  the  assets  are  written  down to their fair value
through a charge to noninterest expense. No such impairment losses were recorded
during 2002, 2001 or 2000.

Securities Sold Under  Agreements to Repurchase.  From time to time, the Company
enters into sales of securities  under  agreements to repurchase,  generally for
periods of less than 90 days. Fixed coupon agreements are treated as financings,
and the  obligations to repurchase  securities sold are reflected as a liability
in the  consolidated  balance  sheets.  The costs of securities  underlying  the
agreements remain in the asset accounts.

Fair Values of  Financial  Instruments.  The Company is required to disclose the
estimated  fair value of financial  instruments  for which it is  practicable to
estimate fair value.  Fair value estimates are made at a specific point in time,
based on  relevant  market  information  and  information  about  the  financial
instruments.   Fair  value   estimates  are  subjective  in  nature,   involving
uncertainties  and matters of  significant  judgment,  and  therefore  cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.  Non-financial  instruments are excluded from fair value of financial
instrument  disclosure  requirements.  The following methods and assumptions are
used by the  Company in  estimating  fair value  disclosures  for its  financial
instruments,  all of which are issued or held for  purposes  other than  trading
(see Note 19 to these consolidated financial statements):

     Cash  and  Cash  Equivalents,   Noninterest-Bearing   Deposits  and  Demand
     Deposits.  The  carrying  amounts  approximate  fair value due to the short
     maturity  of the  instruments.  The fair value of  deposits  with no stated
     maturity, such as interest checking,  savings and money market accounts, is
     equal to the amount payable on demand at the reporting date.
<PAGE>

     Investment  Securities  Available for Sale. The fair value of the Company's
     securities equals the quoted market price.

     Federal Reserve Bank and Federal Home Loan Bank Stock.  The carrying amount
     of FRB and FHLB stock approximates their fair values.

     Loans and  Leases.  Fair  values  for loans and  leases  are  estimated  by
     discounting  future cash flow payment  streams using rates at which current
     loans to borrowers with similar credit ratings and similar loan  maturities
     are being made.

     Accrued Interest Receivable.  The fair value of accrued interest receivable
     equals the  amount  receivable  due to the  current  nature of the  amounts
     receivable.

     Derivative  Financial   Instruments.   The  fair  value  of  the  Company's
     derivatives equals the quoted market price.

     Interest-Bearing   Deposits.   Fair  values  of  interest-bearing   deposit
     liabilities  are estimated by discounting  future cash flow payment streams
     using rates at which comparable current deposits with comparable maturities
     are being issued. The intangible value of long-term customer  relationships
     with depositors is not taken into account in the fair values disclosed.

     Borrowings  and  Advances.  The carrying  amount of  short-term  borrowings
     approximates  fair value due to the short maturity and, if applicable,  the
     instruments'  floating interest rates, which are tied to market conditions.
     The fair values of long-term  borrowings,  for which the  maturity  extends
     beyond one year,  are  estimated  by  discounting  future cash flow payment
     streams using rates at which  comparable  borrowings  are  currently  being
     offered.

     Accrued Interest Payable. The fair value of accrued interest payable equals
     the amount payable due to the current nature of the amounts payable.

     Guaranteed  Preferred   Beneficial  Interests  in  Company's   Subordinated
     Debentures.  The fair values of the Company's  subordinated  debentures are
     estimated by  discounting  future cash flow payment  streams using discount
     rates  estimated to reflect  those at which  comparable  instruments  could
     currently be offered.

     Financial Instruments with  Off-Balance-Sheet  Risk. The fair values of the
     Company's  commitments to extend credit and commercial and standby  letters
     of credit are estimated using fees currently  charged to enter into similar
     agreements.

Derivative Financial Instruments. Effective January 1, 2001, the Company adopted
Statement of Financial  Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended.  SFAS 133 requires
that all  derivative  instruments,  as  defined,  including  certain  derivative
instruments embedded in other financial instruments or contracts,  be recognized
in the  consolidated  balance sheet as either assets or liabilities  measured at
fair value. The fair value of the Company's derivative financial  instruments is
determined  based  on  quoted  market  prices  for  comparable  instruments,  if
available,  or a valuation  model that  calculates the present value of expected
future  cash  flows.  Subsequent  changes  in  a  derivative's  fair  value  are
recognized  currently in earnings unless specific hedge accounting  criteria are
met.

The Company may enter into  derivative  financial  instruments  such as interest
rate swaps, caps and floors as part of managing its interest rate risk. Interest
rate  swaps  are used to  exchange  fixed and  floating  rate  interest  payment
obligations and caps and floors are used to protect the Company's  balance sheet
from  unfavorable  movements  in interest  rates  while  allowing  benefit  from
favorable movements.

All  derivative  instruments  that qualify for  specific  hedge  accounting  are
recorded at fair value and  classified  either as a hedge of the fair value of a
recognized  asset  or  liability  ("fair  value"  hedge)  or as a  hedge  of the
variability  of cash flows to be received or paid related to a recognized  asset
or liability or a forecasted  transaction ("cash flow" hedge). All relationships
between hedging instruments and hedged items are formally documented,  including
the risk  management  objective  and  strategy  for  undertaking  various  hedge
transactions.  This process includes linking all derivatives that are designated
as hedges to specific assets or liabilities on the balance sheet.

Changes  in the  fair  value  of a  derivative  that  is  highly  effective  and
designated as a fair value hedge and the offsetting changes in the fair value of
the  hedged  item  are  recorded  in  income.  Changes  in the  fair  value of a
derivative  that is highly  effective  and  designated  as a cash flow hedge are
recognized in other comprehensive income until income from the cash flows of the
hedged item are  recognized.  The Company  performs an  assessment,  both at the
inception of the hedge and on a quarterly basis thereafter, to determine whether
these derivatives are highly effective in offsetting changes in the value of the
hedged items. Any change in fair value resulting from hedge  ineffectiveness  is
immediately recorded in income.

<PAGE>
Revenue  Recognition.  The Company  recognizes  revenue on an accrual  basis for
interest and dividend income on loans, investment securities, federal funds sold
and interest bearing due from accounts. Noninterest income is recognized when it
has been  realized or is  realizable  and has been earned.  In  accordance  with
existing  accounting and industry  standards,  as well as guidance issued by the
Securities and Exchange Commission, the Company considers revenue to be realized
or realizable and earned when the following  criteria have been met:  persuasive
evidence   of  an   arrangement   exists   (generally,   there  is   contractual
documentation);  delivery  has  occurred or  services  have been  rendered;  the
seller's  price to the buyer is fixed or  determinable;  and  collectibility  is
reasonably assured. Additionally, there can be no outstanding contingencies that
could  ultimately  cause the  revenue  to be passed  back to the  payor.  In the
isolated  instances  where  these  criteria  have not  been  met,  receipts  are
generally placed in escrow until such time as they can be recognized as revenue.

Trust Fees. Trust fees are recorded on the accrual basis of accounting.

Earnings Per Common Share.  Basic earnings per share ("EPS")  excludes  dilution
and is computed by  dividing  income  available  to common  stockholders  by the
weighted  average  number of common  shares  outstanding  during the  applicable
period.  Diluted  EPS  reflects  the  potential  dilution  that  could  occur if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the earnings of the entity. Such potential dilutive instruments include stock
options  and  warrants.  Note  25 to  these  consolidated  financial  statements
includes disclosure of the Company's EPS calculations.

Comprehensive  Income.  Comprehensive  income is defined as the change in equity
during a period  from  transactions  and other  events from  non-owner  sources.
Comprehensive income is the total of net income and other comprehensive  income,
which for the Company,  is generally comprised of unrealized gains and losses on
securities  available for sale and, if applicable,  unrealized  gains on hedging
instruments qualifying for cash flow hedge accounting treatment pursuant to SFAS
133, as amended. The Company presents  consolidated  statements of comprehensive
income.

Segment  Disclosures.  BNCCORP  segments its operations  into separate  business
activities,  based on the nature of the products and services for each  segment:
banking  operations,  insurance  operations and  brokerage,  trust and financial
services  operations.  The amount of each segment  item  reported is the measure
reported to the chief operating  decision maker for purposes of making decisions
about  allocating  resources  to the  segment  and  assessing  its  performance.
Adjustments and eliminations  made in preparing an enterprise's  general purpose
financial  statements and  allocation of revenues,  expenses and gains or losses
are included in determining reported segment profit or loss if they are included
in the  measure  of the  segment's  profit  or loss  that  is used by the  chief
operating decision maker. Similarly,  only those assets that are included in the
measure of the  segment's  assets that is used by the chief  operating  decision
maker is reported for that segment.  Segment disclosures are provided in Note 16
to these consolidated financial statements.

Stock-Based Compensation.  At December 31, 2002, the Company had two stock-based
employee  compensation plans, which are described more fully in Note 28 to these
consolidated  financial  statements.  The Company  applies the  recognition  and
measurement   principles  of  Accounting   Principles   Board  Opinion  No.  25,
"Accounting   for  Stock   Issued  to   Employees,"   ("APB  25")  and   related
interpretations   in  accounting  for  those  plans.  No  stock-based   employee
compensation  expense is reflected in net income for stock options granted under
the plans as all options  granted under those plans had an exercise  price equal
to the  market  value of the  underlying  common  stock  on the  date of  grant.
Compensation  expense is reflected in net income for the periods presented below
for  restricted  stock  issued  under the stock  plans and its net effect on net
income is reflected in the table below.

The following table  illustrates the effect on net income and EPS if the Company
had applied the fair value  recognition  provisions  of  Statement  of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123") to stock-based employee compensation for the years ended December 31:
<TABLE>
<CAPTION>
                                            2002          2001         2000
                                        -----------   -----------   -----------
<S>                                     <C>           <C>           <C>
Net income, as reported................ $ 2,039,000   $ 1,245,000   $ 2,297,000
Add: total stock-based employee
   compensation expense
   included in reported net income,
   net of related tax effects..........       6,000         6,000        50,000
Deduct: total stock-based employee
   compensation expense determined
   under fair value method for all
   awards, net of related tax effects...    (40,000)     (106,000)     (110,000)
                                        -----------   -----------   -----------
Pro forma net income................... $ 2,005,000   $ 1,145,000   $ 2,237,000
                                        ===========   ===========   ===========
Earnings per share:
  Basic - as reported.................. $      0.75   $      0.52   $      0.96
  Basic - pro forma....................        0.72          0.45          0.89
  Diluted - as reported................        0.75          0.51          0.96
  Diluted - pro forma..................        0.72          0.44          0.89
</TABLE>
<PAGE>
Recently Issued and Adopted Accounting Pronouncements.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standards No. 143,  "Accounting  for Asset  Retirement
Obligations"  ("SFAS 143").  SFAS 143 amends FASB  Statement No. 19,  "Financial
Accounting and Reporting by Oil and Gas Producing Companies," and applies to all
entities.  The  statement  addresses  financial  accounting  and  reporting  for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement  costs. It applies to legal  obligations  associated
with the  retirement  of  long-lived  assets that  result from the  acquisition,
construction,  development and / or the normal operation of a long-lived  asset,
except for certain  obligations  of lessees.  BNCCORP  adopted this  standard on
January 1, 2003;  however,  adoption of this  statement  did not have a material
impact.

In August 2001, the FASB issued Statement of Financial  Accounting Standards No.
144,  "Accounting  for the  Impairment or Disposal of Long-Lived  Assets" ("SFAS
144").  SFAS  144  supersedes  FASB  Statement  No.  121,  "Accounting  for  the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets To Be Disposed Of,"
and the  accounting and reporting  provisions of APB Opinion No. 30,  "Reporting
the Results of  Operations - Reporting the Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions,"  for the  disposal  of a segment  of a  business  (as  previously
defined in that opinion).  SFAS 144 requires that one  accounting  model be used
for long-lived  assets to be disposed of by sale,  whether  previously  held and
used or newly acquired, and broadens the presentation of discontinued operations
to include more  disposal  transactions  than were  included  under the previous
standards. BNCCORP adopted SFAS 144 on January 1, 2002. Under SFAS 144, the sale
of the Fargo  branch of the Bank on September  30, 2002 has been  presented as a
discontinued operation for financial reporting purposes.

In April 2002, the FASB issued Statement of Financial  Accounting  Standards No.
145,  "Rescission  of  FASB  Statements  No.  4, 44 and  64,  Amendment  of FASB
Statement No. 13, and  Technical  Corrections"  ("SFAS 145").  SFAS 145 rescinds
FASB Statement No. 4, "Reporting Gains and Losses from  Extinguishment of Debt,"
and an amendment of that Statement,  FASB Statement No. 64,  "Extinguishments of
Debt Made to Satisfy  Sinking-Fund  Requirements."  SFAS 145 also  rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." Finally,
SFAS 145 amends FASB  Statement  No. 13,  "Accounting  for Leases," to eliminate
inconsistency  between the required  accounting for sale-leaseback  transactions
and the required  accounting for certain lease  modifications that have economic
effects  that are  similar  to  sale-leaseback  transactions  and  amends  other
existing  authoritative  pronouncements to make various  technical  corrections,
clarify meanings, or describe their applicability under changed conditions.  The
provisions of SFAS 145 related to the  rescission of FASB Statement No. 4 are to
be applied in fiscal years beginning after May 15, 2002 (January 1, 2003 for the
Company) with any gain or loss on  extinguishment of debt that was classified as
an extraordinary item in prior periods presented that does not meet the criteria
in  APB  Opinion  30  for   classification   as  an  extraordinary   item  being
reclassified.  The  provisions of SFAS 145 related to FASB Statement No. 13 that
relate to  modifications  of a capital  lease  that make it an  operating  lease
became  effective for transactions  occurring after May 15, 2002.  Management is
still assessing the impact of adoption of this pronouncement.

In June 2002, the FASB issued  Statement of Financial  Accounting  Standards No.
146,  "Accounting for Costs Associated with Exit or Disposal  Activities" ("SFAS
146").  SFAS  146  addresses  financial   accounting  and  reporting  for  costs
associated with exit or disposal  activities and nullifies  Emerging Issues Task
Force Issue No. 94-3,  "Liability  Recognition for Certain Employee  Termination
Benefits and Other Costs to Exit an Activity  (including  Certain Costs Incurred
in a  Restructuring)"  ("EITF Issue  94-3").  One of the  principal  differences
between SFAS 146 and EITF Issue 94-3 pertains to the criteria for  recognizing a
liability  for exit or disposal  costs.  Under EITF Issue 94-3, a liability  for
such costs was  recognized  as of the date of an entity's  commitment to an exit
plan. Pursuant to SFAS 146, a liability is recorded as of the date an obligation
is incurred.  SFAS 146 requires that an exit or disposal  liability be initially
measured  at fair  value.  Provisions  of SFAS  146 are  effective  for  exit or
disposal  activities  that are initiated  after  December 31, 2002.  The Company
adopted SFAS 146 on January 1, 2003 with no material impact.

In October  2002,  the FASB issued SFAS 147.  SFAS 147 removes  acquisitions  of
financial  institutions  from the scope of both  SFAS 72 and FIN 9 and  requires
that those  transactions  be accounted for in accordance  with SFAS 141 and 142.
Thus, the requirement to recognize (and subsequently amortize) any excess of the
fair  value  of  liabilities  assumed  over  the  fair  value  of  tangible  and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer  applies  to  acquisitions  within the scope of SFAS 147.  Entities  with
previously recognized unidentifiable intangible assets that are still amortizing
them in  accordance  with SFAS 72 must,  effective the latter of the date of the
acquisition or the full adoption of SFAS 142, reclassify those intangible assets
to goodwill and terminate  amortization on them. The Company adopted SFAS 147 on
October 1, 2002 and the adoption resulted in no reclassification or revisions to
prior period financial statements.

<PAGE>
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements  for Guarantees  Including  Indirect  Guarantees of
Indebtedness  of Others" ("Fin 45"),  which addresses the disclosures to be made
by a  guarantor  in its  interim  and  annual  financial  statements  about  its
obligations under guarantees. These disclosure requirements are included in Note
21 to  these  consolidated  financial  statements.  Fin  45  also  requires  the
recognition  of  a  liability  by  a  guarantor  at  the  inception  of  certain
guarantees.  Fin 45 requires  the  guarantor  to  recognize a liability  for the
non-contingent  component of the  guarantee,  which is the  obligation  to stand
ready to perform in the event that  specified  triggering  events or  conditions
occur.  The  initial  measurement  of this  liability  is the fair  value of the
guarantee at inception.  The recognition of the liability is required even if it
is not probable  that  payments  will be required  under the guarantee or if the
guarantee  was issued with a premium  payment or as part of a  transaction  with
multiple  elements.  As noted  above,  the Company  has  adopted the  disclosure
requirements  of Fin 45 (see  Note  21)  and  will  apply  the  recognition  and
measurement  provisions  for  all  guarantees  entered  into or  modified  after
December 31, 2002. The adoption is not expected to have a material impact.

In December 2002, the FASB issued  Statement of Financial  Accounting  Standards
No. 148,  "Accounting for Stock-Based  Compensation;  Transition and Disclosure"
("SFAS  148").  SFAS 148 amends  SFAS 123 to  provide  new  guidance  concerning
transition  when an entity  changes from the intrinsic  value method to the fair
value  method of  accounting  for employee  stock-based  compensation  cost.  As
amended by SFAS 148, SFAS 123 now also  requires  additional  information  to be
disclosed  regarding such cost in annual  financial  statements and in condensed
interim  statements  of  public  companies.   In  general,  the  new  transition
requirements  are  effective for  financial  statements  for fiscal years ending
after  December 15, 2002.  Earlier  application is permitted if statements for a
fiscal  year ending  prior to  December  15, 2002 have not yet been issued as of
December 2002. Interim disclosures are required for reports containing condensed
financial  statements for periods beginning after December 15, 2002. The Company
accounts for stock-based  compensation  using the intrinsic  method under ABP 25
and plans to continue to do so while providing the  disclosures  provided for in
SFAS 123. The Company adopted the annual  disclosure  requirements  for SFAS 148
for  purposes  of these  consolidated  financial  statements  and will adopt the
interim disclosure requirements of SFAS 148 beginning with its interim financial
statements for the period ended March 31, 2003.

In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable  Interest  Entities"  ("FIN 46").  FIN 46  addresses  consolidation  by
business   enterprises  of  variable   interest   entities  which  have  certain
characteristics  by requiring  that if a business  enterprise  has a controlling
interest  in a variable  interest  entity (as  defined by FIN 46),  the  assets,
liabilities  and  results  of  activities  of the  variable  interest  entity be
included in the  consolidated  financial  statements  with those of the business
enterprise.  FIN 46 applies  immediately to variable  interest  entities created
after January 31, 2003 and to variable  interest entities in which an enterprise
obtains an interest  after that date.  For variable  interests  acquired  before
February  1, 2003,  FIN 46 applies in the first  fiscal  year or interim  period
beginning  after June 15, 2003. The Company will adopt FIN 46 as indicated above
but  presently  does not have  any  variable  interest  entities  that  would be
required to be included in its consolidated financial statements.

Regulatory Environment.  BNCCORP and its subsidiaries are subject to regulations
of certain state and federal agencies,  including periodic examinations by those
regulatory agencies. BNCCORP and the Bank are also subject to minimum regulatory
capital  requirements.  At December 31, 2002,  capital levels  exceeded  minimum
capital requirements (see Note 18 to these consolidated financial statements).

Reclassifications.  Certain amounts in the financial  statements for prior years
have been reclassified to conform to the current year's presentation.

<PAGE>
2. Acquisitions, Mergers and Divestitures:

The following acquisitions, mergers and divestitures, or transactions associated
with them, transpired during the three-year period ended December 31, 2002:

On September 30, 2002,  the Company sold its Fargo,  North Dakota branch largely
due to the fact that the branch did not achieve critical mass for the Company in
the Fargo  marketplace  and the sale  allowed the Company to redirect  assets to
markets where they can be more productively and profitably employed. Pursuant to
a definitive  branch purchase and assumption  agreement dated July 26, 2002, the
Company  sold the  assets  of the Fargo  branch,  including  the bank  building,
furniture,  fixtures and  equipment  totaling  $6.0 million and $19.5 million of
loans. The Company also sold $31.0 million in deposits. Prior to the application
of the Company's direct costs incurred in the sale of the branch ($56,000),  the
transaction resulted in a net gain on sale of $7,000. These amounts are included
in the line item "Gain  (loss) from  operations  of  discontinued  Fargo  branch
(including  net loss on sale of $49,000 for 2002),  net of income  taxes" in the
consolidated  statements of income.  The Fargo branch's  profit or loss, for the
periods presented, is also reflected in this line item.  Additionally,  included
in this line item are the following amounts of net interest income for the Fargo
branch  for  the  twelve  months  ended  December  31,  2002,   2001  and  2000,
respectively:  $973,000,  $726,000 and $267,000. The Fargo branch had previously
been  reported  in the  banking  operations  segment  of the  Company's  segment
disclosures.

On April 16, 2002, in order to further grow its insurance  segment,  the Company
acquired  100 percent of the voting  equity  interests of Milne Scali & Company,
Inc.  and its  related  companies  ("Milne  Scali"),  a  Phoenix,  Arizona-based
insurance  agency,  for 297,759  shares of newly issued  common stock (valued at
$2.5 million) and $15.5 million in cash. Acquisitions of such agencies generally
result in the recognition of goodwill due to the service nature of the business,
the lack of tangible  assets  acquired  and the  profitability  of the  acquired
agency.  To effect  the  transaction,  the  Company  incurred  $8.5  million  in
long-term  debt. Of the total $18.0  million  purchase  price,  $7.2 million was
allocated  to the net assets  acquired  (including  intangible  assets)  and the
excess purchase price of approximately  $10.8 million over the fair value of net
assets was  recorded  as  goodwill.  As part of the  transaction,  deferred  tax
liabilities  of $2.3  million  were  initially  recorded,  which also  increased
goodwill by the same  amount.  Subsequent  to the  acquisition,  the Company and
Milne Scali have made an Internal  Revenue Code Section  338(h)(10)  election to
step up the  basis in the  acquired  assets.  Upon the  election,  goodwill  was
reduced by $1.8  million,  deferred  taxes were  reduced by $2.3  million  and a
liability for the resulting income taxes in the amount of $590,000 was recorded.
Under the  Section  338(h)(10)  election,  all of the  goodwill  related  to the
acquisition will be deductible for tax purposes.  Additional consideration of up
to $8.5 million is payable to the former shareholders of Milne Scali, subject to
Milne Scali achieving certain financial  performance targets. In accordance with
purchase method accounting  requirements,  such payments would increase the cost
of the transaction in future periods and are not reflected as liabilities in the
Company's current consolidated balance sheet.

Prospectively,  the  goodwill,  all of which is  attributable  to the  Company's
insurance  segment,   will  be  evaluated  for  possible  impairment  under  the
provisions of SFAS 142. Other acquired intangible assets related to personal and
commercial  insurance  lines books of business and totaling  approximately  $8.0
million  will be  amortized  using a method that  approximates  the  anticipated
useful life of the associated  customer lists,  which will cover a period of 9.8
to 12.5 years.

Milne  Scali's  results  of  operations  have  been  included  in the  Company's
consolidated financial statements since the acquisition date of April 16, 2002.

The following is a condensed  balance sheet  indicating  the amount  assigned to
each major asset and liability caption of Milne Scali as of the acquisition date
(amounts are in thousands):
<TABLE>

<S>                                               <C>
Assets -
  Cash..........................................    $  1,536
  Accounts receivable...........................       1,305
  Fixed assets..................................         412
  Intangible assets, books of business..........       8,018
  Goodwill......................................      13,096
  Other.........................................         104
                                                  -------------
Total assets....................................    $ 24,471
                                                  =============

Liabilities -
  Notes payable.................................    $  1,421
  Insurance company payables....................       1,486
  Deferred tax liabilities......................       2,346
  Other.........................................       1,218
                                                  -------------
Total liabilities...............................       6,471
  Stockholders' equity..........................      18,000
                                                  -------------
Total liabilities and stockholders' equity......    $ 24,471
                                                  =============
</TABLE>
<PAGE>

The  following  pro  forma  information  has  been  prepared  assuming  that the
acquisition  of  Milne  Scali  had  been  consummated  at the  beginning  of the
respective  periods.  The pro forma  financial  information  is not  necessarily
indicative  of the  results  of  operations  as they  would  have  been  had the
transaction been consummated on the assumed dates (amounts are in thousands):

<TABLE>
<CAPTION>

                                           Twelve Months Ended December 31,
                                    -------------------------------------------
                                        2002             2001          2000
                                    -------------   ------------   ------------
<S>                                  <C>            <C>             <C>
Net interest income................. $  14,761      $ 14,251        $  11,494
Noninterest income..................    19,553        18,131           16,086
Noninterest expense.................    28,032        26,215           23,202

Income from continuing operations...     2,313         2,196            2,686
 Income (loss) from discontinued
   operations.......................        14          (203)            (416)
 Income before extraordinary item
   and cumulative effect of
   change in accounting principle...     2,327         1,993            2,270
Net income..........................     2,327         1,746            2,527


Basic earnings per common share.....  $   0.79       $  0.65        $    0.94

Diluted earnings per common share...  $   0.79       $  0.64        $    0.94

</TABLE>

On April 8, 2002, the Company merged BNC National Bank, its Minnesota  chartered
bank,  with and into BNC  National  Bank of Arizona and the name of the combined
bank was changed to BNC National  Bank. The  transaction  was accounted for as a
pooling of interests.

On July 9, 2001, the Company established a new banking subsidiary,  BNC National
Bank of Arizona headquartered in Tempe, Arizona.

On November 20, 2000,  the Company  merged BNC National  Bank,  its North Dakota
chartered bank, with and into BNC National Bank of Minnesota and the name of the
combined bank was changed to BNC National  Bank. The  transaction  was accounted
for as a pooling of interests.

On December 31, 1999, the Company sold its asset-based lending  subsidiary,  BNC
Financial  Corporation ("BNC Financial"),  to Associated Banc-Corp of Green Bay,
Wisconsin.  The Company  received $5.3 million in cash for all of the issued and
outstanding common stock of BNC Financial. The 2000 gain on disposal of $159,000
(pretax gain of $241,000,  net of income tax effects of $82,000)  resulted  from
recoveries  on a  credit  charged  off in  1999 at the  time of the  sale of BNC
Financial.


3. Restrictions on Cash and Due From Banks:

The Bank is required to  maintain  reserve  balances in cash on hand or with the
FRB under the Federal  Reserve Act and Federal  Reserve  Board's  Regulation  D.
Required reserve balances were $3.6 and $4.2 million as of December 31, 2002 and
2001, respectively.


4. Investment Securities Available For Sale:

Investment  securities have been classified in the  consolidated  balance sheets
according to management's  intent.  The Company had no securities  designated as
trading or  held-to-maturity  in its portfolio at December 31, 2002 or 2001. The
carrying  amount of  available-for-sale  securities and their  approximate  fair
values were as follows as of December 31 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
                                                              Gross             Gross           Estimated
                                           Amortized        Unrealized        Unrealized           Fair
                                             Cost             Gains             Losses            Value
                                        ----------------  ---------------   ---------------   ---------------
                     2002
<S>                                     <C>               <C>               <C>               <C>
U.S. government agency mortgage-
  backed securities..................      $  47,072         $    547         $    (43)        $   47,576
U.S. government agency securities....          4,608              595               --              5,203
Collateralized mortgage obligations..        122,795            2,527             (842)           124,480
State and municipal bonds............         27,276            1,589              (50)            28,815
Corporate debt securities............          1,938               60               --              1,998
                                        ----------------  ---------------   ---------------   ---------------
                                           $ 203,689         $  5,318         $   (935)        $  208,072
                                        ================  ===============   ===============   ===============


                     2001                                       Gross            Gross           Estimated
                                             Amortized       Unrealized        Unrealized          Fair
                                               Cost             Gains            Losses            Value
                                         ---------------  ----------------  ---------------  ----------------
U.S. government agency mortgage-
  backed securities..................      $  42,027         $    243         $  (324)        $   41,946
U.S. government agency securities....          4,396               99              --              4,495
Collateralized mortgage obligations..        135,423            2,236            (391)           137,268
State and municipal bonds............         16,952              649            (120)            17,481
Corporate debt securities............         10,329              376             (94)            10,611
                                         ---------------  ----------------  ---------------  ----------------
                                           $ 209,127         $  3,603         $  (929)        $  211,801
                                         ===============  ================  ===============  ================

</TABLE>

The  amortized  cost and  estimated  fair  market  value  of  available-for-sale
securities classified according to their contractual  maturities at December 31,
2002, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Estimated
                                              Amortized          Fair
                                               Cost             Value
                                             -----------      ----------
<S>                                          <C>              <C>
Due in one year or less.................     $        5       $       5
Due after one year through five years...          2,808           3,023
Due after five years through ten years..          4,365           4,515
Due after ten years.....................        196,511         200,529
                                             -----------     -----------
     Total..............................     $  203,689      $  208,072
                                             ===========     ===========
</TABLE>
<PAGE>

Securities  carried at  approximately  $177.8 and $186.0 million at December 31,
2002 and 2001,  respectively,  were pledged as  collateral  for public and trust
deposits and borrowings, including borrowings with the FHLB.

Sales  proceeds  and  gross  realized  gains and  losses  on  available-for-sale
securities were as follows for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>

                                2002                2001                2000
                            -----------         -------------       -----------
<S>                         <C>                 <C>                 <C>
Sales proceeds...........   $  100,651          $  119,394          $   23,789
Gross realized gains.....        2,003               1,530                 324
Gross realized losses....          133                 134                  48

</TABLE>


5. Federal Reserve Bank and Federal Home Loan Bank Stock:

The carrying amounts of FRB and FHLB stock, which approximate their fair values,
consisted of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>

                                                 2002            2001
                                             -----------     -----------
<S>                                          <C>             <C>
Federal Reserve Bank Stock, at cost......... $   1,236       $    849
Federal Home Loan Bank Stock, at cost.......     5,835          6,531
                                             -----------     -----------
  Total..................................... $   7,071       $  7,380
                                             ===========     ===========
</TABLE>

There is no contractual  maturity on these investments;  they represent required
regulatory investments.


6. Loans and Leases:

Composition of Loan and Lease  Portfolio.  The composition of the loan and lease
portfolio was as follows as of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                2002          2001
                                             ----------    ----------
<S>                                          <C>           <C>
Commercial and industrial................... $  94,075     $ 103,883
Real estate:
   Mortgage.................................   147,825       123,727
   Construction.............................    62,926        34,225
Agricultural................................    18,023        19,069
Consumer....................................     7,948         8,404
Lease financing.............................     5,554         7,578
Other.......................................       309         1,549
                                             ----------    ----------
     Total..................................   336,660       298,435
Less:
   Allowance for credit losses..............    (5,006)       (4,325)
   Unearned income and net unamortized
     deferred fees and costs................      (866)         (511)
                                             ----------    ----------
         Net loans and leases............... $ 330,788     $ 293,599
                                             ==========    ==========
<PAGE>
</TABLE>

Geographic  Location and Types of Loans.  Loans were to borrowers located in the
following market areas as of December 31:
<TABLE>
<CAPTION>
                                          2002         2001
                                         ------       ------
<S>                                      <C>          <C>
North Dakota.......................        32%          37%
Minnesota..........................        30           35
Arizona............................        26           17
South Dakota.......................         7            9
Other..............................         5            2
                                         ------       ------
         Totals....................       100%         100%
                                         ======       ======
</TABLE>

Commercial  loan  borrowers  are generally  small- and  mid-sized  corporations,
partnerships  and sole  proprietors  in a wide variety of  businesses.  Loans to
consumers  are both  secured  and  unsecured.  Real  estate  loans  are fixed or
variable rate and include both  amortizing and revolving  line-of-credit  loans.
Real estate  mortgage loans include various types of loans for which the Company
holds real  property  as  collateral.  Of the $147.8 and $123.7  million of real
estate  mortgages  as of December 31, 2002 and 2001,  respectively,  many of the
loans are loans made to commercial  customers  where the collateral for the loan
is,  among  other  things,  the real  estate  occupied  by the  business  of the
customer.  Accordingly,  certain loans categorized as real estate mortgage loans
can be  characterized  as  commercial  loans that are  secured  by real  estate.
Single- and  multi-family  residential  mortgage  loans  totaling $10.1 and $6.6
million at December 31, 2002 and 2001, respectively,  were pledged as collateral
for FHLB  borrowings.  Commercial  loans  totaling  $38.5 and $35.6  million  at
December  31,  2002 and 2001,  respectively,  were  pledged  as  collateral  for
borrowings, including FHLB borrowings.

Concentrations   of   Credit.    The   Company's   credit   policies   emphasize
diversification  of risk among industries,  geographic areas and borrowers.  The
only concentrations of loans exceeding 10 percent of total loans at December 31,
2002 are real  estate  loans,  such as loans to  non-residential  and  apartment
building  operators and lessors of real property ($94.2 million),  loans related
to hotels and other lodging places ($46.9 million) and construction loans ($48.5
million).  Loans within these categories are diversified  across different types
of borrowers,  geographically  dispersed, and secured by many different types of
real estate and other collateral.

Impaired Loans. As of December 31, the Company's recorded investment in impaired
loans and the related valuation allowance was as follows (in thousands):
<TABLE>
<CAPTION>
                                    2002                       2001
                         -------------------------   -------------------------
                          Recorded      Valuation      Recorded     Valuation
                          Investment    Allowance     Investment    Allowance
                         ------------  -----------   ------------  -----------
<S>                       <C>           <C>          <C>           <C>
Impaired loans -
 Valuation allowance
  required..............  $  13,412    $   2,210     $  11,571     $    769
 No valuation
  allowance required....         10           --            17           --
                         ------------  -----------   ------------  -----------
   Total impaired
    loans...............  $  13,422    $   2,210     $  11,588     $    769
                         ============  ===========   ============  ===========
</TABLE>
<PAGE>

Impaired loans generally  include loans on which management  believes,  based on
current information and events, it is probable that the Company will not be able
to collect  all  amounts  (i.e.,  contractual  principal  and  interest)  due in
accordance  with the terms of the loan  agreement  and which are  analyzed for a
specific  reserve   allowance.   The  Company  generally   considers  all  loans
risk-graded  substandard  and doubtful as well as  nonaccrual  and  restructured
loans as impaired loans.

The valuation allowance on impaired loans is included in the Company's allowance
for credit losses.

Interest  payments  received on impaired  loans are recorded as interest  income
unless collection of the remaining recorded investment is doubtful at which time
payments received are recorded as reductions of principal.  The average recorded
investment in impaired loans and approximate interest income recognized for such
loans were as follows for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>

                                      2002            2001          2000
                                   -----------    -----------    -----------
<S>                                <C>            <C>            <C>
Average recorded investment
  in impaired loans...............  $ 13,135        $ 9,101       $ 7,393
                                   ===========    ===========    ===========
Interest income recognized
  on impaired loans...............  $    658        $   761       $   791
                                   ===========    ===========    ===========
Average recorded investment in
  impaired loans as a percentage
  of average total loans..........      4.0%           2.9%          2.9%
                                   ===========    ===========    ===========
</TABLE>

Past Due,  Nonaccrual and Restructured  Loans. As of December 31, 2002 and 2001,
the Company had $5.1 million and  $983,000,  respectively,  of loans past due 90
days or more and still accruing interest.  As of December 31, 2002 and 2001, the
Company had $2.5 and $3.4 million,  respectively, of nonaccrual loans and $0 and
$5,000, respectively,  of restructured loans (included as impaired loans above).
The  following  table  indicates  the effect on income if interest on such loans
outstanding at year-end had been recognized at original contractual rates during
the year ended December 31 (in thousands):
<TABLE>
<CAPTION>

                                      2002         2001        2000
                                    --------     --------    --------
<S>                                 <C>          <C>         <C>
Interest income that would
  have been recorded...............  $  237       $  87       $  35
Interest income recorded...........       1           3           6
                                    --------     ---------   --------
Effect on interest income..........  $  236       $  84       $  29
                                    ========     =========   ========
</TABLE>

As of December 31, 2002, the Company had no commitments to lend additional funds
to  borrowers  with  loans  whose  terms  had been  modified  in  troubled  debt
restructurings.

Loans to Related Parties.  Note 22 to these  consolidated  financial  statements
includes  information  relating  to  loans  to  executive  officers,  directors,
principal shareholders and associates of such persons.

Leases.  The Company  extends  credit to borrowers  under direct  finance  lease
obligations.   The  direct  finance  lease   obligations  are  stated  at  their
outstanding principal amount net of unearned income and net unamortized deferred
fees and costs.  At December 31, 2002,  the total minimum  annual lease payments
for direct finance lease  obligations  with remaining  terms of greater than one
year were as follows (in thousands):
<TABLE>
<S>                                    <C>
  2003................................ $ 1,133
  2004................................     890
  2005................................     466
  2006................................     354
  2007................................     158
  Thereafter..........................      --
                                       --------
Total future minimum lease payments..    3,001
Unguaranteed residual values.........      873
                                       --------
Total all payments...................    3,874
Unearned income......................     (485)
                                       --------
Net outstanding principal amount.....  $ 3,389
                                       ========
<PAGE>
</TABLE>

The Company also extends financing to lease companies, securing the loan with an
assignment of lease payments and a security filing against the underlying  asset
of the lease.  These loans are classified  above as lease  financing but are not
direct finance lease obligations.


7. Allowance for Credit Losses:

Transactions  in the  allowance  for credit losses were as follows for the years
ended December 31 (in thousands):

<TABLE>
<CAPTION>
                                          2002         2001         2000
                                       ----------   ----------   ----------
<S>                                     <C>          <C>          <C>
Balance, beginning of year.........     $  4,325     $  3,588     $ 2,872
     Provision for credit losses...        1,202        1,699       1,202
     Loans charged off.............         (657)      (1,265)       (755)
     Loans recovered...............          136          303         269
                                       ----------   ----------   ----------
Balance, end of year...............     $  5,006     $  4,325     $ 3,588
                                       ==========   ==========   ==========
</TABLE>


8. Premises and Equipment

Premises and equipment consisted of the following at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                      2002         2001
                                                   -----------  -----------
<S>                                                 <C>          <C>
Land and improvements.............................  $  1,857     $    569
Buildings and improvements........................     6,002        5,655
Leasehold improvements............................     1,418        1,035
Furniture, fixtures and equipment.................     8,873        8,123
                                                   -----------  -----------
     Total cost...................................    18,150       15,382
Less accumulated depreciation and amortization....    (7,050)      (6,202)
                                                   -----------  -----------
     Net premises, leasehold improvements
       and equipment..............................  $ 11,100     $  9,180
                                                   ===========  ===========
</TABLE>

Depreciation  and  amortization  expense on premises  and  equipment  charged to
continuing  operations  totaled  approximately  $1.3  million,  $1.1 million and
$993,000 for the years ended December 31, 2002, 2001 and 2000, respectively.


9. Goodwill and Other Intangible Assets - Adoption of SFAS 142

Goodwill,  representing  the excess of the purchase price over the fair value of
net assets acquired,  results from purchase acquisitions made by the Company. On
January  1,  2002,  the  Company  adopted  SFAS 142.  Under  SFAS 142,  goodwill
associated  with  business  combinations  completed  after June 30,  2001 is not
required to be amortized. During the transition period from July 1, 2001 through
December  31, 2001,  all of the  Company's  goodwill  associated  with  business
combinations  completed  prior to July 1, 2001 was amortized  over 15 to 25 year
periods.  Effective  January 1, 2002,  the  Company  discontinued  all  goodwill
amortization.


<PAGE>
Since  January  1,  2002,  goodwill  has been  assessed  for  impairment  at the
reporting unit and qualifying  subsidiary levels by applying a  fair-value-based
test at least annually or if impairment  indicators are present. The Company has
$437,000 of unamortized goodwill related to five separate transactions completed
prior to July 1, 2001.  Pursuant to SFAS 142, the Company  completed its initial
goodwill  impairment  assessment during the second quarter of 2002 and concluded
that goodwill was not impaired as of January 1, 2002. No subsequent  events have
occurred that would change the conclusion reached.

Core  deposit  intangibles  are  amortized  based on a useful  life of 10 years.
Insurance books of business intangibles are being amortized over their estimated
lives of 12.5  years for  commercial  lines and 9.8  years for  personal  lines.
Certain  identifiable  intangible  assets that are also  included in the caption
"other  intangible  assets" in the  consolidated  balance  sheets are  generally
amortized over a useful life of 10 to 15 years.


Adjusted Earnings - SFAS 142 Transitional Disclosure. Effective January 1, 2002,
the Company discontinued all goodwill amortization. The following tables
reconcile income from continuing operations, income before extraordinary items
and cumulative effect of change in accounting principle, net income and EPS,
adjusted to exclude amortization expense recognized in those periods related to
goodwill for the years ended December 31 (amounts are in thousands):
<TABLE>
<CAPTION>

                                                2002          2001         2000
                                            ----------   ----------    ---------
<S>                                         <C>          <C>           <C>
 Reported income from continuing
   operations..............................   $ 2,025      $ 1,695      $ 2,456
 Add back: goodwill amortization, net
   of income taxes.........................        --           51           57
                                            ----------   ----------    ---------
 Adjusted income from continuing
   operations..............................   $ 2,025      $ 1,746      $ 2,513
                                            ==========   ==========    =========
 Reported income before extraordinary item
   and cumulative effect of change in
   accounting principle....................   $ 2,039      $ 1,492      $ 2,040
 Add back: goodwill amortization, net of
   income taxes............................        --           51           57
 Adjusted income before extraordinary item
   and cumulative effect of change in
   accounting principle....................   $ 2,039      $ 1,543      $ 2,097
                                            ==========   ==========    =========

 Reported net income ......................   $ 1,960      $ 1,245      $ 2,297
 Add back: goodwill amortization, net of
    income taxes...........................        --           51           57
                                            ----------   ----------    ---------
 Adjusted net income ......................   $ 1,960      $ 1,296      $ 2,354
                                            ==========   ==========    =========

 Basic earnings per common share:
    Reported net income ...................   $  0.75      $  0.52      $  0.96
      Goodwill amortization, net of
       income taxes........................        --         0.02         0.02
                                            ----------   ----------    ---------
 Adjusted net income ......................   $  0.75      $  0.54      $  0.98
                                            ==========   ==========    =========

 Diluted earnings per common share:
    Reported net income ...................   $  0.75      $  0.51      $  0.96
      Goodwill amortization, net
       of income taxes.....................        --         0.02         0.02
                                            ----------   ----------    ---------
 Adjusted net income ......................   $  0.75      $  0.53      $  0.98
                                            ==========   ==========    =========
<PAGE>
</TABLE>
Intangible  Assets.  The gross  carrying  amount of  intangible  assets  and the
associated  accumulated  amortization  at December  31, 2002 is presented in the
table below (in thousands):

<TABLE>
<CAPTION>
                                      Gross                           Net
                                     Carrying     Accumulated       Carrying
                                      Amount      Amortization       Amount
                                    ------------  -------------  ---------------
<S>                                 <C>           <C>            <C>
 Intangible assets:

  Core deposit intangibles..........  $  3,497       $  2,584       $    913
  Insurance books of business
    intangibles.....................     8,018            471          7,547
  Other.............................       874            459            415
                                    ------------  -------------  ---------------
        Total.......................  $ 12,389       $  3,514       $  8,875
                                    ============  =============  ===============
</TABLE>

One intangible  asset included in the "other"  category above has a net carrying
value of $271,000 but is not being amortized  because it has an indefinite life.
Amortization  expense for intangible assets was $881,000,  $482,000 and $528,000
for the years ended December 31, 2002, 2001 and 2000, respectively.

The  following  table  shows  the  estimated  future  amortization  expense  for
amortized intangible assets existing on the Company's books at December 31, 2002
(in thousands).  Projections of amortization expense are based on existing asset
balances  as of  December  31,  2002.  Actual  amortization  expense  may differ
significantly depending upon changes in market conditions:

<TABLE>
<CAPTION>
                                          Insurance
                                        Commercial and
                              Core      Personal Books
                            Deposit      of Business
                          Intangibles    Intangibles      Other          Total
                         -------------  --------------  ------------ -----------
<S>                      <C>            <C>             <C>          <C>
Year ended December 31,
   2003................      350             665            48            1,063
   2004................      350             665            48            1,063
   2005................      233             665            48              946
   2006................       --             665            --              665
   2007................       --             665            --              665
</TABLE>

Goodwill. At January 1, 2002, the Company had a total of $437,000 of unamortized
goodwill relating to five separate purchase transactions completed prior to July
1, 2001. As indicated above, pursuant to SFAS 142, the goodwill was assessed for
impairment during the second quarter of 2002. Management concluded that goodwill
was not impaired as of January 1, 2002. No subsequent  events have occurred that
would change the conclusion reached.

The following table shows the change in goodwill, by reporting segment,  between
January 1, 2002 and December 31, 2002 (amounts are in thousands):
<TABLE>
<CAPTION>
                                                    Segment
                                 -----------------------------------------------
                                  Banking    Insurance     Other       Total
                                 ---------   ---------   ---------   ---------
<S>                              <C>         <C>         <C>         <C>
Balance, January 1, 2002.......   $   212     $    45     $   177     $   434
Goodwill attributable to
  purchase acquisition.........        --      11,776          --      11,776
                                 ---------   ---------   ---------   ---------
Balance, December 31, 2002.....   $   212     $11,821     $   177     $12,210
                                 =========   =========   =========   =========
</TABLE>
<PAGE>
10. Deposits:

The scheduled maturities of time deposits as of December 31, 2002 are as follows
(in thousands):

<TABLE>
     <S>                          <C>
     2003..................       $  97,482
     2004..................          47,401
     2005..................          13,579
     2006..................           4,872
     2007..................           2,416
     Thereafter............             602
                                ----------------
                                 $  166,352
                                ================
</TABLE>

At  December  31,  2002  and  2001,  the  Bank  had  $27.3  and  $34.0  million,
respectively, of time deposits that had been acquired in the national market and
$31.4 and $34.4 million,  respectively,  of time deposits that had been acquired
through a broker.

At December 31, 2002  mortgage-backed  and related  securities with an amortized
cost of  approximately  $15.1  million  were pledged as  collateral  for certain
deposits  and $14.5  million of bank  depository  guaranty  bonds from a bankers
surety company were pledged as additional collateral on Bank deposits.

Deposits Received from Related Parties. Note 22 to these consolidated  financial
statements  includes  information  relating to deposits  received from executive
officers, directors, principal shareholders and associates of such persons.


11. Short-Term Borrowings:

The following table sets forth selected information for short-term borrowings
(borrowings with an original maturity of less than one year) as of December 31
(in thousands):

<TABLE>
<CAPTION>
                                               2002             2001
                                           ------------     ------------
  <S>                                      <C>              <C>
  Federal funds purchased
    and U. S. Treasury tax
    and loan note option accounts (1).....   $ 15,000          $   447
  Repurchase agreements with customers,
    renewable daily, interest payable
    monthly, rates at 1.50%, secured by
    government agency collateralized
    mortgage obligations (1)..............     13,120              313
                                            ------------     ------------
                                             $ 28,120          $   760
                                            ============     ============

<FN>
(1) The weighted average interest rate on short-term  borrowings  outstanding as
of December 31, 2002 and 2001 was 1.48% and 2.53%, respectively.
</FN>
</TABLE>

Customer  repurchase  agreements  are used by the  Bank to  acquire  funds  from
customers  where the  customer  is  required  or  desires  to have  their  funds
supported by collateral  consisting of  government,  government  agency or other
types of  securities.  The  repurchase  agreement  is a  promise  to sell  these
securities to a customer at a certain price and repurchase them at a future date
at that same price plus interest  accrued at an agreed upon rate.  The Bank uses
customer repurchase agreements in its liquidity plan as well as an accommodation
to  customers.  At December 31, 2002,  $13.1  million of  securities  sold under
repurchase  agreements  with an  interest  rate of 1.50%  maturing  in 2003 were
collateralized by government agency collateralized mortgage obligations having a
carrying  value  of  $15.7  million,  a  market  value  of  $15.7  million,  and
unamortized principal balances of $15.1 million.

<PAGE>
The Company had established two additional revolving lines of credit with banks,
totaling $5.5 million,  which were not drawn on at December 31, 2002. The lines,
if drawn upon,  mature daily with interest rates that float at the federal funds
rate.

12. Federal Home Loan Bank Advances:

FHLB advances consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
                                  2002                          2001
                       ---------------------------   ---------------------------
                                       Weighted                      Weighted
Year of Maturity          Amount     Average Rate       Amount     Average Rate
                       -----------  --------------   -----------  --------------
     <S>                <C>         <C>              <C>          <C>
     2002.............         --         --          $  20,000        5.33%
     2003.............    $ 15,000       4.56%           15,000        4.56
     2004.............      15,000       4.77            15,000        4.77
     2005.............       5,000       3.84             5,000        3.84
     2009.............      10,000       5.64            10,000        5.64
     2010.............      52,200       6.09            52,200        6.09
                       ------------ --------------   ------------ --------------
                          $ 97,200       5.49%        $ 117,200        5.46%
                       ============ ==============   ============ ==============
</TABLE>
Some of the advances  listed above have call  provisions  that allow the FHLB to
request  that the  advance  be paid back or  refinanced  at the rates then being
offered by the FHLB.  As of December 31, 2002,  the Company had $62.2 million of
callable FHLB advances all callable quarterly during the first quarter of 2003.

At December 31,  2002,  the advances  from the FHLB were  collateralized  by the
Bank's mortgage loans with unamortized principal balances of approximately $42.9
million resulting in a FHLB collateral equivalent of $26.4 million. In addition,
the advances from the FHLB were  collateralized  by securities with  unamortized
principal balances of approximately  $134.9 million. The Bank has the ability to
draw  additional  advances of $61.2  million  based upon the mortgage  loans and
securities  that are currently  pledged,  subject to a  requirement  to purchase
additional FHLB stock.


13. Long Term Borrowings:

The following  table sets forth selected  information  for long-term  borrowings
(borrowings  with an original  maturity of greater than one year) as of December
31 (in thousands):
<TABLE>
<CAPTION>
                                                       2002             2001
                                                   ------------     ------------
  <S>                                              <C>              <C>
  Note payable to the Bank of North Dakota,
    principal due April 1, 2004,
    interest payable quarterly at 30 day
    LIBOR plus 3.20%, secured by the stock
    of BNC National Bank .........................  $  8,500          $    --
  Other ..........................................        61               13
                                                   ------------     ------------
                                                    $  8,561          $    13
                                                   ============     ============
</TABLE>
The $8.5 million loan from the Bank of North Dakota includes  various  covenants
that are primarily  operational  rather than financial in nature. As of December
31, 2002, the Company was in compliance with these covenants.

At December 31, 2000,  BNCCORP had  outstanding  $12.6  million of  subordinated
notes. The 8 5/8 percent  Subordinated  Notes (the "Notes"),  which qualified as
Tier  2  capital  up to a  certain  limit  under  the  Federal  Reserve  Board's
risk-based capital guidelines (60 percent at December 31, 2000), were considered
unsecured general obligations of BNCCORP. They were redeemable, at the option of
BNCCORP,  at par plus  accrued  interest to the date of  redemption.  Payment of
principal of the Notes could be  accelerated  only in the case of certain events
relating to  bankruptcy,  insolvency or  reorganization  of BNCCORP.  An initial
discount of $750,000 was being  amortized  to interest  expense over the term of
the Notes using the effective interest rate method.

During 2001,  BNCCORP  purchased and retired  $82,000 of the Notes at a discount
using cash  generated  from the sale of BNC  Financial.  On August 31, 2001, the
Company  redeemed  the  remaining  $12.6  million  of the  Notes at par  through
exercise of the option of BNCCORP  discussed  above. The remaining $12.6 million
of the Notes were redeemed  using a portion of the cash  generated  from issuing
trust preferred  securities  through the establishment of BNC Statutory Trust II
(see Note 14 to these consolidated financial  statements).  The transactions and
redemption of the Notes resulted in an extraordinary loss of $134,000 ($0.06 per
diluted share), net of income taxes of ($70,000).
<PAGE>

During 2000,  BNCCORP retired $2.0 million of the Notes.  BNCCORP  purchased the
Notes at a discount,  and the transactions  resulted in  extraordinary  gains of
$257,000 ($.11 per diluted  share),  net of income taxes of $132,000.  The Notes
were retired using cash generated from the sale of BNC Financial.


14.  Guaranteed  Preferred   Beneficial  Interests  in  Company's   Subordinated
Debentures:

In July 2001,  BNCCORP  established a special purpose trust, BNC Statutory Trust
II, for the purpose of issuing $15.0  million of floating  rate trust  preferred
securities.  The  floating  rate trust  preferred  securities  were issued at an
initial  rate of 7.29  percent and adjust  quarterly  to a rate equal to 3-month
LIBOR  plus 3.58  percent.  The  interest  rate at  December  31,  2002 was 5.34
percent.  Prior to July 31, 2011,  the rate shall not exceed 12.5  percent.  The
proceeds from the issuance,  together with the proceeds of the related  issuance
of $464,000 of common securities of the trust, were invested in $15.5 million of
junior subordinated deferrable interest debentures of BNCCORP. The floating rate
junior  subordinated  deferrable  interest  debentures were issued at an initial
rate of 7.29 percent and adjust  quarterly to a rate equal to 3-month LIBOR plus
3.58 percent. The interest rate at December 31, 2002 was 5.34 percent.  Prior to
July 31,  2011,  the rate shall not exceed  12.5  percent.  Concurrent  with the
issuance  of  the  preferred   securities  by  the  trust,   BNCCORP  fully  and
unconditionally  guaranteed all obligations of the special purpose trust related
to the trust  preferred  securities.  The  trust  preferred  securities  provide
BNCCORP  with a more  cost-effective  means  of  obtaining  Tier 1  capital  for
regulatory purposes than if BNCCORP itself were to issue preferred stock because
BNCCORP is allowed to deduct,  for income tax purposes,  amounts paid in respect
of the  debentures  and  ultimately  distributed  to the  holders  of the  trust
preferred  securities.  The sole  assets of the  special  purpose  trust are the
debentures.  BNCCORP owns all of the common  securities of the trust. The common
securities and debentures, along with the related income effects, are eliminated
within the consolidated financial statements. The preferred securities issued by
the  trust  rank  senior  to the  common  securities.  For  presentation  in the
consolidated  balance sheet, the securities are shown net of discount and direct
issuance costs.

The trust preferred  securities are subject to mandatory  redemption on July 31,
2031,  the stated  maturity  date of the  debentures,  or upon  repayment of the
debentures,  or  earlier,  pursuant to the terms of the trust  agreement.  On or
after July 31,  2006,  the trust  preferred  securities  may be redeemed and the
corresponding  debentures  may be prepaid at the option of  BNCCORP,  subject to
Federal Reserve Board approval,  at declining  redemption prices.  Prior to July
31,  2006,  the  securities  may be  redeemed  at the  option of  BNCCORP on the
occurrence  of certain  events  that result in a negative  tax impact,  negative
regulatory  impact  on the  trust  preferred  securities  or  negative  legal or
regulatory impact on the special purpose trust which would cause it to be deemed
to be an "investment company" for regulatory purposes. In addition,  BNCCORP has
the  right to defer  payment  of  interest  on the  debentures  and,  therefore,
distributions on the trust preferred securities for up to five years.

In July 2000, BNCCORP  established a special purpose trust, BNC Capital Trust I,
for the  purpose  of issuing  $7.5  million of 12.045  percent  trust  preferred
securities.  The proceeds from the  issuance,  together with the proceeds of the
related  issuance of $232,000 of 12.045 percent common  securities of the trust,
were invested in $7.7 million of 12.045 percent junior  subordinated  deferrable
interest  debentures of BNCCORP.  Concurrent  with the issuance of the preferred
securities  by the  trust,  BNCCORP  fully and  unconditionally  guaranteed  all
obligations  of  the  special  purpose  trust  related  to the  trust  preferred
securities.   The  trust  preferred  securities  provide  BNCCORP  with  a  more
cost-effective means of obtaining Tier 1 capital for regulatory purposes than if
BNCCORP  itself  were to issue  preferred  stock  because  BNCCORP is allowed to
deduct,  for income tax purposes,  amounts paid in respect of the debentures and
ultimately  distributed to the holders of the trust  preferred  securities.  The
sole assets of the special purpose trust are the debentures. BNCCORP owns all of
the common securities of the trust. The common securities and debentures,  along
with  the  related  income  effects,  are  eliminated  within  the  consolidated
financial  statements.  The preferred securities issued by the trust rank senior
to the common  securities.  For presentation in the consolidated  balance sheet,
the securities are shown net of discount and direct  issuance  costs.  The trust
preferred  securities are subject to mandatory  redemption on July 19, 2030, the
stated maturity date of the debentures,  or upon repayment of the debentures, or
earlier,  pursuant  to the terms of the trust  agreement.  On or after  July 19,
2010,  the trust  preferred  securities  may be redeemed  and the  corresponding
debentures may be prepaid at the option of BNCCORP,  subject to Federal  Reserve
Board  approval,  at declining  redemption  prices.  Prior to July 19, 2010, the
securities may be redeemed at the option of BNCCORP on the occurrence of certain
events that result in a negative tax impact,  negative  regulatory impact on the
trust preferred securities or negative legal or regulatory impact on the special
purpose  trust which would cause it to be deemed to be an  "investment  company"
for regulatory purposes. In addition,  BNCCORP has the right to defer payment of
interest on the debentures and, therefore,  distributions on the trust preferred
securities for up to five years.
<PAGE>

15. Stockholders' Equity:

BNCCORP and the Bank are subject to certain  minimum capital  requirements  (see
Note 18 to these consolidated financial statements).  BNCCORP is also subject to
certain  restrictions  on the amount of dividends it may declare  without  prior
regulatory  approval in  accordance  with the Federal  Reserve Act. In addition,
certain  regulatory  restrictions  exist  regarding  the  ability of the Bank to
transfer funds to BNCCORP in the form of cash dividends.  Approval of the Office
of the Comptroller of the Currency ("OCC"), the Bank's principal  regulator,  is
required  for the Bank to pay  dividends  to BNCCORP in excess of the Bank's net
profits from the current year plus  retained net profits for the  preceding  two
years. At December 31, 2002 approximately $9.4 million of retained earnings were
available for bank dividend declaration without prior regulatory approval.

Pursuant to a Stock Purchase Agreement (the "Agreement"), in April 2002, BNCCORP
issued 297,759 shares of its common stock to Richard W. Milne,  Jr., Terrence M.
Scali,  and the other  sellers  named in the  Agreement in  connection  with the
Company's  acquisition of Milne Scali.  Note 2 to these  consolidated  financial
statements includes  additional  information related to the acquisition of Milne
Scali.

On May 3, 2002,  BNCCORP issued 150 shares of its noncumulative  preferred stock
to  Richard  W.  Milne,  Jr. and  Terrence  M. Scali for cash.  Each share has a
preferential  noncumulative  dividend  at an annual  rate of 8.00  percent and a
preferred  liquidation value of $10,000 per share. The  noncumulative  preferred
stock is not  redeemable  by BNCCORP  and  carries  no  conversion  rights.  The
proceeds of the issuance were used for general corporate purposes.

On May 30, 2001,  BNCCORP's Board of Directors adopted a rights plan intended to
protect  stockholder  interests  in the event  BNCCORP  becomes the subject of a
takeover  initiative  that  BNCCORP's  Board of  Directors  believes  could deny
BNCCORP's  stockholders the full value of their  investment.  This plan does not
prohibit the Board from considering any offer that it deems  advantageous to its
stockholders. BNCCORP has no knowledge that anyone is considering a takeover.

The rights were issued to each common stockholder of record on May 30, 2001, and
they will be exercisable only if a person acquires,  or announces a tender offer
that would result in ownership  of, 15 percent or more of BNCCORP's  outstanding
common  stock.  The rights  will  expire on May 30,  2011,  unless  redeemed  or
exchanged at an earlier date.

Each  right  entitles  the  registered  holder  to  purchase  from  BNCCORP  one
one-hundredth of a share of Series A Participating  Cumulative  Preferred Stock,
$.01 par value (the  "Preferred  Stock"),  of BNCCORP at a price of $100 per one
one-hundredth of a share,  subject to adjustment.  Each share of Preferred Stock
will be entitled to a minimum  preferential  quarterly dividend payment of $1.00
but will be entitled to an aggregate dividend of 100 times the dividend declared
per share of common  stock.  In the event of  liquidation,  the  holders  of the
Preferred Stock will be entitled to a minimum  preferential  liquidation payment
of $0.01 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of common stock.  Each share of Preferred Stock will have
100 votes,  voting together with the common stock.  Finally, in the event of any
merger,  consolidation or other  transaction in which common stock is exchanged,
each share of  Preferred  Stock will be entitled to receive 100 times the amount
received  per share of common  stock.  Because  of the  nature of the  Preferred
Stock's  dividend,   liquidation  and  voting  rights,  the  value  of  the  one
one-hundredth  of a share of Preferred Stock  purchasable  upon exercise of each
right should approximate the value of one share of common stock.

16. Segment Disclosures:

The Company  segments its operations  into three separate  business  activities,
based on the nature of the  products  and  services  for each  segment:  banking
operations,  insurance  operations and brokerage,  trust and financial  services
operations.

Banking operations provide traditional banking services to individuals and small
and  mid-size  businesses,  such as  accepting  deposits,  consumer and mortgage
banking  activities  and making  commercial  loans.  The mortgage and commercial
banking  activities include the origination and purchase of loans as well as the
sale to and servicing of commercial loans for other institutions.
<PAGE>

Insurance  operations  broker a full range of  insurance  products  and services
including  commercial  insurance,   surety  bonds,   employee   benefits-related
insurance, personal insurance and claims management.

Brokerage, trust and financial services operations provide securities brokerage,
trust and other  financial  services to individuals  and  businesses.  Brokerage
investment  options include  individual  equities,  fixed income investments and
mutual funds.  Trust and financial  services  operations provide a wide array of
trust and other financial services including employee benefit and personal trust
administration services,  financial,  tax, business and estate planning,  estate
administration,    agency   accounts,   employee   benefit   plan   design   and
administration,  individual  retirement  accounts ("IRAs"),  including custodial
self-directed  IRAs, asset management,  tax preparation,  accounting and payroll
services.

The accounting policies of the three segments are the same as those described in
the  summary of  significant  accounting  policies  included  in Note 1 to these
consolidated financial statements.

The  Company's  financial  information  for each  segment  is  derived  from the
internal profitability reporting system used by management to monitor and manage
the  financial  performance  of the Company.  The  operating  segments have been
determined by how executive  management has organized the Company's business for
making operating decisions and assessing performance.

During 2002, the Company presented the following  segments:  banking operations,
insurance  operations and brokerage  operations  with  brokerage  operations not
meeting the  thresholds  for  separate  presentation  in the  interim  financial
statement  segment  disclosures.  Due to the  changing  nature of the  brokerage
operations  segment  and its  closer  alignment  with the  trust  and  financial
services  operations  of the  Company,  the Company has elected to redefine  its
reporting  segments  as  noted  above.  Because  segment  disclosures  were  not
presented in the 2001 and 2000 audited consolidated  financial statements,  only
one set of segment  disclosures  is  included  in these  consolidated  financial
statements.

The following tables present segment profit or loss, assets and a reconciliation
of  segment  information  as  of,  and  for  the  years  ended  December  31 (in
thousands):
<TABLE>
<CAPTION>
                                                  2002                                                 2002
                              --------------------------------------------------- ----------------------------------------------
                                                   Brokerage/
                                                    Trust/                        Reportable           Intersegment Consolidated
                               Banking  Insurance  Financial  Other (a)   Totals   Segments   Other(a) Elimination     Total
                              --------- --------- ---------- ----------  -------- ---------- --------- -----------  ------------
<S>                           <C>       <C>       <C>         <C>        <C>       <C>        <C>      <C>          <C>
Net interest income.......... $ 15,089  $   41      $    -    $ (2,102)  $ 13,028  $15,130    $(2,102)   $   1,883     $ 14,911
Other revenue-external
 customers...................    6,272   9,191       1,934         115     17,512   17,397        115       (1,216)      16,296
Other revenue-from other
  segments...................       99      --          55         648        802      154        648         (802)          --
Depreciation and
  amortization...............    1,518     633          33          17      2,201    2,184         17           --        2,201
Equity in the net income
  of investees...............      639      --          --       3,620      4,259      639      3,620       (4,259)          --
Other significant noncash
  items:
  Provision for credit
   losses....................    1,202      --          --          --      1,202    1,202         --           --        1,202
Segment profit (loss) from
   continuing operations.....    4,502   1,461        (677)     (2,439)     2,847    5,286     (2,439)          --        2,847
Income tax provision
  (benefit)..................    1,505     430        (255)       (858)       822    1,680       (858)          --          822
Income from discontinued
  Fargo branch, net of
  income taxes...............       49      --          --          --         49       49         --           --           49
Loss on sale of
  discontinued Fargo branch,
  net of income taxes........      (35)     --          --          --        (35)     (35)        --           --          (35)
Segment profit (loss)........    3,011   1,031        (422)     (1,581)     2,039    3,620     (1,581)          --        2,039
Segment assets, from
  continuing operations......  599,415  26,364       1,307      66,931    694,017  627,086     66,931      (91,789)     602,228
Segment assets...............  599,415  26,364       1,307      66,931    694,017  627,086     66,931      (91,789)     602,228

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     2001                                                 2001
                              --------------------------------------------------- ----------------------------------------------
                                                   Brokerage/
                                                    Trust/                        Reportable           Intersegment Consolidated
                               Banking  Insurance  Financial  Other (a)   Totals   Segments   Other(a) Elimination     Total
                              --------- --------- ---------- ----------  -------- ---------- --------- -----------  ------------
<S>                           <C>       <C>        <C>      <C>         <C>        <C>       <C>        <C>         <C>
Net interest income.........  $ 15,380  $    18    $    -   $  (1,885)  $ 13,513   $ 15,398  $ (1,885)  $  1,417    $ 14,930
Other revenue-external
 customers..................     5,204    1,952     2,176          70      9,402      9,332        70       (688)      8,714
Other revenue-from other
 segments...................        62       --        69         703        834        131       703       (834)         --
Depreciation and
 amortization...............     1,368       96        84          57      1,605      1,548        57         --       1,605
Equity in the net income
 (loss)of investees.........      (384)      --        --       2,820      2,436       (384)    2,820     (2,436)         --
Other significant noncash
 items:
  Provision for credit
   losses...................     1,699       --        --          --      1,699      1,699        --         --       1,699
Segment profit (loss) from
   continuing operations....     5,032      140      (655)     (2,131)     2,386      4,517    (2,131)        --       2,386
Income tax provision
 (benefit)..................     1,757       (9)     (367)       (690)       691      1,381      (690)        --         691
Loss from discontinued
 Fargo branch, net of
 income taxes...............      (203)      --        --          --       (203)      (203)       --         --        (203)
Extraordinary item - loss
 on early extinguishment
 of debt, net of income
 taxes......................        --       --        --        (134)      (134)        --      (134)        --        (134)
Cumulative effect of
 change in accounting
 principle, net of income
 taxes......................      (113)      --        --          --       (113)      (113)       --         --        (113)
Segment profit (loss).......     2,959      149      (288)     (1,575)     1,245      2,820    (1,575)        --       1,245
Segment assets, from
 continuing operations......   558,175    2,026     1,976      52,475    614,652    562,177    52,475    (58,685)    555,967
Segment assets..............   587,265    2,026     1,976      52,475    643,742    591,267    52,475    (58,685)    585,057
</TABLE>
<TABLE>
<CAPTION>
                                                    2000                                                 2000
                              --------------------------------------------------- ----------------------------------------------
                                                   Brokerage/
                                                    Trust/                        Reportable           Intersegment Consolidated
                               Banking  Insurance  Financial  Other (a)   Totals   Segments   Other(a) Elimination     Total
                              --------- --------- ---------- ----------  -------- ---------- --------- -----------  ------------
<S>                           <C>         <C>      <C>       <C>         <C>       <C>       <C>        <C>         <C>
 Net interest income.......   $ 14,306    $  18    $   (1)   $  (1,355)  $ 12,968  $14,323   $ (1,355)  $    410     $ 13,378
 Other revenue-external
  customers................      2,925    2,012      2,998          53      7,988    7,935         53       (305)       7,683
 Other revenue-from
  other segments...........          2       --         59       1,426      1,487       61      1,426     (1,487)          --
 Depreciation and
  amortization.............      1,270       95         87          68      1,520    1,452         68         --        1,520
 Equity in the net
  income of investees......         85       --         --       2,954      3,039       85      2,954     (3,039)          --
 Other significant
  noncash items:
   Provision for credit
    losses.................      1,202       --         --          --      1,202    1,202         --         --        1,202
 Segment profit (loss)
  from continuing
  operations...............      4,728      216        287      (1,592)     3,639    5,231     (1,592)        --        3,639
 Income tax provision
  (benefit)................      1,580       20        101        (518)     1,183    1,701       (518)        --        1,183
 Loss from discontinued
  Fargo branch, net of
  income taxes.............      (575)       --         --          --       (575)    (575)        --         --         (575)
 Gain on disposal of
  asset-based lending
  subsidiary, net of
  income taxes.............         --       --         --         159        159       --        159         --          159
 Extraordinary item -
  gain on early
  extinguishment of debt,
  net of income taxes......         --       --         --         257        257       --        257         --          257
 Segment profit (loss).....      2,573      196        186        (658)     2,297    2,955       (658)        --        2,297
 Segment assets, from
  continuing operations....    545,748    1,794      2,814      48,906    599,262  550,356     48,906    (51,814)     547,448
 Segment assets............    568,316    1,794      2,814      48,906    621,830  572,924     48,906    (51,814)     570,016
---------------------------------
<FN>
(a)  The  financial  information  in the "Other"  column is for the bank holding
     company.
</FN>
</TABLE>
<PAGE>
17. Derivatives:

On January  1, 2001,  the  Company  had an  interest  rate floor  contract  that
qualified as a cash flow hedge of interest  rate risk  associated  with floating
rate  commercial  loans.  As a result of the  adoption of SFAS 133,  the Company
recognized this derivative instrument at its fair value and recorded a charge to
earnings  of  $113,000,  net of  taxes,  for the  derivative  instrument's  loss
excluded from the assessment of hedge effectiveness. This amount is presented as
the  cumulative  effect of a change in  accounting  principle for the year ended
December  31, 2001.  During  2001,  the Company  recognized  in interest  income
$256,000  for the  derivative  instrument's  gain and a loss of  $(109,000)  was
reclassified into interest income as a result of the  discontinuance of its cash
flow hedge.

During May and June 2001, the Company purchased, for $1.2 million, interest rate
cap contracts with notional  amounts  totaling $40 million to mitigate  interest
rate risk in rising-rate scenarios.  The referenced interest rate is three-month
LIBOR with $20 million of 4.50  percent  contracts  having  three-year  original
maturities and $20 million of 5.50 percent  contracts having five-year  original
maturities.  The  contracts,  classified as other  assets,  are reflected in the
Company's  December 31, 2002  consolidated  balance sheet at their then combined
fair value of $136,000.  The  contracts  are not being  accounted  for as hedges
under SFAS 133. As a result,  the impact of marking the  contracts to fair value
has been, and will continue to be, included in net interest  income.  During the
years  ended  December  2002 and 2001,  the impact of marking the  contracts  to
market (reflected as an increase in interest expense) was $779,000 and $331,000,
respectively.


18. Regulatory Capital:

BNCCORP  and the Bank are  subject to various  regulatory  capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate  certain   mandatory  -  and  possibly   additional
discretionary - actions by regulators  that, if undertaken,  could have a direct
material  effect on the Company's  financial  results.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action,  BNCCORP
and the Bank must meet specific  capital  guidelines  that involve  quantitative
measures of their assets,  liabilities  and certain  off-balance-sheet  items as
calculated  under   regulatory   accounting   practices.   Capital  amounts  and
classifications  of  BNCCORP  and the  Bank  are  also  subject  to  qualitative
judgments by the regulators about components, risk weightings and other factors.

Quantitative  measures established by the regulations to ensure capital adequacy
require  BNCCORP and the Bank to maintain  minimum amounts and ratios (set forth
in the  tables  that  follow)  of total and Tier I capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined)  to average  assets  (as  defined).  Management  believes  that,  as of
December 31, 2002, BNCCORP and the Bank met all capital adequacy requirements to
which they are subject.

As of December 31, 2002, the most recent  notifications from the OCC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total  risk-based,  Tier I risk-based and Tier I leverage  ratios as set
forth in the table that  follows.  There are no  conditions or events since that
notification that management believes have changed the institution's category.

Actual capital  amounts and ratios of BNCCORP and its  subsidiary  bank(s) as of
December 31 are also presented in the tables (dollar amounts in thousands):
<PAGE>
<TABLE>
<CAPTION>
                                                                                                      To be Well Capitalized Under
                                                                          For Capital Adequacy         Prompt Corrective Action
                                                     Actual                     Purposes                      Provisions
                                            ------------------------    -------------------------    ------------------------------
                                               Amount       Ratio         Amount         Ratio         Amount           Ratio
                                            -------------  ---------    ------------   ----------    ------------   ---------------
<S>                                         <C>            <C>          <C>            <C>           <C>            <C>
       As of December 31, 2002
Total Capital (to risk-weighted assets):
   Consolidated............................   $ 41,270       9.53 %      $ 34,641         8.0 %           N/A            N/A
   BNC National Bank.......................     45,142      10.45          34,562         8.0        $ 43,202           10.0 %
Tier I Capital (to risk-weighted assets):
   Consolidated............................     25,613       5.92          17,321         4.0             N/A            N/A
   BNC National Bank.......................     40,137       9.29          17,281         4.0          25,921            6.0
Tier I Capital (to average assets):
   Consolidated............................     25,613       4.46          22,948         4.0             N/A            N/A
   BNC National Bank.......................     40,137       7.00          22,923         4.0          28,654            5.0

       As of December 31, 2001
Total Capital (to risk-weighted assets):
   Consolidated............................   $ 53,428      12.96 %      $ 32,969         8.0 %           N/A            N/A
   BNC National Bank.......................     44,098      11.01          32,053         8.0        $ 40,067           10.0 %
   BNC National Bank of Arizona............      2,657      22.93             927         8.0           1,159           10.0
Tier I Capital (to risk-weighted assets):
   Consolidated............................     36,536       8.87          16,485         4.0             N/A            N/A
   BNC National Bank.......................     39,916       9.96          16,027         4.0          24,040            6.0
   BNC National Bank of Arizona............      2,514      21.70             464         4.0             695            6.0
Tier I Capital (to average assets):
   Consolidated............................     36,536       6.33          23,074         4.0             N/A            N/A
   BNC National Bank.......................     39,916       6.96          22,940         4.0          28,675            5.0
   BNC National Bank of Arizona............      2,514      20.10             500         4.0             625            5.0
</TABLE>

19. Fair Value of Financial Instruments:

The estimated fair values of the Company's financial  instruments are as follows
as of December 31 (in thousands):
<TABLE>
<CAPTION>
                                                           2002                              2001
                                           ---------------------------------  --------------------------------
                                              Carrying            Fair           Carrying           Fair
                                               Amount            Value            Amount           Value
                                           ----------------  ---------------  ---------------- ---------------
<S>                                        <C>               <C>              <C>              <C>
Assets:
  Cash, due from banks and federal
    funds sold............................   $   17,137       $   17,137        $   23,972       $  23,972
  Investment securities available
    for sale..............................      208,072          208,072           211,801         211,801
  Federal Reserve Bank and Federal Home
    Loan Bank Stock.......................        7,071            7,071             7,380           7,380
  Loans and leases, net...................      330,788          331,034           293,599         296,416
  Accrued interest receivable.............        2,856            2,856             3,008           3,008
  Derivative financial instruments........          136              136               915             915
                                           ----------------  ---------------  ---------------- ---------------
                                                566,060       $  566,306           540,675      $  543,492
                                                             ===============                   ===============
   Other assets...........................       36,168                             44,382
                                           ----------------                   ----------------
                                             $  602,228                         $  585,057
                                           ================                   ================
Liabilities:
  Deposits, noninterest-bearing...........   $   44,377       $   44,377        $   30,521       $  30,521
  Deposits, interest-bearing..............      353,868          356,736           344,756         346,765
  Borrowings and advances.................      133,881          142,393           117,973         118,846
  Accrued interest payable................        1,608            1,608             2,428           2,428
  Guaranteed preferred beneficial
    interests in Company's
    subordinated debentures...............       22,326           23,926            22,244          22,915
                                           ----------------  ---------------  ---------------- ---------------
                                                556,060       $  569,040           517,922      $  521,475
                                                             ===============                   ===============
  Other liabilities.......................        8,445                             36,456

  Stockholders' equity....................       37,723                             30,679
                                           ----------------                   ----------------
                                             $  602,228                         $  585,057
                                           ================                   ================
Financial instruments with
  off-balance-sheet risk:
  Commitments to extend credit............                    $      351                        $     323
  Standby and commercial
    letters of credit.....................                            89                                7
                                                             ----------------                  ---------------
                                                              $      440                        $     330
                                                             ================                  ===============
<PAGE>
</TABLE>
20. Financial Instruments With Off-Balance-Sheet Risk:

In the normal  course of business,  the Company is a party to various  financial
instruments  with  off-balance-sheet  risk,  primarily  to meet the needs of its
customers as well as to manage its interest rate risk. These instruments,  which
are issued by the Company for purposes other than trading, carry varying degrees
of credit,  interest rate or liquidity risk in excess of the amount reflected in
the consolidated balance sheets.

Commitments  to Extend  Credit.  Commitments  to extend credit are agreements to
lend to a  customer  provided  there is no  violation  of any  condition  in the
contract.  Commitments  to extend credit are legally  binding and generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. The contractual  amount represents the Company's exposure to credit loss in
the event of default by the  borrower;  however,  at December 31, 2002 no losses
were anticipated as a result of these commitments, based on current information.
The  Company  manages  this  credit  risk by using the same  credit  policies it
applies  to  loans.  Collateral  is  obtained  to  secure  commitments  based on
management's  credit  assessment of the  borrower.  The  collateral  may include
marketable securities,  receivables, inventory, equipment and real estate. Since
the Company expects many of the commitments to expire without being drawn, total
commitment  amounts do not necessarily  represent the Company's future liquidity
requirements related to such commitments.

Standby  and  Commercial  Letters  of  Credit.  Standby  letters  of credit  are
conditional  commitments issued by the Company to guarantee the performance of a
customer to a third party.  Commercial letters of credit are issued on behalf of
customers to ensure payment or collection in connection with trade transactions.
In the event of a customer's nonperformance,  the Company's credit loss exposure
is the  same as in any  extension  of  credit,  up to the  letter's  contractual
amount;  however, at December 31, 2002 no losses were anticipated as a result of
these  commitments,  based  on  current  information.  Management  assesses  the
borrower's  credit to  determine  the  necessary  collateral,  which may include
marketable securities, real estate, accounts receivable and inventory. Since the
conditions  requiring  the Company to fund letters of credit may not occur,  the
Company expects its liquidity  requirements related to such letters of credit to
be less than the total outstanding commitments.

The  contractual  amounts of these financial  instruments  were as follows as of
December 31, (in thousands):
<TABLE>
<CAPTION>
                                       2002                     2001
                             ----------------------    -------------------------
                                          Variable                   Variable
                             Fixed Rate     Rate       Fixed Rate      Rate
                             ----------   ---------    ----------   ------------
 <S>                         <C>          <C>          <C>          <C>
 Commitments to
  extend credit.............  $  11,322   $  91,694    $  18,425     $  92,543
 Standby and commercial
  letters of credit.........        188       8,730          355         1,834
</TABLE>

Interest  Rate Swaps,  Caps and Floors.  Interest  rate swaps are  contracts  to
exchange  fixed  and  floating  rate  interest  payment  obligations  based on a
notional  principal  amount.  The Company enters into swaps to hedge its balance
sheet against fluctuations in interest rates.  Interest rate caps and floors are
used to protect  the  Company's  balance  sheet from  unfavorable  movements  in
interest rates while allowing benefit from favorable movements.  The credit risk
related to interest rate contracts is that  counterparties may be unable to meet
the contractual  terms of the agreements.  This risk is estimated by calculating
the  present  value  of the  cost to  replace  outstanding  contracts  in a gain
position at current market rates, reported on a net basis by counterparties. The
Company manages the credit risk of its interest rate contracts through bilateral
collateral  agreements,  credit  approvals,  limits and  monitoring  procedures.
Additionally,  the Company reduces the assumed  counterparty credit risk through
master  netting  agreements  that  permit the  Company to settle  interest  rate
contracts with the same counterparty on a net basis.

The  notional  amounts  of these  financial  instruments  were as  follows as of
December 31 (in thousands):
<TABLE>
<CAPTION>

                                   2002               2001
                              --------------     --------------
<S>                             <C>                <C>
Interest rate caps...........   $  40,000          $  40,000
</TABLE>

<PAGE>

21. Guarantees

As of December 31, 2002,  the Company had entered into the  following  guarantee
arrangements:

Contingent  Consideration in Business Combination.  Pursuant to the terms of the
agreement  related to the  acquisition of Milne Scali in April 2002,  additional
consideration of up to $8.5 million may be payable to the former shareholders of
Milne Scali,  subject to Milne Scali  achieving  certain  financial  performance
targets.  In  accordance  with SFAS 141,  there is no  current  carrying  amount
associated with this guarantee.  Additionally,  there are no recourse provisions
associated  with this  guarantee  that would  enable the Company to recover from
third  parties  any of the  amounts  paid under the  guarantee  and there are no
assets held either as collateral or by third parties that,  upon the  occurrence
of any triggering  event or condition under the guarantee that the Company could
obtain and  liquidate  to recover all or a portion of the amounts paid under the
guarantee.

Guaranteed Preferred Beneficial Interests in Company's Subordinated  Debentures.
BNCCORP,  concurrent  with the issuance of preferred  securities in July 2000 by
BNC  Capital  Trust I and in July  2001 by BNC  Statutory  Trust  II,  fully and
unconditionally guaranteed all obligations of the special purpose trusts related
to the trust  preferred  securities  (See Note 14 for a full  description of the
nature of the established trusts and the securities issued by the trusts). There
are no recourse  provisions  associated with these  guarantees that would enable
BNCCORP  to  recover  from  third  parties  any of the  amounts  paid  under the
guarantees and there are no assets held either as collateral or by third parties
that,  upon the  occurrence  of any  triggering  event or  condition  under  the
guarantees  that BNCCORP  could obtain and liquidate to recover all or a portion
of the amounts paid under the guarantees.

Performance  Standby  Letters of Credit.  As of December 31, 2002,  the Bank had
issued $642,000 of performance  standby letters of credit.  Performance  standby
letters of credit are irrevocable  obligations to the beneficiary on the part of
the Bank to make  payment on account of any default by the account  party in the
performance   of  a   nonfinancial   or  commercial   obligation.   Under  these
arrangements,   the  Bank   could,   in  the  event  of  the   account   party's
nonperformance,  be required to pay a maximum of the amount of issued letters of
credit. Under the agreements, the Bank has recourse against the account party up
to and including the amount of the  performance  standby  letter of credit.  The
Bank evaluates each account party's creditworthiness on a case-by-case basis and
the amount of collateral  obtained  varies and is based on  management's  credit
evaluation  of the account  party.  As of December  31, 2002,  under  accounting
standards then effective,  there was no current carrying amount  associated with
these guarantees.  Effective January 1, 2003, such guarantees will be recognized
as  liabilities  at their fair values as they are modified or entered  into,  in
accordance with FIN 45.

Financial  Standby  Letters of Credit.  As of December  31,  2002,  the Bank had
issued $7.9 million of financial  standby letters of credit.  Financial  standby
letters of credit are irrevocable  obligations to the beneficiary on the part of
the Bank to repay  money  borrowed  by or  advanced to or for the account of the
account  party or to make payment on account of any  indebtedness  undertaken by
the  account  party,  in the event that the  account  party fails to fulfill its
obligation to the beneficiary.  Under these arrangements, the Bank could, in the
event of the account party's nonperformance, be required to pay a maximum of the
amount of issued letters of credit. Under the agreements,  the Bank has recourse
against  the  account  party up to and  including  the  amount of the  financial
standby   letter  of  credit.   The  Bank   evaluates   each   account   party's
creditworthiness  on a case-by-case basis and the amount of collateral  obtained
varies and is based on management's  credit  evaluation of the account party. As
of December 31, 2002,  under accounting  standards then effective,  there was no
current carrying amount associated with these  guarantees.  Effective January 1,
2003,  such guarantees will be recognized as liabilities at their fair values as
they are modified or entered into, in accordance with FIN 45.


22. Related-Party/Affiliate Transactions:

The Bank has entered  into  transactions  with  related  parties such as opening
deposit  accounts for and extending  credit to employees of the Company.  In the
opinion of management,  such  transactions  have been fair and reasonable to the
Bank and have been entered  into under terms and  conditions  substantially  the
same as those offered by the Bank to unrelated parties.

In the  normal  course of  business,  loans are  granted  to, and  deposits  are
received  from,  executive  officers,  directors,   principal  stockholders  and
associates  of such  persons.  The  aggregate  dollar  amount  of  these  loans,
exclusive of loans to any such  persons  which in the  aggregate  did not exceed
$60,000, were $1.0 and $1.8 million at December 31, 2002 and 2001, respectively.
During  2002,  $264,000  of new loans  were  made and  repayments  totaled  $1.2
million.  The total amount of deposits  received from these parties was $3.1 and
$1.8 million at December 31, 2002 and 2001, respectively. Loans to, and deposits
received  from,  these  parties  were  made on  substantially  the  same  terms,
including  interest rates and  collateral,  as those  prevailing at the time for
comparable  transactions with unrelated persons and do not involve more than the
normal risk of collection.


<PAGE>
On May 3, 2002,  BNCCORP issued 150 shares of its noncumulative  preferred stock
to Richard W.  Milne,  Jr. and  Terrence  M.  Scali,  executive  officers of the
Company,  for cash. Each share has a preferential  noncumulative  dividend at an
annual  rate of 8.0 percent  and a  preferred  liquidation  value of $10,000 per
share.  The  noncumulative  preferred  stock is not  redeemable  by BNCCORP  and
carries no conversion rights.

During the first  quarter of 2003,  the Company  expects to  purchase  the Milne
Scali building at 1750 East Glendale Avenue, Phoenix,  Arizona. The Company will
purchase the building from Milne Scali Properties,  LLC. Milne Scali Properties,
LLC is a limited  liability  company whose members are Richard W. Milne, Jr. and
Terrence M. Scali, executive officers of the Company. The purchase price for the
building  will be the  appraised  amount of $3.9  million,  which will be funded
through cash  generated from  operations.  An  independent  party  completed the
appraisal.  See Note 27,  "Commitments  and  Contingencies - Leases" for further
discussion of the option to purchase the building.

The  Federal  Reserve  Act  limits  amounts  of,  and  requires  collateral  on,
extensions of credit by the Bank to BNCCORP,  and with certain  exceptions,  its
non-bank affiliates. There are also restrictions on the amounts of investment by
the Bank in stocks and other  subsidiaries  of BNCCORP and such  affiliates  and
restrictions  on the  acceptance of their  securities as collateral for loans by
the Bank. As of December 31, 2002, BNCCORP and its affiliates were in compliance
with these requirements.


23. Repossessed and Impaired Asset Expenses/Write-Offs:

The Company recorded write downs to estimated net realizable value of other real
estate owned and repossessed  assets, and related collection and other expenses,
of $142,000,  $40,000,  and $470,000 for the years ended December 31, 2002, 2001
and 2000, respectively. The Company's investment in repossessed assets of $8,000
as of  December  31,  2002  represents  management's  current  estimate  of  net
realizable value based upon current valuation of the assets.


24. Income Taxes:

The provision (benefit) for income taxes consists of the following for the years
ended December 31 (in thousands):

<TABLE>
<CAPTION>
                                       2002            2001             2000
                                   -----------     ------------     -----------
<S>                                <C>             <C>              <C>
Continuing Operations -
   Current:
      Federal..................... $     800       $     657        $     380
      State.......................       218             376              200
   Deferred:
      Federal.....................      (250)           (218)             385
      State.......................        54            (124)             218
                                   -----------     ------------     -----------
                                   $     822       $     691        $   1,183
                                   ===========     ============     ===========


                                       2002             2001            2000
                                   -----------     -------------    -----------
Discontinued Operations -
   Current:
      Federal..................... $       5       $     (77)       $    (181)
      State.......................         1              (6)             (96)
                                   -----------     -------------    -----------
                                   $       6       $     (83)       $    (277)
                                   ===========     =============    ===========
</TABLE>

<PAGE>

The provision  (benefit) for federal income taxes expected at the statutory rate
differs from the actual provision as follows for the years ended December 31 (in
thousands):
<TABLE>
<CAPTION>

                                       2002           2001           2000
                                    -----------    -----------    ----------
<S>                                 <C>            <C>            <C>
Tax at 34% statutory rate.......... $     967      $    811       $   1,237

 State taxes (net of federal
  benefit).........................       108            85             253
 Tax-exempt interest...............      (289)         (250)           (321)
 Other, net........................        36            45              14
                                    -----------    -----------    ----------
                                    $     822      $    691       $   1,183
                                    ===========    ===========    ==========
</TABLE>


Temporary  differences  between the financial statement carrying amounts and tax
bases of assets and  liabilities  that  result in  significant  portions  of the
Company's  deferred tax assets and  liabilities are as follows as of December 31
(in thousands):
<TABLE>
<CAPTION>
                                                       2002             2001
                                                    -----------      -----------
<S>                                                 <C>              <C>
Deferred tax asset:
  Loans, primarily due to
    differences in accounting
    for credit losses..........................     $  1,809         $   1,490
  Difference between book and
    tax amortization of branch
    premium acquisition costs..................          312               276
  Other........................................          731               392
                                                    -----------      -----------
              Deferred tax asset...............        2,852             2,158
                                                    -----------      -----------
Deferred tax liability:
  Unrealized gain on securities
    available for sale.........................        1,666             1,016
  Leases, primarily due to differences
    in accounting for leases...................          594               420
  Premises and equipment, primarily due
    to differences in original cost
      basis and depreciation...................          902               578
                                                    -----------      -----------
           Deferred tax liability..............        3,162             2,014
                                                    -----------      -----------
           Net deferred tax asset (liability)..     $   (310)        $     144
                                                    ===========      ===========
</TABLE>

The Company has, in its judgment,  made certain reasonable  assumptions relating
to the  realization of deferred tax assets.  Based upon these  assumptions,  the
Company has determined  that no valuation  allowance is required with respect to
the deferred tax assets.

<PAGE>

25. Earnings Per Share:

The  following  table shows the amounts used in computing  EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances:

<TABLE>
<CAPTION>

                                             Net
                                           Income
                                           (Loss)         Shares      Per-Share
                                        (Numerator)   (Denominator)     Amount
                                        ------------  -------------  -----------
<S>                                     <C>           <C>            <C>
              2002
  Basic earnings per common share:
Income from continuing operations...... $ 2,025,000
Less: Preferred stock dividends........     (79,000)
                                        ------------
Income from continuing operations
  available to common stockholders.....   1,946,000     2,611,629    $     0.74

Income from discontinued Fargo
  branch, net of income taxes..........      14,000     2,611,629          0.01
                                        ------------                 -----------
Income attributable to common
  stockholders......................... $ 1,960,000     2,611,629    $     0.75
                                        ============                 ===========
Effect of dilutive shares -
    Options............................                    17,169
                                                      --------------
  Diluted earnings per common share:
Income from continuing operations...... $ 2,025,000
Less: Preferred stock dividends........     (79,000)
                                        ------------
Income from continuing operations
  available to common stockholders.....   1,946,000     2,628,798    $     0.74

Income from discontinued Fargo
  branch, net of income taxes..........      14,000     2,628,798          0.01
                                        ------------                 -----------
Income attributable to common
  stockholders......................... $ 1,960,000     2,628,798    $     0.75
                                        ============                 ===========

              2001
  Basic earnings per common share:
Income from continuing operations...... $ 1,695,000     2,395,353    $     0.71
Loss from discontinued Fargo branch,
  net of income taxes..................    (203,000)    2,395,353         (0.08)
Extraordinary item - loss on early
  extinguishment of debt, net of
  income taxes.........................    (134,000)    2,395,353         (0.06)
Cumulative effect of change in
  accounting principle, net
  of income taxes......................    (113,000)    2,395,353         (0.05)
                                                      ------------   -----------
Income available to common
  stockholders......................... $ 1,245,000                  $     0.52
                                        ============                 ===========
Effect of dilutive shares -
    Options............................                    25,760
                                                      ------------
  Diluted earnings per common share:
Income from continuing operations...... $ 1,695,000     2,421,113    $     0.70
Loss from discontinued Fargo branch,
  net of income taxes..................    (203,000)    2,421,113         (0.08)
Extraordinary item - loss on early
  extinguishment of debt,
  net of income taxes..................    (134,000)    2,421,113         (0.06)
Cumulative effect of change in
  accounting principle, net
    of income taxes....................    (113,000)    2,421,113         (0.05)
                                        -------------                -----------
Income available to common
  stockholders......................... $ 1,245,000                  $     0.51
                                        =============                ===========
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                             Net
                                           Income
                                           (Loss)          Shares      Per-Share
                                         (Numerator)   (Denominator)     Amount
                                         ------------  -------------  ----------
<S>                                     <C>            <C>            <C>
                 2000
  Basic earnings per common share:
Income from continuing operations......  $ 2,456,000     2,397,356     $   1.02
Gain on disposal of asset-based
  lending subsidiary, net of
  income taxes.........................      159,000     2,397,356         0.07
Loss from discontinued Fargo branch,
  net of income taxes..................     (575,000)    2,397,356        (0.24)
Extraordinary item - gain on early
  extinguishment of debt, net of
  income taxes.........................      257,000     2,397,356         0.11
                                        -------------                 ----------
Income available to common
  stockholders.........................  $ 2,297,000     2,397,356     $   0.96
                                        =============                 ==========
Effect of dilutive shares -
   Options.............................                      1,197
                                                       -------------
  Diluted earnings per common share:
Income from continuing operations......  $ 2,456,000     2,398,553     $   1.02
Gain on disposal of asset-based
  lending subsidiary, net of
  income taxes.........................      159,000     2,398,553         0.07
Loss from discontinued Fargo branch,
  net of income taxes..................     (575,000)    2,398,553        (0.24)
Extraordinary item - gain on early
  extinguishment of debt, net of
  income taxes.........................      257,000     2,398,553         0.11
                                        --------------                ----------
Income available to common
  stockholders.........................  $ 2,297,000     2,398,553     $   0.96
                                        ==============                ==========
</TABLE>

The following  options and warrants,  with exercise prices ranging from $5.88 to
$17.75,  were outstanding  during the periods indicated but were not included in
the  computation of diluted EPS because their  exercise  prices were higher than
the average price of the Company's common stock for the period:
<TABLE>
<CAPTION>

                                       2002            2001             2000
                                   ------------    ------------     -----------
<S>                                <C>             <C>              <C>
Quarter ended March 31.............     97,508         101,570         159,934
Quarter ended June 30..............     96,145          97,177         152,548
Quarter ended September 30.........    103,498          95,508         154,348
Quarter ended December 31..........     91,989         101,649         120,512
</TABLE>


26. Benefit Plans:

BNCCORP has a qualified,  tax-exempt  401(k) savings plan covering all employees
of BNCCORP and its subsidiaries who meet specified age and service requirements.
The BNCCORP  401(k)  savings plan will be merged with the plan of Milne Scali on
April 1, 2003. Under the BNCCORP plan,  eligible employees may elect to defer up
to 50 percent of  compensation  each year not to exceed the dollar  limit set by
law.  At  their  discretion,  BNCCORP  and  its  subsidiaries  provide  matching
contributions of up to 50 percent of employee deferrals up to a maximum employer
contribution of 5 percent of employee compensation.  Generally,  all participant
contributions and earnings are fully and immediately  vested.  The Company makes
its matching  contribution  during the first calendar quarter following the last
day of each calendar year and an employee must be employed by the Company on the
last  calendar day of the year in order to receive the current  year's  employer
match. The anticipated matching contribution is expensed monthly over the course
of the calendar year based on employee  contributions  made throughout the year.
The Company made matching  contributions of $261,000,  $207,000 and $188,000 for
2002, 2001 and 2000, respectively.  Under the investment options available under
the 401(k) savings plan, employees may elect to invest their salary deferrals in
BNCCORP common stock.  At December 31, 2002, the assets in the plan totaled $5.5
million and included $1.4 million  (200,211  shares)  invested in BNCCORP common
stock.



<PAGE>

27. Commitments and Contingencies:

Employment  Agreements and Noncompete  Convenants.  The Company has entered into
three-year  employment  agreements  with its chairman of the board and president
and chief  executive  officer (the  "Executives").  The Executives  will be paid
minimum  annual  salaries  throughout  the terms of the  agreements  and  annual
incentive bonuses as may, from time to time, be fixed by the board of directors.
The Executives  will also be provided with benefits  under any employee  benefit
plan  maintained  by  BNCCORP  for its  employees  generally,  or for its senior
executive  officers in particular,  on the same terms as are applicable to other
senior executives of BNCCORP. Under the agreements,  if status as employees with
BNCCORP is terminated  for any reason other than death,  disability,  cause,  as
defined  in the  agreements,  or if they  terminate  their  employment  for good
reason,  as defined in the  agreements,  or following a change in control of the
Company,  as  defined  in the  agreements,  then the  Executives  will be paid a
lump-sum amount equal to three times their current annual compensation.

In conjunction  with the April 2002 business  combination  with Milne Scali, the
Company has entered into five-year  employment  agreements with the chairman and
president of Milne Scali (the "Insurance Executives").  The Insurance Executives
will be paid minimum annual salaries  throughout the terms of the agreements and
annual  incentive  bonuses as may,  from time to time,  be fixed by the board of
directors.  The Insurance  Executives  will also be provided with benefits under
any employment  benefit plan maintained by BNCCORP for its employees  generally,
or for its senior  executive  officers in  particular,  on the same terms as are
applicable to other senior executives of BNCCORP.

In conjunction with its 1998 business combination with Lips & Lahr, Inc., ("Lips
& Lahr") the Company assumed five-year  employment  agreements with two officers
of Lips & Lahr (the "Officers").  The agreements,  which originally provided for
salaries based upon a percentage of all net annual commissions  received by Lips
& Lahr on business written by the Officers,  were amended to provide for minimum
annual  salaries  through the remainder of the contract term,  which ran through
December  31,  2000.  Additionally,  the  agreements  provide for the payment of
deferred compensation for a term of ten years commencing on February 1, 2001 and
continuing monthly until paid in full.  Finally,  as separate  consideration for
the release of all present and future claims to the Officers'  books of business
at the end of the term of the  employment  contract  and for other  terms of the
contract  involving  confidentiality,   nonpiracy  and  a  restrictive  covenant
covering a period of five years after the term of the agreement,  the agreements
provide for 120  monthly  payments  also  commencing  on  February 1, 2001.  The
deferred  compensation  payments  have been accrued for as of December 31, 2002.
Both of the  Officers  resigned  and the  Company  remains  obligated  under the
deferred  compensation  and  non-compete  provisions of the original  employment
agreements.

In the  business  combination  with  Lips &  Lahr,  BNC  Insurance  assumed  two
additional  non-compete  agreements with former officers of Lips & Lahr. Monthly
payments  under these  agreements,  which  commenced in 1996,  are  scheduled to
continue into 2006.

Legal  Proceedings.  From  time to  time,  the  Company  may be a party to legal
proceedings arising out of its lending,  deposit operations or other activities.
The Company engages in foreclosure  proceedings and other collection  actions as
part of its loan collection  activities.  From time to time,  borrowers may also
bring  actions  against  the  Company,  in some  cases  claiming  damages.  Some
financial  services  companies have been  subjected to  significant  exposure in
connection  with  litigation,  including  class action  litigation  and punitive
damage claims. While the Company is not aware of any actions or allegations that
should  reasonably give rise to any material adverse effect, it is possible that
the  Company  could be  subjected  to such a claim in an  amount  that  could be
material.  Based upon a review with its legal counsel,  management believes that
the ultimate  disposition of pending  litigation will not have a material effect
on the Company's financial condition, results of operations or cash flows.



Leases.  The Company has entered into  operating  lease  agreements  for certain
facilities  and  equipment  used in its  operations.  Rent expense for the years
ended December 31, 2002, 2001 and 2000, was $1.2 million, $675,000 and $422,000,
respectively,  for facilities,  and $94,000, $94,000 and $43,000,  respectively,
for equipment and other items.  At December 31, 2002,  the total minimum  annual
base lease payments for operating leases were as follows:
<TABLE>

  <S>                        <C>
  2003...................... $  1,421
  2004......................    1,309
  2005......................    1,119
  2006......................      956
  2007......................      918
  Thereafter................    2,025
</TABLE>
<PAGE>

The  Company has the option to  purchase  the Milne Scali  building at 1750 East
Glendale  Avenue,  Phoenix,  Arizona  if such  option is  exercised  before  the
fifteenth  day of April,  2004 or a date  which is  fifteen  days of  receipt of
written  notice from the lessor  that the lessor has  received a bona fide third
party  purchase  offer,  whichever  is sooner.  Under the lease  agreement,  the
purchase price, payable in cash, shall be the greater of $4.1 million, the price
set forth in a purchase  offer, if any, or the fair market value of the building
as of the date the purchase  notice is delivered to the lessor.  The Company and
the  lessor  have  agreed  that the  option to  purchase  the  building  will be
exercised  during the first  quarter of 2003.  The  purchase  price will be $3.9
million,  the appraised  value of the building,  and will be funded through cash
generated  from  operations.  If the  purchase of the  building is  completed as
planned,  the annual base lease payments for operating  leases stated above will
be reduced by $295,000  for 2003,  $393,000  for each of the years 2004  through
2007   and   $1.7   million   for  the   period   thereafter.   See   Note   22,
"Related-Party/Affiliate  Transactions" for further  information related to this
transaction.

The Company is  subleasing a building in Bismarck.  The sublease runs for a term
of 24 months,  terminating on May 30, 2003,  renewable for 5 additional two-year
terms.  Future minimum rentals to be received under the sublease are $84,300 per
annum, paid annually in advance by each June 1.


28. Stock-Based Compensation:

BNCCORP's  1995 Stock  Incentive Plan (the "1995 Stock Plan") and its 2002 Stock
Incentive Plan (the "2002 Stock Plan," together, the "Stock Plans") are intended
to provide  long-term  incentives to its key employees,  including  officers and
directors  who are  employees  of the  Company.  The 1995 Stock  Plan,  which is
administered  by the  compensation  committee  of the  board of  directors  (the
"Committee"),  provides for an  authorization  of 250,000 shares of common stock
for issuance thereunder.  The 2002 Stock Plan, which is also administered by the
Committee,  provides for an  authorization of 125,000 shares of common stock for
issuance  thereunder.  Under the Stock  Plans,  the Company may grant  employees
incentive stock options,  nonqualified  stock options,  restricted stock,  stock
awards or any combination thereof. The Committee  establishes the exercise price
of any stock options  granted  under the Stock Plans  provided that the exercise
price may not be less than the fair market  value of a share of common  stock on
the date of grant.  The Committee  determines  vesting  requirements,  which may
vary, and the maximum term of options granted is generally ten years.

As of December 31, 2002,  24,473  restricted  shares issued under the 1995 Stock
Plan were outstanding. 22,473 of the shares were fully vested. 2,000 shares vest
50  percent  in each of 2003 and 2004.  The  Company  records  the  compensation
expense related to restricted stock on a straight-line basis over the applicable
service period.  Compensation cost charged to operations was $9,000,  $9,000 and
$74,000 in 2002,  2001 and 2000,  respectively.  The  Company  did not issue any
restricted stock during 2002, 2001 or 2000.

The Company's Nonemployee Director Stock Option Plan (the "Directors' Plan") was
adopted during 1998, administered by the Committee and terminated during 1999.

The Company  applies APB 25 and related  interpretations  in accounting for both
the Stock Plans and the Directors' Plan.  Accordingly,  no compensation cost has
been recognized for the options issued under the plans in 2002, 2001 or 2000. As
of December 31,  2002,  180,810  options had been  awarded  under the 1995 Stock
Plan. 10,775 of them had been exercised and 170,035 remained outstanding.  3,900
options  awarded under the Directors' Plan remained  outstanding.  No awards had
been made under the 2002 Stock Plan. Had  compensation  cost been  determined on
the basis of fair value pursuant to SFAS 123, net income and EPS would have been
reduced as follows for the years ended December 31:
<TABLE>
<CAPTION>

                             2002             2001             2000
                        -------------    --------------    --------------
<S>                     <C>              <C>               <C>
Net Income:
     As Reported.......  $ 2,039,000        $1,245,000        $2,297,000
     Pro Forma.........    2,005,000         1,145,000         2,237,000
Basic EPS:
     As Reported.......         0.75              0.52              0.96
     Pro Forma.........         0.72              0.45              0.89
Diluted EPS:
     As Reported.......         0.75              0.51              0.96
     Pro Forma.........         0.72              0.44              0.89
</TABLE>


<PAGE>

Following is a summary of stock option transactions for the years ended December
31:
<TABLE>
<CAPTION>
                                                2002                          2001                            2000
                                    --------------------------   ----------------------------    -----------------------------
                                     Options        Weighted       Options         Weighted       Options         Weighted
                                        To          Average          to            Average           to           Average
                                     Purchase       Exercise      Purchase         Exercise       Purchase        Exercise
                                      Shares          Price        Shares           Price          Shares          Price
                                    -----------    -----------   ------------    -------------   -----------    -------------
<S>                                 <C>            <C>           <C>             <C>             <C>            <C>
Outstanding, beginning of year....    208,408         $10.37       118,148           $ 13.84       122,434          $ 14.82
Granted...........................      2,500           7.51       109,840              6.16        18,500             6.03

Exercised.........................     (4,000)          6.03        (4,840)             5.94            --               --
Forfeited.........................    (32,973)         10.12       (14,740)             8.21       (22,786)           12.80
                                    -----------                  ------------                    -----------
Outstanding, end of year..........    173,935          10.48       208,408             10.37       118,148            13.84
                                    ===========                  ============                    ===========
Exercisable, end of year..........     92,248          12.87       106,948             12.88        62,688            13.11
                                    ===========                  ============                    ===========
Weighted average fair value
  of options:
    Granted.......................     $ 3.35                       $ 2.91                          $ 3.05
                                    ===========                  ============                    ===========
    Exercised.....................     $ 2.91                       $ 2.83                          $  --
                                    ===========                  ============                    ===========
    Forfeited.....................     $ 4.61                       $ 3.88                          $ 5.84
                                    ===========                  ============                    ===========
</TABLE>

The fair value of each option  granted is  estimated on the grant date using the
Black-Scholes  option  pricing  model.  The following  assumptions  were made in
estimating fair value of options granted for the years ended December 31:
<TABLE>
<CAPTION>

Weighted average -                    2002           2001            2000
                                  ----------     -----------     ----------
 <S>                              <C>            <C>             <C>
 Dividend yield...................     0.00%           0.00%          0.00%
 Risk-free interest rate -
  7 year treasury yield...........     3.35%           5.00%          6.30%
 Volatility.......................    36.73%          35.36%         36.08%
 Expected life.................... 7.0 years       7.0 years      7.0 years
</TABLE>


Following  is a summary of the status of options  outstanding  at  December  31,
2002:
<TABLE>
<CAPTION>

                                          Outstanding Options                      Exercisable Options
                               --------------------------------------------  ------------------------------

                                            Weighted Average      Weighted                  Weighted
                                               Remaining          Average                   Average
                                              Contractual         Exercise                  Exercise
                                 Number          Life              Price        Number       Price
                               ----------   ----------------   ------------  -----------  ------------
<S>                            <C>          <C>                <C>           <C>          <C>
Options with exercise prices
  ranging from:
          $17.00 to $17.75        63,500        6.0 years         $ 17.05      51,580       $ 17.06
          $5.88 to $10.00        110,435        8.2 years         $  6.70      40,668       $  7.56
                               ----------                                    -----------
                                 173,935                                       92,248
                               ==========                                    ===========
</TABLE>



<PAGE>

29. Condensed Financial Information-Parent Company Only:

Condensed financial  information of BNCCORP on a parent company only basis is as
follows:
<TABLE>
<CAPTION>

                               Parent Company Only
                            Condensed Balance Sheets
                                As of December 31
                        (In thousands, except share data)

                                                       2002             2001
                                                   ------------    -------------
<S>                                                <C>             <C>
Assets:
     Cash and cash equivalents...................    $  3,871         $  6,250
     Investment in subsidiaries..................      64,518           46,847
     Loans.......................................          --                5
     Receivable from subsidiaries................          95               86
     Deferred charges and intangible
      assets, net................................         154              154
     Other.......................................         993              782
                                                   ------------    -------------
                                                     $ 69,631         $ 54,124
                                                   ============    =============
Liabilities and stockholders' equity:
     Subordinated debentures.....................    $ 22,484         $ 22,398
     Long term note..............................       8,500               --
     Accrued expenses and other liabilities......         924            1,047
                                                   ------------    -------------
                                                       31,908           23,445
                                                   ------------    -------------
     Preferred stock, $.01 par value -
       2,000,000 shares authorized; 150 shares
          issued and outstanding as of
          December 31, 2002......................          --               --
     Capital surplus - preferred stock...........       1,500               --
         Common stock, $.01 par value -
          10,000,000 shares authorized;
          2,700,929 and 2,399,170 shares
          issued and outstanding (excluding
          42,880 shares held in treasury)........          27               24
     Capital surplus - common stock..............      16,614           14,084
     Retained earnings...........................      17,395           15,435
     Treasury stock (42,880 shares)..............        (513)            (513)
     Accumulated other comprehensive income,
         net of income taxes.....................       2,700            1,649
                                                   ------------    -------------
     Total stockholders' equity..................      37,723           30,679
                                                   ------------    -------------
                                                     $ 69,631         $ 54,124
                                                   ==============  =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                               Parent Company Only
                         Condensed Statements of Income
                         For the Years Ended December 31
                                 (In thousands)

                                                 2002         2001       2000
                                             -----------  ----------- ---------
<S>                                          <C>          <C>         <C>
Income:
     Management fee income..................   $  649      $   703    $ 1,426
     Interest...............................       83          322        322
     Other..................................      114           70         53
                                             -----------  ----------- ---------
         Total income.......................      846        1,095      1,801
                                             -----------  ----------- ---------
Expenses:
     Interest...............................    2,185        2,207      1,677
     Personnel expense......................      521          512      1,162
     Legal and other professional...........      210          144        124
     Depreciation and amortization..........       17           57         68
     Other..................................      352          307        361
                                             -----------  ----------- ---------
         Total expenses.....................    3,285        3,227      3,392
                                             -----------  ----------- ---------
Loss before income tax benefit and
     equity in undistributed income of
     subsidiaries...........................   (2,439)      (2,132)    (1,591)
Income tax benefit..........................      858          691        518
                                             -----------  ----------- ---------
Loss before equity in undistributed
     income of subsidiaries.................   (1,581)      (1,441)    (1,073)
Equity in undistributed income of
     subsidiaries...........................    3,606        3,023      3,529
                                             -----------  ----------- ---------
Income from continuing operations...........    2,025        1,582      2,456
Equity in undistributed income (loss) from
     operations of discontinued branch......       14         (203)      (575)
                                             -----------  ----------- ---------
Income before gain on disposal of
     asset-based lending subsidiary.........    2,039        1,379      1,881
Gain on disposal of asset-based lending
     subsidiary.............................       --           --        159
                                             -----------  ----------- ---------
Income before extraordinary item............    2,039        1,379      2,040
Extraordinary item-gain (loss) on early
     extinguishment of debt, net of
     income taxes...........................       --         (134)       257
                                             -----------  ----------- ---------
         Net income......................... $  2,039     $  1,245    $ 2,297
                                             ===========  =========== =========
</TABLE>
<PAGE>
<TABLE>

<CAPTION>
                               Parent Company Only
                       Condensed Statements of Cash Flows
                         For the Years Ended December 31
                                 (In thousands)

                                                    2002      2001       2000
                                                 ---------  ---------  ---------
<S>                                              <C>        <C>        <C>
Operating activities:
  Net income.................................... $ 2,039    $ 1,245    $ 2,297
  Adjustments to reconcile net income to net
   cash used in operating activities -
    Gain on sale of discontinued operation......      --         --       (159)
    Depreciation and amortization...............      18         43         48
    Equity in undistributed income of
      subsidiaries..............................  (3,620)    (2,820)    (2,954)
    Change in prepaid expenses and other
      receivables...............................     265       (111)        20
    Change in accrued expenses and other
      liabilities...............................    (123)       332         98
    Other.......................................    (482)       386         14
                                                 ---------  ---------  ---------
       Net cash used in operating activities..    (1,903)      (925)      (636)
                                                 ---------  ---------  ---------
Investing activities:
   Net decrease in loans........................       5         11         --
   Increase in investment in subsidiaries ...... (13,000)    (3,464)      (232)
   Additions to premises and equipment, net.....     (21)        12        (59)
                                                 ---------  ---------  ---------
       Net cash used in investing activities.... (13,016)    (3,441)      (291)
                                                 ---------  ---------  ---------
Financing activities:
   Repayments of long-term borrowings...........      --    (13,172)    (2,001)
   Proceeds from long-term borrowings...........   8,500         --        --
   Amortization of discount on
     subordinated notes.........................      --        371         93
   Amortization of deferred charges.............      --         14         20
   Proceeds from issuance of subordinated
     debentures.................................      --     14,893      7,440
   Proceeds from issuance of preferred stock....   1,500         --         --
   Proceeds from issuance of common stock.......   2,524         --         --
   Amortization of discount on subordinated
     debentures.................................      86         53         12
   Payment of preferred stock dividends.........     (79)        --         --
   Other, net...................................       9        (86)        74
                                                 ---------  ---------  ---------
       Net cash provided by financing
        activities..............................  12,540      2,073      5,638
                                                 ---------  ---------  ---------
Net increase (decrease) in cash and cash
   equivalents..................................  (2,379)    (2,293)     4,711
Cash and cash equivalents, beginning of year....   6,250      8,543      3,832
                                                 ---------  ---------  ---------
Cash and cash equivalents, end of year.......... $ 3,871    $ 6,250    $ 8,543
                                                 =========  =========  =========
Supplemental cash flow information:
   Interest paid................................ $ 2,050    $ 2,143    $ 1,293
                                                 =========  =========  =========
   Income tax payments received from
      subsidiary bank(s), net of
      income taxes paid......................... $ 1,563    $   652    $    69
                                                 =========  =========  =========
</TABLE>

<PAGE>

30. Quarterly Financial Data (unaudited, in thousands, except shares and EPS):
<TABLE>
<CAPTION>
                                                      2002
                               -------------------------------------------------
                                  First       Second        Third        Fourth
                                 Quarter      Quarter      Quarter      Quarter
                               -----------  -----------  -----------  ----------
<S>                                <C>          <C>          <C>          <C>
Interest income............... $    7,581   $    7,825   $    8,431   $   7,981
Interest expense..............      4,111        4,538        4,347       3,911
                               -----------  -----------  -----------  ----------
Net interest income...........      3,470        3,287        4,084       4,070
Provision for credit
  losses......................        217          185          400         400
                               -----------  -----------  -----------  ----------
Net interest income
  after provision
  for credit losses...........      3,253        3,102        3,684       3,670

Noninterest income............      2,345        4,119        5,123       4,709
Noninterest expense...........      5,374        7,187        7,355       7,242
                               -----------  -----------  -----------  ----------
Income before income
  taxes.......................        224           34        1,452       1,137
Income tax provision
  (benefit)...................         94          (30)         430         328
                               -----------  -----------  -----------  ----------
Income from continuing
  operations..................        130           64        1,022         809
Gain (loss) from
  discontinued Fargo
  branch, net of
  income taxes................         60           38          (69)        (15)
                               -----------  -----------  -----------  ----------
Net income.................... $      190   $      102   $      953   $     794
                               ===========  ===========  ===========  ==========

Dividends on preferred
  stock....................... $       --   $      (19)  $      (30)  $     (30)
                               -----------  -----------  -----------  ----------
Net income attributable
  to common stockholders...... $      190   $       83   $      923   $     764
                               ===========  ===========  ===========  ==========

Basic earnings per common
 share:
Income from continuing
  operations (less
  preferred stock
  dividends).................. $     0.05   $     0.02   $     0.37   $    0.29
Gain (loss) from
  discontinued Fargo
  branch, net of
  income taxes................       0.03         0.01        (0.03)      (0.01)
                               -----------  -----------  -----------  ----------
Basic earnings per common
  share....................... $     0.08   $     0.03   $     0.34   $    0.28
                               ===========  ===========  ===========  ==========

Diluted earnings per common
  share:
Income from continuing
  operations (less preferred
  stock dividends)............ $     0.05   $     0.02   $     0.37   $    0.29
Gain (loss) from discontinued
  Fargo branch, net of income
  taxes.......................       0.03         0.01        (0.03)      (0.01)
                               -----------  -----------  -----------  ----------
Diluted earnings per common
  share....................... $     0.08   $     0.03   $     0.34   $    0.28
                               ===========  ===========  ===========  ==========

Average common shares:
Basic.........................  2,399,170    2,645,213    2,697,929    2,699,951
Diluted.......................  2,424,739    2,670,195    2,702,709    2,710,311

                Unaudited - see accompanying accountant's report.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                             2001
                                       -------------------------------------------------
                                          First        Second       Third       Fourth
                                         Quarter      Quarter      Quarter      Quarter
                                       -----------  -----------  -----------  ----------
<S>                                     <C>         <C>          <C>          <C>
Interest income........................$   10,155   $    9,844   $    8,887   $    8,700
Interest expense.......................     6,469        5,836        6,027        4,324
                                       -----------  -----------  -----------  -----------
Net interest income....................     3,686        4,008        2,860        4,376
Provision for credit losses............       350          600          500          249
                                       -----------  -----------  -----------  -----------
Net interest income after
  provision for credit losses..........     3,336        3,408        2,360        4,127

Noninterest income.....................     2,187        2,478        1,827        2,222
Noninterest expense....................     4,305        4,701        5,084        5,469
                                       -----------  -----------  -----------  -----------
Income (loss) before income taxes......     1,218        1,185         (897)         880
Income tax provision (benefit).........       371          354         (378)         344
                                       -----------  -----------  -----------  -----------
Income (loss) from continuing
  operations...........................       847          831         (519)         536

Income (loss) from discontinued
  Fargo branch, net of income taxes....       (58)        (144)         (57)          56
                                       -----------  -----------  -----------  -----------
Income (loss) before extraordinary
  item and cumulative effect of change
  in accounting principle..............       789          687         (576)         592
Extraordinary item - gain (loss) on
  early extinguishment of debt, net
  of income taxes......................         4            4         (142)          --
Cumulative effect of change in
  accounting principle, net of income
  taxes................................      (113)          --           --           --
                                       -----------  -----------  -----------  -----------
Net income (loss)......................$      680   $      691   $     (718)  $      592
                                       ===========  ===========  ===========  ===========

Basic earnings per common share:
Income (loss) from continuing
  operations...........................$     0.35   $     0.35   $    (0.22)  $     0.23
Income (loss) from discontinued
  Fargo branch, net of income taxes....     (0.02)       (0.06)       (0.02)        0.02
Extraordinary item - loss on early
  extinguishment of debt, net of
  income taxes.........................        --           --        (0.06)          --
Cumulative effect of change in
  accounting principle, net of
  income taxes.........................     (0.05)          --           --           --
                                       -----------  -----------  -----------  -----------
Basic earnings (loss) per
  common share.........................$     0.28   $     0.29   $    (0.30)  $     0.25
                                       ===========  ===========  ===========  ===========

Diluted earnings per common share:
Income (loss) from continuing
  operations...........................$     0.35   $     0.34   $    (0.22)  $     0.22
Income (loss) from discontinued
  Fargo branch, net of income taxes....     (0.02)       (0.06)       (0.02)        0.02
Extraordinary item - loss on early
  extinguishment of debt, net of
  income taxes.........................        --           --        (0.06)          --
Cumulative effect of change in
  accounting principle, net of
  income taxes.........................     (0.05)          --           --           --
                                       -----------  -----------  -----------  -----------
Diluted earnings (loss) per
  common share.........................$     0.28   $     0.28   $    (0.30)  $     0.24
                                       ===========  ===========  ===========  ===========

Average common shares:
Basic.................................. 2,394,610    2,394,330    2,398,118    2,399,170
Diluted................................ 2,411,482    2,426,269    2,398,118    2,421,819

                Unaudited - see accompanying accountant's report.

</TABLE>

<PAGE>


Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

On April 5, 2002,  Arthur  Andersen  LLP  ("Arthur  Andersen")  resigned  as our
independent  auditors.  We filed a Form 8-K on April 5,  2002  reporting  Arthur
Andersen's  resignation.  On May 28, 2002, we appointed KPMG LLP ("KPMG") as our
independent  auditors to replace Arthur  Andersen.  The decision to appoint KPMG
was  approved  by our Board of  Directors,  subject to  approval of the terms of
KPMG's  engagement by the Audit Committee of our Board of Directors.  We filed a
Form 8-K on May 28, 2002 reporting the appointment of KPMG.

During its  tenure as our  independent  public  accountants,  Arthur  Andersen's
reports on our  consolidated  financial  statements  at and for the years  ended
December 31, 2001 and 2000 did not contain an adverse  opinion or  disclaimer of
opinion and were not  qualified  or modified as to  uncertainty,  audit scope or
accounting  principles.  During the period covered by our consolidated financial
statements  at and for the years ended  December  31, 2001 and 2000  through the
date of Arthur Andersen's resignation, there were no disagreements on any matter
of  accounting  principles  or  practices,  financial  statement  disclosure  or
auditing  scope  or  procedure  which,  if not  resolved  to  Arthur  Andersen's
satisfaction,  would have caused it to make  reference to the subject  matter in
conjunction  with its report on our consolidated  financial  statements for such
years;  and there were no reportable  events as defined in Item  304(a)(1)(v) of
Regulation S-K.

Arthur Andersen was provided with the disclosure set forth above and provided us
with a letter to the effect that it did not disagree  with the above  statements
as far as they relate to Arthur Andersen.

During the period covered by our  consolidated  financial  statements at and for
the years ended  December 31, 2001 and 2000 through the date of  appointment  of
KPMG,  we did not consult KPMG with  respect to the  application  of  accounting
principles to a specified transaction, either completed or proposed, or the type
of audit  opinion  that might be rendered on our  financial  statements,  or any
other matters or  reportable  events  described in Item  304(a)(2) of Regulation
S-K.


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information  concerning our directors and officers  called for by this item will
be included in our definitive  Proxy  Statement  prepared in connection with the
2003 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 11. Executive Compensation

Information  concerning the  compensation  of our executives  called for by this
item will be included in our definitive  Proxy Statement  prepared in connection
with the 2003  Annual  Meeting of  Stockholders  and is  incorporated  herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information  concerning  security  ownership  of certain  beneficial  owners and
management  called for by this item will be  included  in our  definitive  Proxy
Statement  prepared in connection  with the 2003 Annual Meeting of  Stockholders
and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions called for
by this item will be  included in our  definitive  Proxy  Statement  prepared in
connection  with the 2003 Annual  Meeting of  Stockholders  and is  incorporated
herein by reference.

Item 14. Controls and Procedures

Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days  prior to the date of this  annual  report on Form  10-K,  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls and procedures ("Disclosure  Controls"),  and our internal controls and
procedures for financial reporting ("Internal  Controls").  This evaluation (the
"Controls Evaluation") was done under the supervision and with the participation
of management,  including our President and Chief Executive  Officer ("CEO") and
Chief Financial  Officer ("CFO").  Rules adopted by the SEC require that in this
section of the annual report we present the  conclusions  of the CEO and the CFO
about the  effectiveness of our Disclosure  Controls and Internal Controls based
on and as of the date of the Controls Evaluation.
<PAGE>

CEO and CFO  Certifications.  Appearing  immediately  following  the  Signatures
section of this annual report there are "Certifications" of the CEO and the CFO.
The   Certifications  are  required  in  accordance  with  Section  302  of  the
Sarbanes-Oxley Act of 2002 (the "Section 302  Certifications").  This section of
the annual report is the information concerning the Controls Evaluation referred
to in the  Section 302  Certifications  and this  information  should be read in
conjunction   with  the  Section  302   Certifications   for  a  more   complete
understanding of the topics presented.

Disclosure  Controls and Internal Controls.  Disclosure  controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed  in our reports  filed  under the  Exchange  Act,  such as this annual
report, is recorded, processed,  summarized and reported within the time periods
specified in the SEC's rules and forms.  Disclosure  Controls are also  designed
with the  objective  of  ensuring  that  such  information  is  accumulated  and
communicated  to our  management,  including the CEO and CFO, as  appropriate to
allow timely decisions  regarding  required  disclosure.  Internal  Controls are
procedures  which  are  designed  with the  objective  of  providing  reasonable
assurance that (1) our transactions are properly authorized;  (2) our assets are
safeguarded  against  unauthorized or improper use; and (3) our transactions are
properly  recorded and reported,  all to permit the preparation of our financial
statements in conformity with accounting  principles  generally  accepted in the
United States.

Limitations on the Effectiveness of Controls. Our management,  including the CEO
and CFO, does not expect that our Disclosure  Controls or our Internal  Controls
will  prevent  all error and all  fraud.  A control  system,  no matter how well
developed and operated, can provide only reasonable, but not absolute, assurance
that the  objectives  of the control  system are met.  Further,  the design of a
control  system must reflect the fact that there are resource  constraints,  and
the benefits of controls must be considered relative to their costs.  Because of
the inherent  limitations in all control systems,  no evaluation of controls can
provide  absolute  assurance that all control issues and instances of fraud,  if
any, within the Company have been detected.  These inherent  limitations include
the  realities  that  judgments  in  decision-making  can be  faulty,  and  that
breakdowns can occur because of simple error or mistake. Additionally,  controls
can be circumvented by the individual acts of some persons,  by collusion of two
or more people,  or by  management  override of the  control.  The design of any
system of  controls  also is based in part upon  certain  assumptions  about the
likelihood of future events,  and there can be no assurance that any design will
succeed in achieving  its stated goals under all  potential  future  conditions.
Over time,  control may become inadequate  because of changes in conditions,  or
the degree of  compliance  with the  policies  or  procedures  may  deteriorate.
Because  of  the  inherent  limitations  in  a  cost-effective  control  system,
misstatements due to error or fraud may occur and not be detected.

Scope of the  Controls  Evaluation.  The CEO/CFO  evaluation  of our  Disclosure
Controls and our Internal Controls included a review of the controls' objectives
and design,  our controls'  implementation and the effect of the controls on the
information  generated  for use in this  annual  report.  In the  course  of the
Controls  Evaluation,  we sought to identify data errors,  controls  problems or
acts of fraud and to  confirm  that  appropriate  corrective  action,  including
process  improvements,  were being  undertaken.  This type of evaluation will be
done  on  a  quarterly  basis  so  that  the  conclusions   concerning  controls
effectiveness  can be reported in our quarterly  reports on Form 10-Q and annual
report on Form 10-K.  Our  Internal  Controls  are also  evaluated on an ongoing
basis by our internal  audit and credit review  departments  in connection  with
their audit and review activities. The overall goals of these various evaluation
activities are to monitor our Disclosure  Controls and our Internal Controls and
to make  modifications as necessary.  Our external auditors also review Internal
Controls in  connection  with their audit and review  activities.  Our intent in
this  regard is that the  Disclosure  Controls  and  Internal  Controls  will be
maintained  as dynamic  systems that change  (including  with  improvements  and
corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were
any  "significant   deficiencies"  or  "material  weaknesses"  in  our  Internal
Controls, or whether we had identified any acts of fraud involving personnel who
have a significant role in our Internal Controls. This information was important
both for the  Controls  Evaluation  generally  and because  items 5 and 6 in the
Section  302  Certifications  of the CEO and CFO  require  that  the CEO and CFO
disclose that  information to our board's audit committee and to our independent
auditors and to report on related  matters in this section of the annual report.
In the professional auditing literature, "significant deficiencies" are referred
to as  "reportable  conditions."  These are  control  issues  that  could have a
significant  adverse  effect on the ability to record,  process,  summarize  and
report  financial  data in the financial  statements.  A "material  weakness" is
defined  in  the  auditing  literature  as  a  particularly  serious  reportable
condition  where the internal  control does not reduce to a relatively low level
the risk that  misstatements  caused by error or fraud may occur in amounts that
would be material in relation to the  financial  statements  and not be detected
within a timely  period by employees in the normal  course of  performing  their
assigned  functions.  We also sought to deal with other controls  matters in the
Controls Evaluation, and in each case if a problem was identified, we considered
what  revision,  improvement  and/or  correction to make in accordance  with our
ongoing procedures.
<PAGE>

In accordance with SEC  requirements,  the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this annual report, there have been no
significant  changes  in  Internal  Controls  or in  other  factors  that  could
significantly  affect Internal  Controls,  including any corrective actions with
regard to significant deficiencies and material weaknesses.

Conclusions.  Based upon the Controls Evaluation, our CEO and CFO have concluded
that,  subject to the  limitations  noted  above,  our  Disclosure  Controls are
effective  to ensure  that  material  information  relating  to BNCCORP  and its
consolidated  subsidiaries  is made known to  management,  including the CEO and
CFO,  particularly  during  the  period  when our  periodic  reports  are  being
prepared,  and that our Internal  Controls are  effective to provide  reasonable
assurance that our financial  statements are fairly presented in conformity with
accounting principles generally accepted in the United States.

Information  concerning  certain controls and procedures called for by this item
will be included in our definitive  Proxy Statement  prepared in connection with
the 2003 Annual Meeting of Stockholders and is incorporated herein by reference.


                                     PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a) Exhibits.

     Reference is made to the Exhibit  Index  beginning  on page E-1 hereby.  We
     will furnish to any  eligible  stockholder,  upon  written  request of such
     stockholder,  a copy of any exhibit listed upon the payment of a reasonable
     fee equal to our expenses in furnishing such exhibit.

     (b) Reports on Form 8-K.

     No reports on Form 8-K were filed  during the quarter  ended  December  31,
     2002.


<PAGE>



                                   Signatures

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned; thereunto duly authorized, on March 18, 2003.

                                       BNCCORP, Inc.

                                       By:   /s/ Tracy Scott
                                           --------------------------------
                                             Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated, on March 18, 2003.


      /s/ Tracy Scott                        Chairman of the Board and Director
------------------------------------
          Tracy Scott


      /s/ Gregory K. Cleveland            President, Chief Executive Officer and
------------------------------------                     Director
          Gregory K. Cleveland                   (Principal Executive Officer)
                                                 (Principal Financial Officer)



      /s/ Brenda L. Rebel                   Chief Financial Officer and Director
------------------------------------            (Principal Accounting Officer)
          Brenda L. Rebel                                  Director


      /s/ Denise Forte-Pathroff, M.D.
------------------------------------                       Director
          Denise Forte-Pathroff, M.D.


      /s/ John A. Hipp, M.D.
------------------------------------                       Director
          John A. Hipp, M.D.


      /s/ Richard M. Johnsen, Jr.
------------------------------------                       Director
          Richard M. Johnsen, Jr.


      /s/ David A. Erickson
------------------------------------                       Director
          David A. Erickson


      /s/ Jerry R. Woodcox
------------------------------------                       Director
          Jerry R. Woodcox


      /s/ Terrence M. Scali
------------------------------------                       Director
          Terrence M. Scali

<PAGE>


                                 CERTIFICATIONS


I, Gregory K. Cleveland, President and Chief Executive Officer, certify that:

1.   I have reviewed this annual report on Form 10-K of BNCCORP, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.





Date: March 18, 2003                  By   /s/ Gregory K. Cleveland
                                           -------------------------------------
                                           Gregory K. Cleveland
                                           President and Chief Executive Officer

<PAGE>

I, Brenda L. Rebel, Treasurer and Chief Financial Officer, certify that:

1.   I have reviewed this annual report on Form 10-K of BNCCORP, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.





Date:  March 18, 2003                By   /s/ Brenda L. Rebel
                                        ----------------------------------------
                                          Brenda L. Rebel
                                          Treasurer and Chief Financial Officer


<PAGE>

                                 EXHIBIT INDEX

Exhibit
  No.                             Exhibit Description

   2.1  Stock Purchase  Agreement dated as of December 6, 1999, by and between
        BNCCORP, Inc. and Associated  Banc-Corp,  incorporated by reference to
        Exhibit 2.1 to the Registrant's Form 8-K dated as of January 14, 2000.

   3.1  Certificate of Incorporation of the Company, incorporated by reference
        to Exhibit 3.1 to the Registrant's Registration Statement on Form SB-2
        (Registration No. 33-92369).

   3.2  Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the
        Registrant's  Registration  Statement on Form SB-2  (Registration  No.
        33-92369).

   4.1  Specimen of Common  Stock  Certificate,  incorporated  by reference to
        Exhibit  4  to  Amendment  No.  1  to  the  Registrant's  Registration
        Statement on Form SB-2 (Registration No. 33-92369).

   4.2  Form of  Indenture  by and between  BNCCORP,  Inc.  and Firstar  Trust
        Company,  as Trustee,  incorporated by reference to Exhibit 4.1 to the
        Registrant's  Registration  Statement on Form SB-2  (Registration  No.
        333-26703).

   4.3  Rights Agreement,  dated as of May 30, 2001, between BNCCORP, Inc. and
        American  Stock   Transfer  and  Trust   Company,   as  Rights  Agent,
        incorporated  by reference to Exhibit 1 to the  Registrant's  Form 8-A
        dated June 5, 2001.

   10.1 Form of Indemnity Agreement by and between the Company and each of the
        Company's Directors,  incorporated by reference to Exhibit 10.1 to the
        Registrant's  Registration  Statement on Form SB-2  (Registration  No.
        33-92369).

   10.2 Form of Employment  Agreement between the Company and each of Tracy J.
        Scott and Gregory K.  Cleveland,  incorporated by reference to Exhibit
        10.2  to  the  Registrant's   Registration   Statement  on  Form  SB-2
        (Registration No. 33-92369).

   10.3 Form of BNCCORP,  Inc.  1995 Stock  Incentive  Plan,  incorporated  by
        reference to Exhibit 10.3 to the Registrant's  Registration  Statement
        on Form SB-2 (Registration No. 33-92369).

   10.4 Form of Stock Option  Agreement for the Grant of  Non-Qualified  Stock
        Options Under the BNCCORP,  Inc. 1995 Stock Incentive Plan dated as of
        June  7,  1995,  incorporated  by  reference  to  Exhibit  10.5 to the
        Registrant's Form 10-KSB dated as of March 29, 1996.

   10.5 Junior  Subordinated  Indenture between BNCCORP,  Inc. and First Union
        National  Bank as Trustee dated as of July 12, 2000,  incorporated  by
        reference  to Exhibit 10.1 to the  Registrant's  Form 10-Q dated as of
        August 2, 2000.

   10.6 Guarantee Agreement between BNCCORP, Inc. as Guarantor and First Union
        National  Bank as  Guarantee  Trustee  dated as of July 12, 2000 - BNC
        Capital  Trust I,  incorporated  by  reference  to Exhibit 10.2 to the
        Registrant's Form 10-Q dated as of August 2, 2000.

   10.7 Amended and Restated Trust Agreement among BNCCORP, Inc. as Depositor,
        First  Union  National  Bank as  Property  Trustee,  First Union Trust
        Company,   National   Association   as   Delaware   Trustee   and  the
        Administrative  Trustees dated as of July 12, 2000 - BNC Capital Trust
        I, incorporated by reference to the Registrant's Form 10-Q dated as of
        August 2, 2000.

   10.8 Indenture between BNCCORP,  Inc., as issuer, and State Street Bank and
        Trust  Company  of  Connecticut,  National  Association,  as  Trustee,
        Floating Rate Junior  Subordinated  Deferrable Interest Debentures Due
        2031,  dated July 31, 2001,  incorporated by reference to Exhibit 10.1
        to the Registrant's Form 10-Q dated as of August 13, 2001.

   10.9 Guarantee Agreement by and between BNCCORP, Inc. and State Street Bank
        and Trust Company of Connecticut, National Association, dated July 31,
        2001,  incorporated  by reference to Exhibit 10.2 to the  Registrant's
        Form 10-Q dated as of August 13, 2001.

  10.10 Amended and  Restated  Declaration  of Trust by and among State Street
        Bank and  Trust  Company  of  Connecticut,  National  Association,  as
        Institutional  Trustee,  BNCCORP,  Inc.,  as  Sponsor,  and Gregory K.
        Cleveland,  Tracy Scott and Brenda L. Rebel, as Administrators,  dated
        July 31,  2001,  incorporated  by  reference  to  Exhibit  10.3 to the
        Registrant's Form 10-Q dated as of August 13, 2001.
<PAGE>

  10.11 Form of BNCCORP,  Inc.  2002 Stock  Incentive  Plan,  incorporated  by
        reference to Appendix A to the Company's  Definitive  Proxy  Statement
        dates May 17, 2002.

  10.12 Stock Purchase Agreement,  dated March 22, 2002, by and among BNCCORP,
        Inc., BNC Insurance, Inc. and the Sellers named therein,  incorporated
        by reference to the registrant's Form 8-K filed on May 1, 2002.

  10.13 Employment and Non-competition Agreement, dated April 15, 2002, by and
        between BNC  Insurance,  Inc.,  Milne & Company  Insurance,  Inc.  and
        Richard W. Milne,  Jr.,  incorporated by reference to the registrant's
        Form 8-K filed on May 1, 2002.

  10.14 Employment and Non-competition Agreement, dated April 15, 2002, by and
        between BNC  Insurance,  Inc.,  Milne & Company  Insurance,  Inc.  and
        Terrence M. Scali,  incorporated by reference to the registrant's Form
        8-K filed on May 1, 2002.

  10.15 Branch Purchase and Assumption Agreement by and among Alerus Financial,
        National Association, BNC National Bank and its parent, BNCCORP, Inc.,
        dated  as  of  July  26,  2002,   incorporated  by  reference  to  the
        registrant's Form 10-Q filed on November 12, 2002.

   21.1 Subsidiaries of Company.

   23.1 Consent of Independent Certified Public Accountants

   99.1 Certifications of Chief Executive Officer and Chief Financial Officer