U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                      -----
                                   FORM 10-KSB
                                      -----
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF
      1934 For the fiscal year ended December 31, 1998
                                         or
[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                           Commission File No. 0-26290

                                  BNCCORP, INC.
                 (Name of small business issuer in its charter)

           Delaware                                    45-0402816
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or orrganization)

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

                   Issuer's telephone number: (701) 250-3040
       Securities registered under Section 12(b) of the Exchange Act: None
         Securities registered under Section 12(g) of the Exchange Act:

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

      Check  whether  the issuer (1) filed all  reports  required to be filed by
Section 13 of 15(d) of the  Exchange  Act during the past 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 ___

      Check if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  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-KSB
or any amendment to this Form 10-KSB. []

      The issuer's revenues for its most recent fiscal year: $35,344,000

      The aggregate market value of the voting stock held by  non-affiliates  of
the  Registrant  at March 15, 1999 was $16,050,000.

      The number of shares of the Registrant's common stock outstanding on March
15, 1999 was 2,408,980.

      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  1997 annual meeting of stockholders  are incorporated by
reference into Part III hereof.

      Transitional Small Business Disclosure Format (check one): Yes ___  No  X


                         

<PAGE>


                                       BNCCORP, INC.

                                ANNUAL REPORT ON FORM 10-KSB
                          FOR FISCAL YEAR ENDED DECEMBER 31, 1998


                                     TABLE OF CONTENTS

                                                                           Page

                                           PART I
Item 1.     Description of Business                                           3
Item 2.     Description of Property                                           9
Item 3.     Legal Proceedings                                                 9
Item 4.     Submission of Matters to a Vote of Security Holders              10

                                          PART II
Item 5.     Market for Common Equity and Related Stockholder Matters         10
Item 6.     Management's Discussion and Analysis or Plan of Operation        10
Item 7.     Financial Statements                                             40
Item 8.     Changes In and Disagreements With Accountants on Accounting 
            and Financial Disclosure                                         76

                                          PART III
Item 9.     Directors, Executive Officers, Promoters and Control Persons;
            Section 16(a) Beneficial Ownership Reporting Compliance          76
Item 10.    Executive Compensation                                           76
Item 11.    Security Ownership of Certain Beneficial Owners and Management   76
Item 12.    Certain Relationships and Related Transactions                   76
Item 13.    Exhibits and Reports on Form 8-K                                 76


<PAGE>




                                           PART I


Item 1.     Description of Business

General

BNCCORP,  Inc.  ("BNCCORP"),  a Delaware  corporation,  is a  multibank  holding
company  registered  under the Bank  Holding  Company  Act of 1956 (the  "BHCA")
headquartered in Bismarck, North Dakota. BNCCORP (together with its consolidated
subsidiaries,  "BNC" or the  "Company")  provides a broad  range of banking  and
financial services to small and mid-size businesses, private banking clients and
consumers  through its 17  facilities  in North  Dakota and  Minnesota.  BNCCORP
operates primarily through its two commercial banking subsidiaries, BNC National
Bank (together with its wholly-owned  subsidiaries,  BNC Insurance, Inc. and BNC
Asset Management, Inc., "BNC--North Dakota"), which is headquartered in Bismarck
and  has 14  additional  offices  in  North  Dakota,  and BNC  National  Bank of
Minnesota  ("BNC--Minnesota,"  together with  BNC--North  Dakota,  the "Banks"),
which is located in Minneapolis,  Minnesota.  In addition,  the Company provides
asset-based commercial financing through its non-bank subsidiary,  BNC Financial
Corporation ("BNC Financial"), located in St. Cloud, Minnesota.

Growth Strategy

BNCCORP was formed in 1987 with the  objective of acquiring  and  improving  the
performance of strategically located banks in North Dakota. Since that time, the
banking  industry has undergone  rapid change.  Many non-bank  competitors  have
entered into the banking business. The proliferation of non-bank competitors has
resulted in the availability of a multitude of financial  products and services.
Technological  advances  have  improved  delivery  systems  and given  customers
immediate access to these products and services.  To remain  competitive in this
rapidly changing environment, BNCCORP has expanded its objective. The Company is
committed  to moving into the future as a  full-service  provider  of  financial
services including  traditional  banking,  trust,  asset management,  brokerage,
insurance, financial planning and other services.

BNC  aims to  achieve  its  objectives  through  expanded  product  and  service
offerings  and an emphasis on customer  service and local  relationship  banking
with small and  mid-size  businesses,  private  banking  clients and  consumers.
Management believes that the Company's  entrepreneurial  approach to banking and
the introduction of new products and services will continue to attract small and
mid-size  businesses which often are not of sufficient size to be of interest to
the larger banks in its market  areas.  See  "--Market  Areas." Such  businesses
frequently  have difficulty  finding  banking  services that meet their specific
needs and have sought,  and management  believes will continue to seek,  banking
institutions  that are more  relationship-oriented.  BNC  offers a wide range of
banking and  finance-related  products and services,  including  trust services,
asset management,  retirement planning, tax planning and preparation,  insurance
and other private banking services. See "--Products and Services."

Acquisitions have played an important role in BNC's growth strategy. The Company
has  completed  several  bank and  nonbank  acquisitions.  The  largest of these
acquisitions  was the  Company's  July 1995  acquisition  of seven North  Dakota
branches,  with aggregate deposits of approximately  $104.8 million,  from First
Bank fsb. See Note 2 to the  Consolidated  Financial  Statements  included under
Item 7 of Part II for a summary of mergers and acquisitions  consummated  during
the three year period ended December 31, 1998.

<PAGE>

Management  believes  that its  increased  product  and  service  offerings  and
acquisitions  have  generated  significant  growth for the Company.  BNC's total
assets have increased from $118.0 million at December 31, 1992 to $396.3 million
at December  31,  1998.  The  Company's  goal  continues to be the creation of a
well-capitalized  $500  million to $1 billion  financial  services  organization
focused on local  relationship  banking.  Efforts are ongoing to ensure that the
executive  management  team and  operating  systems are in place to achieve this
goal.  The  Company's  management  team  combines   experienced,   conscientious
overseers  of  traditional  banking  services  with  aggressive  and  innovative
marketers and managers of diversified  financial services.  BNC will continue to
emphasize  internally-generated  growth.  The  Company  will  also  seek  growth
opportunities  through  acquisition of financial  services  companies or de novo
branching in North and South Dakota, Minnesota and, possibly, Iowa, Nebraska and
Wisconsin.  The Company recently expanded its growth  opportunities by opening a
branch in Fargo, North Dakota, during February 1999.

Market Areas

BNC's  primary  market areas are the  Bismarck/Mandan  and Fargo (North  Dakota)
metropolitan areas, the Minneapolis/St.Paul  (Minnesota)  metropolitan area, and
the rural  communities  surrounding  the  branch  offices of  BNC--North  Dakota
(Linton,  Ellendale,  Garrison, Stanley, Kenmare, Crosby and Watford City, North
Dakota).  During  January 1999, the Company  established an insurance  office in
Dickinson,  North Dakota.  The asset-based  lending  activities of BNC Financial
have been conducted primarily in Minnesota.  During 1998, BNC--Minnesota and BNC
Financial continued to generate  significant loan growth in the Minnesota market
area.  As of  December  31,  1998,  52  percent of the  Company's  loans were to
borrowers located in Minnesota and 38 percent were to borrowers located in North
Dakota.  The remaining 10 percent represents loans to borrowers in 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 loans originated at each of BNC's geographic locations:

                                                       December 31, 1998
                                                     -----------------------
                                           Year                     
                    Location              Opened              
                                            or         Total         Loans
                                         Acquired     Deposits    Originated
          -----------------------------  ----------  ----------   ----------
                                                         (in thousands)
          BNC--North Dakota..........   
            Bismarck.................         1990   $ 106,110    $ 122,788
            Linton...................         1987      47,070        9,605
            Ellendale................         1995      10,343        1,385
            Garrison.................         1995      13,735          428
            Stanley..................         1995      15,146          385
            Kenmare..................         1995      16,544          158
            Crosby...................         1995      17,870          237
            Watford City.............         1995      13,066          114
          BNC--Minnesota.............         1996      44,615      111,928
          BNC Financial..............         1996          --       23,842
          BNCCORP (parent company)...         1987          --          340
                                                     ----------   ----------
               Total ................                $ 284,499    $ 271,210
                                                     ==========   ==========

Products and Services

Loans. The Company's loans primarily consist of commercial and industrial loans,
real estate mortgage loans, real estate construction loans,  agricultural loans,
consumer  loans and lease  financing.  In  allocating  its assets  among  loans,
investments  and other  earning  assets,  BNC attempts to maximize  return while
managing risk at acceptable levels. BNC's primary lending focus is on commercial
loans and owner-occupied  real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services,  including  commercial  revolving  lines of  credit,  residential  and
commercial real estate mortgage loans,  consumer loans and equipment  financing.

<PAGE>

For more information on the lending activities of the Company, see "Management's
Discussion  and  Analysis  or  Plan  of   Operation--Financial   Condition--Loan
Portfolio" included under Item 6 of Part II.

Interest  rates  charged  on loans  may be fixed or  variable  and vary with the
degree of risk, loan term,  underwriting and servicing costs,  loan amount,  and
extent of other  banking  relationships  maintained  with  customers.  Rates are
further subject to competitive pressures, the current interest rate environment,
availability of funds and government regulations.

The Company also offers asset-based  commercial financing through BNC Financial,
the  Company's  non-bank  subsidiary  which was acquired in 1996.  BNC Financial
provides  asset-based  working  capital and term financing to small and mid-size
companies  for  refinancings,   recapitalizations,   acquisitions  and  seasonal
borrowing  through  senior loans  secured by business  assets such as equipment,
accounts receivable,  and inventory.  Revolving credit facilities and term loans
are cross-collateralized. Management of BNC Financial is experienced in, and has
adopted   policies  and  procedures  to  address  the  risks   associated  with,
asset-based  lending.  Asset-based lending often involves higher risk than loans
traditionally extended by banks, but often involves higher returns.

Deposits.  Each of BNC's 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.  Deposits are insured by
the Federal Deposit Insurance  Corporation  ("FDIC") up to statutory limits. The
Banks  also  purchase   brokered   deposits  and  obtain   direct   non-brokered
certificates of deposit through national deposit networks when such transactions
are beneficial to the Banks. See  "Management's  Discussion and Analysis or Plan
of Operation--Financial Condition--Deposits" included under Item 6 of Part II.

Trust, Personal Banking,  Investment and Insurance Products. Since January 1997,
BNC--North  Dakota's Financial Services division has been providing a wide array
of trust,  personal banking,  investment and insurance services for corporations
and individuals. These services range from fiduciary and personal trust services
to  tax  planning  and  preparation,  payroll  processing,  financial  planning,
retirement  planning,  employee  stock option  plans,  employee  benefit  plans,
individual retirement accounts ("IRAs"), including custodial self-directed IRAs,
asset  preservation,  charitable  giving  and  related  services  and  insurance
services of all types. These services provide opportunities to solidify customer
relationships  by  meeting  more  of the  banking  and  financial  needs  of the
Company's  current  customer base. They also present  opportunities to establish
new  customer  relationships  in the markets  served by BNC.  The  January  1998
business  combination with Lips and Lahr, Inc. ("Lips & Lahr") has significantly
increased  the level and nature of  insurance  activities  conducted by BNC. See
Note 2 to the Consolidated  Financial  Statements  included under Item 7 of Part
II.

Investment  Portfolio.  The purpose of the Company's  investment portfolio is to
provide a source of earnings and manage  liquidity.  Investments  are  centrally
managed in order to aid in compliance with federal laws and  regulations,  which
place certain restrictions on the amounts and types of investments BNC may hold.
While the investment portfolio serves many functions, the primary function is to
contribute  to the  overall  profitability  of the  Company.  The  objective  of
managing the portfolio is to purchase and own securities  with good  risk/reward
profiles in various interest-rate  scenarios. The role of the investment officer
is not to "predict"  interest rates, but rather to identify what might happen to
a security in question,  and the portfolio as a whole, given possible changes in
interest  rates.  BNC maintains an investment  grade  portfolio  oriented toward
mortgage-backed  securities and  collateralized  mortgage  obligations issued by
U.S.  government  agencies.  BNC  maintains a small amount of  investment  grade
obligations  of state and political  subdivisions.  In addition,  BNC holds U.S.
Treasury and U.S.  government  agency  obligations as a means of securing public
funds and repurchase  agreements.  See "Management's  Discussion and Analysis or
Plan of  Operation--Financial  Condition--Investment  Securities" included under
Item 6 of Part II.


<PAGE>


Distribution Methods

BNC offers its banking and financial  products and services through  traditional
industry  distribution  methods  including its network of bank, branch and other
offices.  In addition,  the Company offers 24-hour  telephone  banking  services
through its voice response system, BNC Bankline.  The Company also provides cash
management  services  to  its  commercial  customers  through  its  Xpress  Cash
Management  system.  This system allows  customers to process  funds  transfers,
wires,  automated clearing house (ACH)  transactions,  stop payments and account
history inquiries using their office computers and modems.  The Company has also
established  an  internet  web site  which is  currently  being  used to provide
corporate financial  information,  current investment news and stock prices. The
Company  anticipates  that it will begin  offering full internet  banking during
2000 in order to provide  online  banking to  customers at any time and from any
location.

Risk Management

The uncertainty of whether events,  expected or otherwise,  will have an adverse
impact on the Company's  capital or earnings is an  inevitable  component of the
business of banking.  To ensure that the risks  inherent in BNC's  business  are
identified,  measured,  controlled and monitored,  the Company has established a
risk  management  committee  composed  of  senior  management  from  across  the
organization (the "Risk Management Committee"). The Risk Management Committee is
responsible for determining the desired risk profile of the Company,  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  to  appropriately   fund  the  Company's   portfolio  of
investments.  The Risk  Management  Committee  addresses  each of the major risk
categories identified by the banking regulators,  if applicable,  as well as any
additional  identified  risks  inherent in the  Company's  business.  Such risks
include, but are not limited to, credit, liquidity,  interest rate, transaction,
compliance,  strategic and reputation  risk. In each  identified  risk area, the
Risk Management Committee measures the level of risk to the Company based on the
business  it  conducts  and  develops  plans to bring  risks  within  acceptable
tolerances.   See   "Management's   Discussion   and   Analysis   or   Plan   of
Operation--Financial  Condition--Loan  Portfolio  and  --Liquidity,  Market  and
Credit Risk" included under Item 6 of Part II for further  discussion of credit,
liquidity and interest rate risk.

Competition

The deregulation of the banking  industry,  the increasing  number of state laws
that permit  multi-bank  holding  companies and the increasing  availability  of
nationwide  interstate  banking have  heightened  the level of competition in an
already  intensely  competitive  market.  The North Dakota and Minnesota  market
areas are highly competitive banking environments. Competition is encountered in
seeking  deposits,  obtaining  loan  customers and in providing all of the other
banking  and  financial   products  and  services  offered  by  BNC.   Principal
competitors  include  multi-regional  financial  institutions  such  as  Norwest
Corporation,  U.S. Bancorp and Community First Bankshares, Inc. as well as large
and small  thrifts,  independent  banks,  credit  unions and many  national  and
regional  brokerage  houses.  BNC also  competes with other  non-bank  financial
institutions,  including  retail stores that maintain their own credit  programs
and  government  agencies  that make low cost or guaranteed  loans  available to
certain  borrowers.   Some  of  these  competitors  have  substantially  greater
resources and lending  limits than BNC, and may offer certain  services that BNC
does not provide. In addition,  some of the non-bank financial institutions that
compete  with BNC are not  subject to the  extensive  federal  regulations  that
govern BNC.  Management  believes that many competitors  have emphasized  retail
banking and financial  services,  leaving the small and mid-size business market
underserved. This has allowed BNC 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 the
future  profitability  of the Company  will depend on its ability to continue to
compete successfully in its market areas.


<PAGE>


Supervision and Regulation

General. BNCCORP and the Banks 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.  The following  information  briefly  summarizes  certain
material  statutes  and  regulations  affecting  BNCCORP  and the  Banks  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 the business, operations and prospects of
BNCCORP and the Banks.  The Company is unable to predict the nature or extent of
the effects that fiscal or monetary  policies,  economic controls or new federal
or state legislation may have on its 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  ("FRB").  BNCCORP is required to file
periodic  reports  with the FRB and such other  reports  as the FRB may  require
pursuant to the BHCA. As a nonbank subsidiary,  BNC Financial is also subject to
regulation  by the FRB.  The Banks are  national  banking  associations  and are
subject  to  supervision,  regulation  and  examination  by  the  Office  of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC,  the Banks are also subject to regulation  and  supervision  by the
FDIC. Additionally, the Banks are members of the Federal Reserve System.

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 FRB. 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 FRB to be closely  related to
banking or managing banks.

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 Banks to BNCCORP and BNC Financial who are defined as "affiliates" of the
Banks under the Act.  Section 23B of the Act places  standards  of fairness  and
reasonableness on other of the Banks' transactions with their affiliates.

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 loan loss reserves. The Banks
seek participations to accommodate  borrowers whose financing needs exceed their
lending limits.

Loans to Executive  Officers,  Directors  and  Principal  Stockholders.  Certain
limitations and reporting  requirements  are also placed on extensions of credit
by the Banks to principal  stockholders  of BNCCORP and to directors and certain
executive  officers  of the Banks  (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 Banks or principal  stockholder  of BNCCORP may be limited in his
or her ability to obtain credit from financial institutions with which the Banks
maintain correspondent relationships.

Interstate Banking and Branching. Interstate banking and branching provisions of
federal  and state  laws may place  certain  limitations  on  expansion  by bank
holding companies or banks.

Capital Adequacy.  The capital adequacy of BNCCORP and the Banks 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 Banks to supervisory or enforcement  actions. In addition,  BNCCORP could

<PAGE>

be required to guarantee a capital restoration plan of one or more of its Banks,
should such Banks become  "undercapitalized" under capital guidelines.  See Note
11 to the Consolidated Financial Statements included under Item 7 of Part II.

Dividend  Restrictions.  Federal  rules  also  limit  a  bank's  ability  to pay
dividends to its parent bank holding  company in excess of certain amounts or if
the payment would result in the bank being considered  "undercapitalized"  under
capital guidelines.

Community  Reinvestment Act. Under the Community  Reinvestment Act ("CRA"),  the
Banks are encouraged to respond to the credit and other needs of the communities
they  serve.  Bank  performance  under the CRA is  periodically  tested  and the
federal  bank  regulatory  agencies  consider  CRA  ratings in  connection  with
acquisitions involving the change in control of a financial institution.

Deposit Insurance.  FDIC-insured depository institutions that are members of the
FDIC's Bank Insurance Fund and Savings Association  Insurance Fund pay insurance
premiums  at rates  based  on their  assessment  risk  classification,  which is
determined  in part  based on the Bank's  capital  ratios and in part on factors
that the FDIC deems  relevant  to  determine  the risk of loss to the  insurance
funds.  The Banks also pay additional  assessments  that are used to pay certain
Financing Corporation obligations issued between 1987 and 1989 to resolve failed
savings and loan associations.

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.

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
either of the Banks was 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.

Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Banks are 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 and the Fair  Housing 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.

Changing Regulatory Structure. The FRB, 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,  the North Dakota Department of Banking and Financial Institutions and
the Minnesota  Department of Commerce possess  significant  authority to address
violations of their respective  state's banking laws by banks operating in their
respective states by enforcement and other supervisory actions.

The laws and regulations affecting banks and bank holding companies have changed
significantly  in recent years,  and there is reason to expect that changes will

<PAGE>

continue in the future, although it is difficult to predict the outcome of these
changes.  From time to time,  various bills are  introduced in the United States
Congress with respect to regulation of financial institutions.  Certain of these
proposals,  if adopted,  could significantly  change the regulation of banks and
the  financial  services  industry.  BNC  cannot  predict  whether  any of these
proposals will be adopted or, if adopted, how these proposals would affect BNC.

Monetary Policy.  The monetary policy of the FRB has a significant effect on the
operating results of bank holding companies and their subsidiaries. The FRB uses
the various means at its disposal to influence  overall growth and  distribution
of bank loans,  investments  and deposits and interest rates charged on loans or
paid on deposits.  FRB monetary policies have materially affected the operations
of  commercial  banks in the past and are  expected  to continue to do so in the
future.  The nature of future monetary  policies and the effect of such policies
on the  business  and  earnings  of  BNCCORP  and  its  subsidiaries  cannot  be
predicted.

Employees

At December  31,  1998,  BNC had  approximately  200  employees,  including  183
full-time  equivalent  employees.  None of  BNC's  employees  are  covered  by a
collective  bargaining  agreement and management  believes that its relationship
with its employees is good.

Item 2.     Description of Property

The principal offices of BNCCORP and BNC--North Dakota are located in BNC's main
office building at 322 East Main Avenue, Bismarck, North Dakota. The building is
owned by BNC--North  Dakota.  BNC--North  Dakota 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
Linton,  Crosby,  Ellendale,  Kenmare  and  Stanley,  North  Dakota as well as a
temporary  facility  located on its permanent site in Fargo,  North Dakota.  The
Company plans to begin  construction of a permanent  facility for Fargo by April
1999.

BNC--North Dakota's  facilities at 100 West Main Street (Mandan),  500 North 9th
Street (Bismarck),  Watford City,  Garrison and Dickinson,  North Dakota and the
land at South 3rd Street (Bismarck) are leased. BNC-North Dakota is also leasing
a facility at 4656 Amber  Valley  Parkway in Fargo,  pending  completion  of its
permanent facility to be located at 3137 32nd Avenue SW. The facilities occupied
by  BNC--Minnesota at 333 South Seventh Street,  Minneapolis,  Minnesota and the
facilities housing BNC Financial at 4150 South 2nd Street, St. Cloud,  Minnesota
are also leased.

All owned and leased properties are considered in good operating  condition and,
except for the Fargo location,  are believed  adequate for the Company's present
and  foreseeable  future  operations.  BNC does not anticipate any difficulty in
leasing  additional  suitable space upon expiration of present lease terms.  See
Note 16 to the Consolidated  Financial  Statements included under Item 7 of part
II for  additional  information  concerning  lease  and  other  commitments  and
construction of the Fargo facility.

Item 3.     Legal Proceedings

BancInsure,  Inc. vs. BNC National  Bank,  N.A. and Debra J.  Gronlie,  Civ. No.
A1-98-97,  U.S.D.C.  District of North Dakota.  See Note 16 to the  Consolidated
Financial  Statements  included  under  Item 7 of  Part II for a  discussion  of
current status of this case.

The  Company  is  currently  not  a  party  to  any  additional  material  legal
proceedings.  Periodically,  and in the  ordinary  course of  business,  various
claims  and  lawsuits  which are  incidental  to BNC's  business  may be brought
against or by BNC, such as claims to enforce liens,  condemnation proceedings on
properties in which BNC holds security  interests,  claims  involving the making
and  servicing  of real  property  loans  and  other  issues  incidental  to the
Company's  business.  In the  opinion of  management,  the  resolution  of these
matters  will not have a  material  adverse  effect on the  Company's  financial
position or results of  operations.  

<PAGE>

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, 1998.

                                          PART II

Item 5.     Market for 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 the Common Stock for
the  periods  indicated  as  reported  by the Nasdaq  Stock  Market.  The quotes
represent  "inter-dealer"  prices without adjustment or mark-ups,  mark-downs or
commissions and may not represent actual transactions.

                                    For the Years Ended December 31,
                                   ------------------------------------
                                         1998               1997
                                   -----------------  -----------------
               Period               High      Low      High      Low
                                   --------  -------  -------   -------
               First Quarter...... $ 20.50   $ 16.25  $ 13.50   $ 11.75
               Second Quarter..... $ 23.25   $ 16.88  $ 12.75   $ 10.50
               Third Quarter...... $ 19.00   $ 12.88  $ 17.00   $ 11.00
               Fourth Quarter..... $ 13.00   $  9.00  $ 17.00   $ 14.50

On March 15,  1999,  there  were 108  record  holders  and  approximately  1,300
beneficial owners of the Company's Common Stock.

BNCCORP's  policy  is to  retain  its  earnings  to  support  the  growth of its
business. The board of directors of BNCCORP has never declared cash dividends on
its  Common  Stock  and does not plan to do so in the  foreseeable  future.  The
ability of BNCCORP to pay cash dividends  largely  depends on the amount of cash
dividends paid to it by the Banks. Capital  distributions,  including dividends,
by the  Banks  are  subject  to  federal  regulatory  restrictions  tied to each
institution's  earnings and capital.  See "Supervision and  Regulation--Dividend
Restrictions" included under Item 1 of Part I.

During  March  1999,  the  Company  issued  3,296  shares  of  Common  Stock  to
shareholders  of Lips & Lahr in a private  offering  believed to be exempt under
the  Securities  Act of 1933  and the  regulations  and  rules  thereunder.  The
issuance  was the  second  and final  share  issuance  in  conjunction  with the
business combination with Lips & Lahr. See Note 2 to the Consolidated  Financial
Statements included under Item 7.

Item 6.     Management's Discussion and Analysis or Plan of Operation

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,  1998,  1997 and  1996 are  derived  from the  historical  audited
consolidated  financial  statements  of the Company.  The  Consolidated  Balance
Sheets as of December 31, 1998 and 1997 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, 1998 were  audited by Arthur
Andersen LLP, independent public accountants. 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 7.


<PAGE>


                                  Selected Financial Data

                                               For the Years Ended December 31,
                                               ---------------------------------
                                                   1998        1997      1996
                                               -----------   ---------  --------
                                                 (dollars in thousands, except
                                                          share data)
   Income Statement Data:
   Total interest income........................ $ 30,467     $26,543   $20,962
   Total interest expense.......................   16,749      13,915    11,108
                                                 ---------   ---------  --------
   Net interest income..........................   13,718      12,628     9,854
   Provision for credit losses..................    1,290       2,619       739
   Noninterest income...........................    5,050       4,124     3,730
   Noninterest expense..........................   13,918      11,663    10,506
   Provision for income taxes...................    1,293       1,044     1,169
                                                 ---------   ---------  --------
   Net income................................... $  2,267     $ 1,426   $ 1,170
                                                 =========   =========  ========
   Balance Sheet Data: (at end of period)
   Total assets................................. $396,332    $361,003  $289,479
   Investments and federal funds sold...........   96,601      94,624    66,391
   Loans........................................  270,876     235,200   202,997
   Allowance for credit losses..................    3,093       3,069     1,594
   Total deposits...............................  284,499     262,824   239,770
   Short-term borrowings........................   49,290      46,503    11,437
   Long-term borrowings.........................   30,646      21,812    10,615
   Stockholders' equity.........................   25,255      23,148    21,595
   Book value per common share outstanding...... $10.57 (1)  $ 9.64 (2)$ 8.99(2)
   Earnings Performance Data:
   Return on average total assets...............     .61%        .45%      .45%
   Return on average stockholders' equity.......    9.30%       6.39%     5.47%
   Net interest margin..........................    3.98%       4.31%     4.09%
   Net interest spread..........................    3.51%       3.85%     3.63%
   Basic earnings per common share..............    $0.95       $0.59     $0.49
   Diluted earnings per common share............    $0.91       $0.59     $0.49
   Balance Sheet and Other Key Ratios:
   Nonperforming assets to total assets.........    1.14%        .41%      .15%
   Nonperforming loans to total loans...........     .88%        .64%      .14%
   Net loan charge-offs to average loans........   (.50)%      (.51)%    (.11)%
   Allowance for credit losses to total loans...    1.14%       1.30%      .78%
   Allowance for credit losses to nonperforming      
      loans.....................................     129%        205%      555%
   Average stockholders' equity to average         
      total assets..............................    6.58%       7.06%     8.20%
--------------------

(1) Based on total common shares outstanding of 2,390,184.

(2) Based on total common shares outstanding of 2,402,126.

Overview

Net income for 1998 was $2.3 million, or basic and diluted earnings per share of
$0.95 and $0.91, respectively,  compared with $1.4 million, or basic and diluted
earnings  per share of $0.59,  in 1997 and $1.2  million,  or basic and  diluted
earnings per share of $0.49,  in 1996.  The Company's  performance  for 1998 and
1997 was impacted by special  credit loss  provisions of $631,000  booked during
the third quarter of 1998 and $1.9 million  booked during the second  quarter of
1997.  $454,000 of the special  provision  booked in 1998 and all of the special
$1.9 million provision booked in 1997 related to lending  activities of a former
loan officer at BNC-North Dakota.  Additionally,  the Company incurred legal and

<PAGE>

other expenses  relating to proceedings  against the loan officer and resolution
of loans  originated by the officer  totaling  $124,000 and $139,000 in 1998 and
1997, respectively.

The Company's  unaudited proforma net income,  earnings per share and returns on
average  assets and  average  equity for the years ended  December  31, 1998 and
1997,  without the special credit loss provisions and other expenses  related to
the former loan officer would have been approximately (in thousands,  except per
share data):

                                   1998                          1997
                        ----------------------------  --------------------------
                        As Reported     Pro Forma     As Reported     Pro Forma
                        -------------  -------------  -------------  -----------

Net income...............    $ 2,267        $ 2,638      $ 1,426        $ 2,745
Basic earnings per share.    $  0.95        $  1.10      $  0.59        $  1.14
Diluted earnings per share   $  0.91        $  1.05      $  0.59        $  1.14
Return on average assets.       0.61%          0.71%        0.45%          0.87%
Return on average equity.       9.30%         10.28%        6.39%         11.94%

In addition to the special credit loss  provision and other  expenses  discussed
above, the Company's 1998 results reflected the following highlights:

      Net  interest  income  increased  9  percent  to  $13.7  million  due to a
      combination of factors discussed below.

      Noninterest  income  increased 22 percent to $5.1 million due to increases
      in loan fees and revenues  from trust,  brokerage  and other  professional
      services.

      Noninterest  expenses increased 19 percent to $13.9 million.  The increase
      was primarily attributable to the Company's growth initiatives.

Results of Operations

Net Interest Income.  Net interest income, the difference between total interest
income   earned  on  earning   assets  and  total   interest   expense  paid  on
interest-bearing liabilities, is the Company's principal 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 BNC's  average  balance  sheets and  reflects  the yield on average
assets and costs of average  liabilities.  Such  yields and costs are derived by
dividing income and expense by the average balance of assets and liabilities. No
tax equivalent adjustments were made, and 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

                                                             For the Years ended December 31,
                               -------------------------------------------------------------------------------
                                           1998                  1997                  1996
                               ------------------------- -------------------------- --------------------------
                                       Interest  Average          Interest  Average          Interest  Average
                               Average earned    yield    Average earned    Yield   Average   earned    yield
                               Balance   or        or     balance   or        or    Balance     or        or
                                        paid      cost             paid     Cost               paid      cost
                               ------- -------- -------- -------- -------- -------- ------- ---------- --------
<S>                            <C>     <C>      <C>       <C>     <C>      <C>      <C>     <C>        <C>
                                                                 (dollars in thousands)
Assets
     Federal funds sold....... $ 5,336 $    289    5.42% $  5,650 $    306    5.42% $ 2,714 $      145    5.34%
     Taxable investments......  87,781    5,284    6.02%   64,862    4,163    6.42%  66,189      4,340    6.56%
     Tax-exempt investments...   1,775       95    5.35%    1,112       71    6.38%   1,448         94    6.49%
     Loans (1)................ 253,282   24,799    9.79%  223,486   22,003    9.85% 171,780     16,383    9.54%
     Allowance for credit      
        losses................  (3,134)      --      --    (2,298)      --      --   (1,265)        --      --
                               -------- --------          -------- --------         -------- ----------
          Total interest-
          earning assets (2).. 345,040   30,467    8.83%  292,812   26,543    9.06% 240,866     20,962    8.70%
  Noninterest-earning assets:
           Cash and due from    
              banks...........   6,911                      6,208                     5,436
           Other..............  18,383                     17,040                    14,319
                               --------                   --------                  --------
                Total assets..$370,334                   $316,060                  $260,621
                               ========                   ========                  ========
Liabilities and Stockholders'
   Equity
  Deposits:
          NOW and money market 
             accounts.........$ 63,115  $ 2,128    3.37% $ 50,582 $  1,580    3.12% $38,920  $   1,004    2.58%
          Savings.............   8,717      197    2.26%    8,904      206    2.31%   8,498        196    2.31%
  Certificates of deposit:
          Under $100,000...... 130,759    7,332    5.61%  127,092    7,110    5.59% 124,682      7,055    5.66%
          $100,000 and over...  36,704    2,152    5.86%   41,581    2,386    5.74%  25,499      1,483    5.82%
                               -------- --------          -------- --------         --------    -------
     Total interest-bearing    
        deposits.............. 239,295   11,809    4.93%  228,159   11,282    4.94% 197,599      9,738    4.93%
  Short-term borrowings:
          Securities and loans
             sold under
             agreements to      
             repurchase and
             federal funds
             purchased........   6,745     348    5.16%    7,262      413     5.69%   7,340        409    5.57%
           FHLB notes payable.  42,831   2,346    5.48%   15,468      881     5.70%   7,192        406    5.65%
     Long-term borrowings.....  25,741   2,246    8.73%   16,062    1,339     8.34%   7,027        555    7.90%
                               -------  -------           -------  -------           -------    -------
               Total           
               interest-bearing 
               liabilities.... 314,612  16,749    5.32%  266,951   13,915     5.21% 219,158     11,108    5.07%
Noninterest-bearing demand     
   accounts...................  24,827                    20,357                     15,147
                               --------                  --------                   --------
      Total deposits and
      interest-bearing               
      liabilities............. 339,439                   287,308                    234,305
Other noninterest-bearing       
   liabilities................   6,518                     6,425                      4,939
                               --------                  --------                   --------
      Total liabilities....... 345,957                   293,733                    239,244
Stockholders' equity..........  24,377                    22,327                     21,377
                               --------                  --------                   --------
      Total liabilities and
         stockholders'                  
         equity.............. $370,334                 $316,060                    $260,621
                              ========                 ========                    ========
Net interest income...........         $13,718                   $12,628                       $9,854
                                       =======                   =======                       =======
Net interest spread...........                   3.51%                        3.85%                       3.63%
                                                ======                        ======                     ======
Net interest margin...........                   3.98%                        4.31%                       4.09%
                                                ======                        ======                     ======
  Ratio of average
     interest-earning assets        
     to average interest-
     bearing liabilities......109.67%                   109.69%                     109.91%
                              =======                   =======                     =======
</TABLE>
--------------------

(1) Interest  income does not  include  loan  origination  fees other than those
    amortized  and  included as an  adjustment  to loan yield as required  under
    Statement  of  Financial   Accounting  Standards  No.  91,  "Accounting  for
    Nonrefundable  Fees and Costs Associated with Originating or Acquiring Loans
    and Initial Direct Costs of Leases."  Average  nonaccrual loans are included
    in average loans outstanding.

(2) Yields do not include  adjustments  for  tax-exempt  interest  because  such
    interest is not material.

The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest  expense for the major  components
of interest-earning  assets and  interest-bearing  liabilities and distinguishes

<PAGE>

between the increase related to higher  outstanding  balances and the volatility
of interest  rates.  Changes in net interest  income due to both volume and rate
have been included in the changes due to rate:



                         Analysis of Changes in Net Interest Income

                                           For the Years Ended December 31,
                                   ---------------------------------------------
                                    1998 Compared to 1997  1997 Compared to 1996
                                   ----------------------- ---------------------
                                   Change Due to           Change Due to
                                   ---------------        ---------------
                                   Volume   Rate   Total  Volume   Rate   Total
                                   ------- ------ ------ ------- ------- -------
                                                 (in thousands)
  Interest-Earning Assets
     Federal funds sold........... $ (17)  $  --  $ (17) $  157  $    4  $   161
     Investments..................  1,514   (369)  1,145  (109)    (91)    (200)
     Loans........................  2,934   (138)  2,796  4,931     689    5,620
                                   ------- ------ ------ ------- ------- -------
        Total increase (decrease)
            in interest income....  4,431   (507)  3,924  4,979     602    5,581
                                   ------- ------ ------ ------- ------- -------
  Interest-Bearing Liabilities
     NOW and money market accounts    392     156    548    301     275      576
     Savings......................    (4)     (5)    (9)      9       1       10
     Certificates of Deposit:
        Under $100,000............    205      16    221    136    (81)       55
        $100,000 and over.........  (280)      46  (234)    935    (32)      903
     Short-term borrowings:
        Securities and loans sold 
           under agreements to 
           repurchase and federal 
           funds purchased........   (29)    (35)   (64)    (4)       9        5
        FHLB notes payable........  1,558    (93)  1,465    467       7      474
     Long-term borrowings.........    807     100    907    714      70      784
                                  ------- ------- ------ ------- ------- -------
        Total increase in interest 
           expense................  2,649     185  2,834  2,558     249    2,807
                                  ------- ------- ------ ------- ------- -------
        Increase (decrease) in net 
        interest income...........$1,782  $ (692) $1,090 $2,421  $  353  $ 2,774
                                  ======= ======= ====== ======= ======= =======

Year ended  December 31, 1998  compared to year ended  December  31,  1997.  Net
interest  income  increased  $1.1 million,  or 8.6 percent,  to $13.7 million as
compared to $12.6 million.  Net interest spread and net interest margin declined
to 3.51 and 3.98  percent,  respectively.  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>


                                Net Interest Income Analysis

                                              For the Years
                                             Ended December         Change
                                                   31,
                                            ------------------  ----------------
                                              1998      1997
                                             -------  ---------
                                           (amounts in millions)
Total interest income increased.............$   30.5  $   26.5  $   4.0      15%
  Due to:
    Increase in average earning assets......$  345.0  $  292.8  $  52.2      18%
  Driven by:
    Increase in average loans (a)...........$  253.3  $  223.5  $  29.8      13%
    Increase in average taxable              
       investments (b)......................$   87.8  $   64.9  $  22.9      35%
  The increases in average earning assets
    volume were offset by:
    Decreased yield on earning assets.......   8.83%     9.06%   -0.23%      -3%
  Driven by:
    Decreased yield on loans (c)............   9.79%     9.85%   -0.06%      -1%
    Decreased yield on taxable                
       investments (d)......................   6.02%     6.42%   -0.40%      -6%
    Mix change in earning asset portfolio --
      Average loans as a percent of total
         interest- earning assets (e).......     73%       76%    -3.0%      -4%
Total interest expense increased............$   16.7   $  13.9  $   2.8      20%
  Due to:
    Increase in average interest-bearing     
       liabilities..........................$  314.6   $ 267.0  $  47.6      18%
    Increased cost on interest-bearing        
       liabilities..........................   5.32%     5.21%    0.11%       2%
  Driven by:
    Increase in average interest-bearing    
       deposits (f).........................$  239.3   $ 228.2  $  11.1       5%
    Increase in average borrowings (g)......$   75.3   $  38.8  $  36.5      94%
    Mix change in interest-bearing liability
    portfolio --
      Average borrowings as a percent of
         total interest-bearing liabilities 
         (h)................................     24%       15%       9%      60%
These increases with somewhat offset by:
    Decrease in cost of borrowings (i)......   6.56%     6.79%   -0.23%      -3%

--------------------

(a) Loan growth  primarily  attributable  to  increases in loans  originated  at
    BNC-Minnesota and BNC Financial.

(b) Increase in average  taxable  investments is primarily  attributable  to the
 purchase of $18.8 million of fixed rate mortgage-backed securities late in 1997
 as part of an interest rate risk management strategy.

(c) 75 basis point decline in prime rate late in 1998.  Decrease in loan pricing
spread to prime rate due to competitive pressures in all markets.

(d) Primarily  attributable  to the  significant  decrease in the Treasury yield
curve that occurred during the second half of 1998 and the  reinvestment of cash
flows from maturing mortgage-backed securities and other investments at current,
lower rates.

(e) Average loans increased by 13 percent.  However, average taxable investments
increased by $22.9 million,  or 35 percent.  Late in 1997, the Company purchased
$18.8 million of fixed rate  mortgage-backed  securities  funded with an advance
from the  Federal  Home  Loan Bank  ("FHLB")  as part of an  interest  rate risk
management  strategy.   Overall,  the  larger  percentage  increase  of  taxable
investments  was  greater  than the  percentage  increase  in loans.  Therefore,
average loans as a percent of total interest-earning assets decreased.

(f) Deposit growth from both BNC-North Dakota and BNC-Minnesota, primarily money
market deposit accounts.

<PAGE>

(g) The Company  relied more heavily on  borrowings  to fund  growth,  including
increased FHLB  borrowings.  The borrowing  rates charged by the FHLB were often
cost effective compared to offering top of market rates for time certificates of
deposit.  Increase  also  reflects  issuance  of  the  Company's  8 5/8  percent
subordinated notes (the "Subordinated  Notes") in May 1997 (outstanding 7 months
during  1997  versus  12 months  during  1998).  See Note 8 to the  Consolidated
Financial  Statements  included  under  Item 7 for a summary  of all  borrowings
outstanding at December 31, 1998.

(h)  Increased  reliance  on  borrowings  caused  a  higher  percentage  of  the
interest-bearing  liabilities  portfolio  to be  comprised  of  borrowings  with
generally higher costs than  interest-bearing  deposits.  However, the borrowing
rates charged by the FHLB were often cost effective  compared to offering top of
market rates for time  certificates of deposits,  although these borrowing rates
are higher than costs of interest-bearing checking and money market accounts.

(i) Lower overall  average cost on federal funds  purchased and FHLB  borrowings
due to 75 basis  point  decline in federal  funds rate late in 1998 along with a
similar  decrease  in  rates at the  FHLB.  

Although costs on interest-bearing  liabilities increased, the Company's cost of
total deposits, with  noninterest-bearing  deposits included,  decreased 7 basis
points to 4.47  percent due to an  increase in the ratio of  noninterest-bearing
deposits to total deposits to 9.40 percent from 8.19 percent.  See  "--Financial
Condition--Deposits."

As  indicated  above,  the  Company's  net  interest  margin  for the year ended
December 31, 1998 was negatively impacted by a number of factors.  These factors
included,  but were not limited to, competitive pricing pressures,  the decrease
in the  Treasury  yield  curve  during the second  half of 1998 and the 75 basis
point decrease in prime rate that occurred  primarily  during the fourth quarter
of 1998. While the prime rate reductions are generally reflected  immediately in
the yield on  adjustable  rate  loans  tied to prime,  the full  extent of these
reductions often cannot be offset immediately with comparable  reductions on the
liability  side  of  the  Company's   balance  sheet   primarily   because  most
certificates of deposit, the largest component of the Company's interest-bearing
liability portfolio, are fixed rate accounts. These accounts must be repriced as
they mature and / or as new volume is  generated.  Additionally,  the ability to
decrease rates offered on interest-bearing checking and money market accounts is
limited as the rates paid on these  liabilities  may  already be at low  levels.
Therefore, absent further FRB actions with respect to interest rates, management
anticipates  that net interest  margins for the first half of 1999 will continue
to reflect  the  negative  impact of the  recent  prime  rate  decreases  on the
Company's yield on earning assets.

Management  implemented a deposit restructuring strategy during 1998. Under this
program,  the  Company has been  successful  in  reducing  its  overall  cost of
deposits.  This program,  coupled with additional  deposit-related  initiatives,
will continue into 1999. Although it is difficult to predict, with any degree of
certainty,  prospects  for net  interest  income in future  periods,  management
anticipates  that continued  successful  implementation  of its  deposit-related
strategies  should  result in further  reductions in total cost of deposits over
the course of 1999 and improved net interest margins in the second half of 1999.
Factors beyond the control of management,  however,  including,  but not limited
to, continued  intense  competition for bank customers and the monetary policies
of the FRB, will continue to impact,  and could materially  affect the Company's
net interest margin and net interest income in coming months.  See  "Supervision
and  Regulation  -Monetary  Policy"  included  under  Item I of  Part  I.  See "
-Financial  Condition  -  Liquidity,  Market  and Credit  Risk" for  information
relating to the impact of fluctuating interest rates on the Company net interest
income.  BNC will  continue  to focus on  expansion  of its  product and service
offerings in order to  supplement  earnings  from core banking  activities.  See
"--Noninterest Income."

Year ended  December 31, 1997  compared to year ended  December  31,  1996.  Net
interest  income  increased  $2.7  million,  or 27 percent,  to $12.6 million as
compared to $9.9 million.  Net interest  spread and net interest margin improved
22 basis points to 3.85 and 4.31 percent,  respectively. The following condensed
information summarizes the major factors combining to create this improvement in
net interest  income,  spread and margin.  Lettered  explanations  following the
summary describe causes of the changes in these major factors:


<PAGE>



                                Net Interest Income Analysis

                                             For the Years
                                           Ended December 31,         Change
                                           ------------------  -----------------
                                             1997      1996
                                           --------  --------
                                           (amounts in millions)
Total interest income increased............$   26.5  $   21.0  $    5.5      26%
  Due to:
    Increase in average earning assets.....$  292.8  $  240.9  $   51.9      22%
    Improved yield on earning assets.......   9.06%     8.70%     0.36%       4%
  Driven by:
    Increase in average loans (a)..........$  223.5  $  171.8  $   51.7      30%
    Improved yield on loans (b)............   9.85%     9.54%     0.31%       3%
    Mix change in earning asset portfolio--
      Average loans as a percent of total
         interest-earning assets (c).......     76%       71%        5%       7%
Total interest expense increased...........$   13.9  $   11.1  $    2.8      25%
  Due to:
    Increase in average interest-bearing
       liabilities.........................$  267.0  $  219.2  $   47.8     22%
    Increased cost of interest-bearing      
       liabilities.........................   5.21%     5.07%     0.14%       3%
  Driven by:
    Increase in average interest-bearing
       deposits (d)........................$  228.2  $  197.6  $   30.6      15%
    Increase in cost of interest-bearing    
       deposits (e)........................   4.94%     4.93%      0.02%      0%
    Increase in average borrowings (f).....$   38.8  $   21.6   $   17.2     80%
    Increase in cost of borrowings (g).....   6.79%     6.35%      0.44%      7%
    Mix change in interest-bearing liability
      portfolio --
      Average borrowings as a percent of
         total interest-bearing liabilities
         (h)...............................     15%       10%        5%      50%
--------------------

(a) Loan  growth  primarily  attributable  to  loans  made to  customers  in the
    Minnesota market area.

(b) 25 basis point increase in prime rate in early 1997 and increased  volume in
asset-based loans at BNC Financial.

(c) Loan growth caused a larger  percentage of the earning asset portfolio to be
comprised of loans which have higher yields than investments.

(d) Deposit growth from both  BNC--North  Dakota and  BNC--Minnesota,  primarily
    money market deposit accounts.

(e) Decreased  costs on time  certificates  of deposit  (caused by lower renewal
rates) were offset by  increased  costs on  interest-bearing  checking and money
market deposit accounts (caused by increased volume in higher  tier/higher rate,
primarily commercial, money market deposit accounts).

(f) The Company  relied more heavily on  borrowings  to fund  growth,  including
increased FHLB borrowings.  Increase also reflects  issuance of the Subordinated
Notes in May 1997. See Note 9 to the Consolidated  Financial Statements included
under Item 7.

(g) Higher overall  average costs on federal funds purchased and FHLB borrowings
coupled with higher costs on long-term  borrowings due to increase in prime rate
and the issuance of the Subordinated Notes.

(h)   Increased   reliance   on   borrowings   caused   higher   percentage   of
interest-bearing liabilities portfolio to be comprised of borrowings with higher
average costs than interest-bearing deposits.

Although costs on interest-bearing  liabilities increased, the Company's cost of
total deposits, with  noninterest-bearing  deposits included,  decreased 4 basis
points to 4.54  percent due to an  increase in the ratio of  noninterest-bearing
deposits to total deposits.
See "--Financial Condition--Deposits."

<PAGE>

Provision for Credit Losses. Management determines a provision for credit losses
which it  considers  sufficient  to maintain an  adequate  allowance  for credit
losses.  In  evaluating  the  adequacy  of  the  allowance  for  credit  losses,
consideration is given to historical charge-off  experience,  growth of the loan
portfolio,  changes in the composition of the loan portfolio,  general  economic
conditions,  information  regarding specific borrower status including financial
condition  and related loan  collateral  values and other  factors and estimates
which are  subject  to change  over  periods  of time.  Estimating  the risk and
potential  amount of loss on loans is subjective.  Ultimate losses may vary from
current estimated losses.  Management reviews its estimates periodically and, as
adjustments  become  necessary,  such adjustments are reported in income through
the provision for credit losses in the appropriate period.

The provision  for credit  losses for the year ended  December 31, 1998 was $1.3
million as compared to $2.6 million in 1997 and  $739,000 in 1996.  Special loan
loss  provisions of $631,000 and $1.9 million were booked by the Company  during
1998 and 1997,  respectively.  See  "-Overview"  for a  discussion  of the facts
surrounding the special  provisions and their impact on the Company's results of
operations for the years ended December 31, 1998 and 1997.  Management  believes
the allowance for credit losses is adequate to cover  anticipated  losses in the
loan   portfolio  at  December  31,  1998.  See   "--Financial   Condition--Loan
Portfolio--Allowance for Credit Losses."

Noninterest Income. The following table presents, for the periods indicated, the
major categories of the Company's  noninterest  income as well as the amount and
percent of change between each of the periods presented. Related information and
material changes are discussed in lettered explanations following the table:



<PAGE>
<TABLE>
<CAPTION>

                                     Noninterest Income

                                                            Increase (Decrease)
                                                    -------------------------------------
                         For the Years Ended          1998 - 1997          1997 -1996
                             December 31,
                      ---------------------------   ----------------    -----------------
                        1998      1997      1996       $        %           $        %
                      --------  --------  -------   ------   -------    --------  -------
<S>                   <C>       <C>       <C>       <C>      <C>        <C>       <C>
                            (in thousands)
Insurance Commissions $ 1,769   $  1,694  $ 1,606   $   75       4%     $     88       5%
Loan fees ...........   1,551      1,040    1,296      511      49% (a)     (256)    (20)%(a)
Service charges......     566        471      418       95      20%           53      13%
Rental income........      43         56       34      (13)    (23)%          22      65%
Net gain (loss) on                                                                          
sales of securities 
   (b)...............     130          8       19      122    1,525%         (11)    (58)%
Other noninterest          
   income............     991        855      357      136      16% (c)      498      139%(d)
                      --------  --------  -------   ------              --------
Total noninterest     
   income............ $ 5,050   $  4,124  $ 3,730      926       22%    $    394       11%
                      ========  ========  =======   ======              ========
</TABLE>
--------------------

     (a) The  increase  in loan fees for 1998 is largely  attributable  to loans
generated and sold during 1998 by BNC-Minnesota and BNC Financial.  The decrease
for  1997 is  largely  attributable  to a  significant  loan  fee  collected  by
BNC-North  Dakota upon  origination  of a large  commercial  loan  during  1996.
Management cannot predict with any degree of certainty the amount of loans which
will be  originated  and related  loan fees which will be  recognized  in future
periods.

     (b) For the year ended December 31, 1998, proceeds from sales of securities
available for sale were $58.9 million with  resultant  gross gains and losses of
$164,000  and  $34,000,  respectively.  In  1997,  the  proceeds  from  sales of
securities  available for sale were $27.2 million with resultant gross gains and
losses of $40,000 and $32,000, respectively. In 1996, the proceeds from sales of
securities  available for sale were $48.7 million with resultant gross gains and
losses of $32,000 and $13,000, respectively.

     (c) The increase in other noninterest  income in 1998 was attributable to a
combination of factors. The most significant were as follows:

     (i)  BNC-North Dakota's Financial Services division recorded  approximately
          $200,000  in  increased  revenue  from  trust,   brokerage  and  other
          professional services.

     (ii) $73,000 was  attributable  to increased  income from automated  teller
          machines ("ATMs").

     (iii) Other immaterial decreases in several line items in this category.

     (d) A number of factors  combined to cause this increase in 1997.  The most
significant were as follows:

     (i)  Approximately  $242,000  was  attributable  to  the  activities  of
          BNC--North   Dakota's   Financial  Services  division  which  recorded
          $370,000 from commission income on the sale of nondeposit investments,
          trust fee income,  tax  preparation  and other  activities  in 1997 as
          compared to $128,000 in  commission  income on the sale of  nondeposit
          investments in 1996.

    (ii)  $79,000 was attributable to increased income from ATMs. The Company
          was operating more ATMs during 1997 than in previous years.

    (iii) $72,000  represents  a  portion  of the  payments  received  from the
          Company's  fidelity  bond  carrier.  See  Note  16  to  the  
          Consolidated Financial Statements included under Item 7.

    (iv)  $49,000  was  attributable  to a gain on the  sale of  farmland  held 
          as other real estate owned.

        Items (iii) and (iv) could be considered to be nonrecurring in nature.

Noninterest  Expense.  The following table presents,  for the periods indicated,
the major categories of the Company's  noninterest expense as well as the amount
and percent of change between each of the periods presented. Related information
and material changes are discussed in lettered explanations below the table:

<PAGE>
<TABLE>
<CAPTION>
                                    Noninterest Expense
                                                               Increase (Decrease)
                                                      --------------------------------------
                             For the Years Ended         1998 - 1997           1997 - 1996
                                 December 31,
                          --------------------------- -------------------    ----------------
                           1998      1997      1996      $        %           $        %
                          --------  -------   ------- -------- --------     -------  -------
<S>                       <C>       <C>       <C>     <C>      <C>          <C>      <C>
                                (in thousands)
Salaries and employee       
   benefits............   $  7,770  $ 6,473   $ 5,448 $  1,297      20% (a) $ 1,025        19%(a)
Depreciation and                          
   amortization........      1,525    1,327     1,106      198      15% (b)     221        20%(b)
Occupancy..............      1,046      997       785       49       5%         212        27%(c)
Office supplies,                                                                                
   telephone and                            
   postage.............        769      661       582      108      16% (d)      79        14%(d)
Professional services..        785      564       401      221      39% (e)     163        41%(f)
Marketing and promotion        455      365       362       90      25%           3         1%
FDIC and other                   
   assessments.........        184      171       239       13       8%         (68)     (28)%     
Other..................      1,384    1,105     1,583      279      25% (g)    (478)     (30)%(g)
                          --------  -------   ------- --------               -------
Total noninterest expense $ 13,918  $11,663   $10,506 $  2,255      19%      $ 1,157      11%
                          ========  =======   ======= ========               =======
Efficiency ratio (h)...     74.16%   69.62%    77.34%    4.54%                (7.72%)
</TABLE>
--------------------

(a)  Increases  in salaries and  employee  benefits  expense over the three year
period are  attributable  primarily  to growth in the number of  employees.  The
Company's average full-time equivalent employees was 173 for 1998 as compared to
149 and 130 for  1997  and  1996,  respectively.  Additional  increases  in this
category are expected  for 1999 due to the  staffing of the  Company's  recently
opened  Fargo  branch  as well as  additional  staffing  in  BNC-North  Dakota's
insurance and  brokerage  divisions.  As of March 15, 1999,  the Company had 193
full-time equivalent employees.

(b) Depreciation and  amortization  expenses were as follows for the years ended
    December 31:

                                                   1998     1997      1996
                                                  -------  --------  --------
                                                        (in thousands)
       Depreciation and amortization on
       premises, leasehold improvements 
          and equipment .....................     $  901   $   718   $    542
       Amortization on deferred charges and             
       intangible assets.....................        624       609        564
                                                  -------  --------  --------
             Total...........................     $1,525   $ 1,327   $  1,106
                                                  =======  ========  ========

    Increases over the three year period for both  depreciation and amortization
    are  attributable  to growth and  acquisitions.  Total  premises,  leasehold
    improvements and equipment being depreciated/amortized were $12.4, $11.4 and
    $8.9  million as of December 31, 1998,  1997 and 1996,  respectively.  Total
    deferred charges and intangible  assets being amortized were $6.4, $6.3, and
    $6.2  million,  respectively,  as of  the  same  dates.  See  Note  2 to the
    Consolidated  Financial  Statements  included  under Item 7 for a summary of
    mergers and  acquisitions  consummated  during the three year  period  ended
    December 31, 1998.

<PAGE>

(c) The increase in occupancy expense for 1997 was also  growth-related.  During
1997,  the Company  operated 12 facilities for the full year (and one additional
for a  portion  of the  year)  as  compared  to ten for the full  year  (and two
additional  for a portion of the year) in 1996. As of March 1999, the Company is
operating 17 facilities.

(d) Increases in office supplies,  telephone and postage are  growth-related and
can be expected to increase in future  periods due to the recent  opening of the
Fargo  branch  and  expansion  in  Company  divisions  providing  nontraditional
financial services.

(e) The increase in expenses for  professional  services for 1998 were primarily
attributable to increases in payments to outside  professionals  and consultants
and were related to several different Company initiatives  including mergers and
acquisitions and recruiting.  Late in 1998, the Company also engaged an investor
relations consulting firm. The Company also experienced small increases in other
professional expenses such as legal and software support.

(f) The  increase  in expenses  related to  professional  services  for 1997 was
mainly  attributable  to increased  legal fees and  repossession  and collection
expenses incurred by BNC--North Dakota. Approximately $139,000 in legal fees and
repossession and collection  expenses incurred during 1997 were directly related
to  proceedings  against a former loan officer and  resolution of related loans.
(Legal  and  other  expenses   associated   with  the  former  officer   totaled
approximately $124,000 in 1998). See "-Overview" and Note 16 to the Consolidated
Financial  Statements  included  under Item 7 for a discussion  of the impact of
these  expenses  on the  Company  and the  current  status of legal  proceedings
involving the former  officer.  During 1997,  the Company also incurred  smaller
additional  increases in other items in this category including software support
fees and other consulting fees.

(g) This category of expenses  includes  directors fees,  blanket bond and other
insurance expense,  education and development  expense,  correspondent  charges,
travel, dues, conventions and other miscellaneous expenses. The increase in 1998
was  primarily  growth-related  and  involved  many  of the  categories  in this
classification,  however,  none of the increases in any individual item was of a
material nature. The decrease for 1997 is the result of the write-off,  in 1996,
of certain  covenants not to compete  deemed to be impaired  under  Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets  and for  Long-Lived  Assets to be  Disposed  of,"  which the
Company adopted during 1996 offset by growth-related  immaterial  increases in a
number of other expense categories in this classification.

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

Financial Condition

Investment Securities. BNC's 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 and the  composition  of the
entire balance  sheet,  the Company seeks a balance among  earnings,  credit and
liquidity  considerations,  with a goal of maximizing  the  longer-term  overall
profitability of the Company.

Investments are centrally managed in order to maximize  compliance (federal laws
and  regulations  place  certain  restrictions  on  the  amounts  and  types  of
investments BNC may hold) and effectiveness of overall investing activities. The
primary  goal  of  BNC's  investment  policy  is to  contribute  to the  overall
profitability  of the Company.  The  objective of the  investment  officer 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 a market
value and  potential  market  value of the  security in question  given  various
interest  rate  scenarios.  Investment  strategies  are  developed  in  light of
constant view of the company's overall  asset/liability  position. As is relates
to investment strategies,  the focus of the Asset/Liability management committee
is to determine  the impact of  interest-rate  changes on both future income and
market value of securities in the portfolio. See "--Liquidity, Market and Credit
Risk--Interest Rate Risk Management."

The following  table presents the  composition  of the  investment  portfolio by
major category as of the dates indicated:


<PAGE>

<TABLE>
<CAPTION>

                              Investment Portfolio Composition

                                                         December 31,
                             ---------------------------------------------------------------------
                                     1998                    1997                   1996
                             ---------------------   ---------------------  ----------------------
                                         Estimated              Estimated               Estimated
                             Amortized     fair      Amortized   fair        Amortized    fair
                               cost       market       cost      market        cost       market
                                          value                  value                    value
                             ---------  ----------  ---------   ---------   ---------  -----------
<S>                          <C>        <C>         <C>         <C>         <C>        <C>
                                                        (in thousands)
Available for Sale:
U.S. Treasury securities..   $  5,098   $   5,109   $  12,489   $  12,532   $  13,814   $   13,856
U.S. government agency
   mortgage-backed             
   securities..............    51,194      51,444      32,136      32,236       9,555        9,559
U.S. government agencies       
   securities..............    13,096      12,998      20,039      20,006       3,633        3,642
Collateralized mortgage        
   obligations.............    19,602      19,607      21,291      21,325      23,898       23,855 
State and municipal bonds..     3,355       3,420       1,166       1,289         759          800
Equity securities..........     4,024       4,023       7,236       7,236       7,773        7,779
                             ---------  ----------  ---------    ---------   ---------  -----------
Total investments..........  $ 96,369   $  96,601   $  94,357    $ 94,624    $ 59,432    $  59,491
                             =========  ==========  =========    =========   =========  ===========

</TABLE>

The following  table presents  maturities for all securities  available for sale
(other than equity  securities)  and yields for all  securities in the Company's
investment portfolio at December 31, 1998:

<TABLE>
<CAPTION>
                         Investment Portfolio -- Maturity and Yields

                                                       Maturing
                                             After 1 but       After 5 but
                           Within 1           within 5          within 10        After 10          
                             year               years             years            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>
  Available for Sale:(2)                     (dollars in thousands)
  U.S. Treasury       
     securities.......$5,098       5.88%     --        --       --        --      --       --   $5,098     5.88%
  U.S. government
     agency mortgage-
     backed      
     securities (3)...    --         --  $7,854     5.97%  $10,445      6.03% $32,895    6.14%  51,194     6.09%
  U.S. government
    agencies            
    securities........11,965      4.74%     250     5.74%      881      4.40%      --      --   13,096     4.74%
  Collateralized
    mortgage          
    obligations (3)...   146      5.96%   2,061     5.67%    3,850      6.04%  13,545    5.67%  19,602     5.75%
  State and municipal    
    bonds.............    20      7.20%     220     6.86%       --        --    3,115    4.86%   3,355     5.01%
                     ------- ---------- ------- ---------   ------- --------- ------- --------  ------- ---------
    Total book value        
      of investment 
      securities.....$17,229      5.09% $10,385     5.92%   $15,176     5.94% $49,555    5.93  $92,345     5.78%
                     ======= ========== ======= =========   ======= ========= ======= ========  ------  --------
  Unrealized holding
     gain on 
     securities
     available for sale..                                                                          232
  Equity securities...                                                                         $ 4,024     6.52%
                                                                                                ------  --------
  Total investment in
    securities                                                                 
    available for sale                                                                         $96,601     5.80%(4)
                                                                                                ======  =========
</TABLE>
--------------------

(1)Yields do not  include  adjustments  for  tax-exempt  interest  because  such
   interest is not  material;  yields also 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 are based on contractual maturities.

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

As of December 31, 1998,  BNC had $96.6 million of securities in the  investment
portfolio as compared to $94.6 and $59.5  million at December 31, 1997 and 1996,
respectively.  During  1998,  the  Company  increased  its  holdings  in  agency
mortgage-backed  securities  and  municipal  bonds  by $19.1  and $2.2  million,
respectively.   During  the  year,  the  Company  also  reduced  the  investment

<PAGE>

portfolio's  allocation  to  U.S.  Treasury  securities  and  government  agency
securities by $7.4 and $6.9 million, respectively. The shift between sectors was
the result of the significant decrease in the Treasury yield curve that occurred
during the second half of 1998. As yield spreads on  mortgage-backed  securities
and municipal  bonds  widened  relative to the  Treasury-curve,  cash flows from
maturing  Treasury and agency securities were reinvested in these two sectors to
maintain the yield on maturing cash flow.  The portfolio  increased in 1997 from
1996 as the Company increased its holdings of U.S.  government agency securities
by $16.4 million.  In addition,  late in 1997, as part of its interest rate risk
management  strategy,  the Company  also  purchased  $18.8  million of long-term
Government National Mortgage Association  securities.  See "--Liquidity,  Market
and Credit  Risk--Interest Rate Risk Management."  Investments accounted for 24,
26 and 21  percent  of total  assets as of  December  31,  1998,  1997 and 1996,
respectively.

At December 31, 1998,  BNC held no securities of any single  issuer,  other than
the U.S. Treasury and U.S.  government  agencies  securities,  that exceeded ten
percent  of  stockholders'  equity.  A  significant  portion  of  the  Company's
investment securities portfolio  (approximately 87 percent at December 31, 1998)
is  pledged  as  collateral  for  public  deposits  and  borrowings,   including
borrowings with the FHLB.

Loan  Portfolio.  The Company's  primary source of income is interest  earned on
loans.  The Company's  loan  portfolio has grown  significantly  during the past
three  years as a result of BNC's  strategy  of  increasing  the  amount of high
quality loans  outstanding to increase net interest income.  Net loans increased
$35.7 million, or 15 percent, to $267.8 million at December 31, 1998 as compared
to $232.1  million at December  31, 1997.  In 1997,  net loans  increased  $30.7
million,  or 15 percent,  as compared to December 31, 1996. The following  table
presents  the  composition  of the  Company's  loan  portfolio  as of the  dates
indicated:

<TABLE>
<CAPTION>
                                 Loan Portfolio Composition
                                                    December 31,
                     ----------------------------------------------------------------------------
                         1998           1997           1996           1995             1994
                     -------------- -------------- ------------- ---------------- ---------------
                     Amount    %    Amount    %     Amount   %     Amount     %     Amount    %
                     ------- ------ ------  ------- ------ ------ -------- ------- ------- -------
<S>                  <C>     <C>    <C>    <C>     <C>    <C>    <C>      <C>     <C>     <C>
                                               (dollars in thousands)
Commercial and                
   industrial (1)...$131,165  49.0  $111,429   47.0 $ 94,701 47.0 $ 41,639    34.8 $ 39,218   35.9
Real estate mortgage  77,254  28.8    56,875   24.5   47,451 23.6   36,606    30.6   32,805   30.0
Real estate          
construction........  20,831   7.8    18,215    7.8    8,806  4.4    5,884     4.9    3,992    3.6
Agricultural........  19,777   7.4    21,064    9.1   20,673 10.3   18,046    15.1   22,144   20.2
Consumer............  14,761   5.5    18,726    8.0   18,734  9.3    9,960     8.3    9,331    8.5
Lease financing.....   7,422   2.8     9,211    4.0   12,970  6.4    8,660     7.2    3,076    2.8
                     ------- ------ -------- ------- ------- ------ ------- ------  ------- -------
Total face amount            
   of loans......... 271,210 101.3   235,520  101.4  203,335 101.0 120,795   100.9  110,566  101.0
Unearned income.....   (334) (0.1)     (320)  (0.1)    (338) (0.2)   (112)   (0.1)     (95)  (0.1)
                     ------- ------ -------- ------- ------- ----- -------- ------  ------- -------
Loans............... 270,876 101.2   235,200  101.3  202,997 100.8 120,683   100.8  110,471  100.9
Less allowance for  
   credit losses.... (3,093) (1.2)   (3,069)  (1.3)  (1,594) (0.8) (1,048)   (0.8)  (1,021)  (0.9)
                     ------- ------ -------- ------- ------- ----- -------- ------- ------- -------
Net loans...........$267,783 100.0  $232,131  100.0 $201,403 100.0 $119,635  100.0 $109,450  100.0
                     ======= ====== ======== ======= ======= ===== ======== ======= ======= =======
</TABLE>
--------------------

(1)The  commercial  and  industrial  loan  category   includes  BNC  Financial's
   asset-based  loans  totaling  $23.3,  $15.1 and $5.6  million at December 31,
   1998, 1997 and 1996, respectively.

The following table presents, for the periods indicated,  the amount and percent
of change in each category of loans in the Company's  loan  portfolio.  Material
changes are discussed in lettered explanations below the table:


<PAGE>



                        Change in Loan Portfolio Composition
                                                Increase (Decrease)
                                ------------------------------------------------
                                    1998 - 1997                1997 - 1996
                                ---------------------     ----------------------
                                    $           %             $           %
                                -----------  --------     ----------   ---------
                                            (dollars in thousands)
  Commercial and industrial..   $    19,736      18% (a)  $   16,728     18% (a)
  Real estate--mortgage......        20,379      36% (b)       9,424     20% (b)
  Real estate--construction..         2,616      14%           9,409    107% (c)
  Agricultural...............        (1,287)     (6)%            391      2%
  Consumer...................        (3,965)    (21)%             (8)     0%
  Lease financing............        (1,789)    (19)%         (3,759)   (29)%
                                 -----------               ----------
  Total face amount of loans.        35,690      15%          32,185      16%
  Unearned income............           (14)     (4)%             18       5%
                                 -----------               ----------
  Loans......................        35,676      15%          32,203      16%
 Allowance for credit losses            (24)      1%          (1,475)    (93)%
                                 -----------               ----------
  Net Loans..................   $    35,652      15%      $   30,728      15%
                                ===========                ==========

--------------------

(a)  Commercial  and  industrial  -  Increases  are  primarily  attributable  to
commercial  loan volume  generated out of the Minnesota  market area during 1998
and 1997.

(b) Real estate--mortgage - Increases are primarily  attributable to loan volume
generated  out of the  Minnesota  market during 1998 and the North Dakota market
during 1997.

(c)  Real   estate--construction   -  Increase  is  attributable   primarily  to
construction loan volume generated out of the Minnesota market area during 1997.

While prospects for continued loan growth appear favorable,  particularly in the
Minnesota  market,  management  cannot  predict with any degree of certainty the
Company's future loan growth potential.

Credit Policy and Approval Procedures.  BNC follows a uniform credit policy that
sets forth  underwriting  and loan  administration  criteria.  The loan  policy,
including  lending  guidelines  for the various  types of credit  offered by the
Company,  is  established by the Board of Directors (the "Board") based upon the
recommendations of senior lending management,  the Chief Credit Officer and such
credit  committees as are established at either the bank or corporate level. The
loan  policy  is  reviewed  and  reaffirmed  by the  Board  at  least  annually.
Underwriting  criteria  are based  upon the risks  associated  with each type of
credit offered, the related borrowers and types of collateral.

The Company delegates 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 monthly basis for summary review. Any exceptions
to loan  policies  and  guidelines  are  subject  to  special  approval  by bank
executive lenders or the credit committees.

Loan  Participations.  Pursuant to BNC's lending policy, loans may not exceed 85
percent of bank legal lending  limits  (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  Banks  sell  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:


<PAGE>



                              Loan Participations Sold

                                              December 31,
                         -------------------------------------------------------
                           1998        1997       1996        1995       1994
                         ----------  ---------  ---------   ---------  ---------
                                                (in thousands)
   BNC--North Dakota......$ 32,300   $  55,500  $  54,100   $ 35,000   $  23,400
   BNC--Minnesota.........  24,400      10,300      3,200         --         --
                         ----------  ---------  ---------   ---------  ---------
     Total............... $ 56,700   $  65,800  $  57,300   $ 35,000   $  23,400
                         ==========  =========  =========   =========  =========

The Banks  generally  retain the right to service the loans as well as the right
to receive a portion of the interest  income on the loans.  The vast majority of
the loans sold by the Banks 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 Banks. See Note 1 to the Consolidated  Financial  Statements  included under
Item 7. Management cannot reliably predict BNC's ability to continue to generate
or sell loan participations or the terms of any such sales.

Concentrations   of   Credit.    The   Company's   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, 1998,
total  outstanding  loans  as  well as all  outstanding  loan  commitments  were
included.  As of December 31, 1998, the Company  identified one concentration of
loans  exceeding  ten percent of total loans and loan  commitments  outstanding.
This concentration was in the construction industry and represented 10.6 percent
of total loans and loan commitments  outstanding.  Loans and commitments in this
category were  extended to 95 customers  who are located in Minnesota,  Iowa and
North and South Dakota and who can be generally categorized as indicated below:

                                                                Percent of
                                                                  total
                                                 Number of     outstanding
                                                 Customers      loans and
                                                                   loan
                                                               commitments
                                                -------------  -------------
          General building contractors.......             29           3.7%
          Heavy construction, excluding          
             building........................             28           4.8%
          Special trade contractors..........             38           2.1%
                                                -------------  -------------
               Total.........................             95          10.6%
                                                =============  =============

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 Company  continually  monitors  industry and other credit  concentrations as
part of its  credit  risk  management  strategies.  In cases  where  significant
concentrations  exist without  sufficient  diversification  and other mitigating
factors,  BNC  generally  sells  loans  without  recourse  to outside  financial
institutions.

Agricultural Loans. Recent  developments  relating to the agricultural  industry
have caused concern with respect to how such developments might impact financial
institutions with concentrations of credit in the agricultural  industry.  BNC's
agricultural loan portfolio totals  approximately $19.8 million, or 7 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 the Company's
agricultural loans are extended to borrowers located in North Dakota. Within the
state,  agricultural loans are diversified over 20 counties with  concentrations
(10  percent  or more of the  total  agricultural  loan  portfolio)  in  Emmons,

<PAGE>

Burleigh,  Hettinger,  and Sargent counties. The Company has been monitoring its
agricultural loans closely. As of December 31, 1998, nonperforming  agricultural
loans totaled $336,000.

Loan  Maturities.  The following  table sets forth the  remaining  maturities of
loans in each major category of BNC's portfolio as of December 31, 1998.  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
                         ---------  --------  ---------  -------- --------  ---------
<S>                      <C>        <C>       <C>        <C>      <C>       <C> 
                                              (in thousands)
 Commercial and          
    industrial.......... $  59,885  $ 14,406  $ 49,737   $  2,382 $  4,755  $ 131,165
 Real estate mortgage...     8,603     9,437    17,997     21,376   19,841     77,254
 Real estate                           
    construction........    12,691        --     8,140         --       --     20,831
 Agricultural...........    10,736     2,069     2,775        707    3,490     19,777
 Consumer...............     7,494     5,686       872        624       85     14,761
 Lease financing........     2,481     4,788        --        153       --      7,422
                         ---------  --------  ---------  -------- --------  ---------
 Total face amount of    
    loans............... $101,890   $ 36,386  $  79,521  $ 25,242 $ 28,171  $ 271,210
                         =========  ========  =========  ======== ========  =========
</TABLE>
--------------------

(1)  Maturities  are based  upon  contractual  maturities.  Floating  rate loans
include loans that would  reprice  prior to maturity if base rates  change.  See
"--Liquidity, Market and Credit Risk--Interest Rate Risk Management" for further
discussion regarding repricing of loans and other assets.

Interest  Rate Floors.  From time to time the Company may use  off-balance-sheet
instruments,  principally  interest  rate floors,  to adjust the  interest  rate
sensitivity of on-balance-sheet items, including loans. During 1998, the Company
purchased an interest  rate floor to adjust the  interest  rate  sensitivity  of
$25.0 million of variable rate  commercial  loans indexed to the prime rate. The
terms of the contract were as follows:

               Trade Date...........    September 24, 1998
               Notional Amount......    $25.0 million
               Referenced Interest      
                  Rate..............    Prime Rate
               Strike Rate..........    8.50%
               Maturity Date........    September 29, 2003
               Determination Dates..    December, March, June and
                                        September 28th

See  -"Liquidity,  Market  and  Credit  Risk"  and  Note 1 to  the  Consolidated
Financial  Statements  included under Item 7 for further discussion  relating to
the interest rate floor and applicable accounting policies.

Nonperforming  Loans and Assets.  BNC's lending  personnel are  responsible  for
continuous monitoring of the quality of the loan portfolio. Officer compensation
depends,  to a substantial  extent, on maintaining loan quality and dealing with
credit issues in a timely and proactive manner.  Lenders are not compensated for
growth at the expense of credit  quality.  Loan  officers  are  responsible  for
ongoing and regular review of past due loans in their respective portfolios. The
loan  portfolio is also  monitored  regularly and examined by the Company's loan
review  personnel.  Loans  demonstrating  weaknesses  are downgraded in a timely
fashion and the Board  receives a listing of all such loans on a monthly  basis.
The Company  also has an annual  independent  credit  review  which tests credit
quality,  compliance  with loan  policy  and  documentation  for all loans  over
$100,000 and a sampling of smaller loans.

<PAGE>

The  following  table sets  forth,  as of the dates  indicated,  the  amounts of
nonperforming  loans and other assets, the allowance for loan losses and certain
related ratios:

<TABLE>
<CAPTION>
                                    Nonperforming Assets

                                                       December 31,
                                      -----------------------------------------------
                                       1998      1997      1996      1995     1994
                                      --------  -------   -------   -------  --------
<S>                                   <C>       <C>       <C>       <C>      <C> 
                                                 (dollars in thousands)
 Nonperforming loans:
    Loans 90 days or more delinquent
 and still accruing interest.........$    307   $ 1,016   $  129    $  290   $     39
    Nonaccrual loans (1) (2).........   2,042       376       22        71        248
    Restructured loans (1) (2).......      44       104      136       119        257
                                      --------  -------   -------   -------  --------
       Total nonperforming loans.....   2,393     1,496      287       480       544
    Real estate acquired by (or in
       lieu of)foreclosure...........   2,112        --      159        --       100
                                      --------  -------   -------   -------  --------
         Total nonperforming assets.. $ 4,505   $ 1,496   $  446    $  480   $   644
                                      ========  =======   =======   =======  ========
 Allowance for credit losses......... $ 3,093   $ 3,069   $1,594    $1,048   $ 1,021
                                      ========  =======   =======   =======  ========
 Ratio of total nonperforming loans      
    to total loans....................    88%      .64%     .14%      .40%      .49%
 Ratio of total nonperforming assets    
    to total assets...................  1.14%     .41%      .15%      .20%      .44%
</TABLE>
--------------------

(1)If the  Company's  nonaccrual  and  restructured  loans had been  current  in
   accordance with their original terms,  additional  interest income would have
   been recognized  into earnings in the amount of $49,000,  $30,000 and $12,000
   for the years ended December 31, 1998, 1997 and 1996, respectively.

(2)The interest income on nonaccrual and  restructured  loans actually  included
   in the Company's  net income was  $175,000,  $26,000 and $6,000 for the years
   ended December 31, 1998, 1997 and 1996, respectively.

The  increase  in  nonperforming   loans  at  December  31,  1997  is  primarily
attributable  to the lending  activities of a former officer.  See  "-Overview,"
"-Allowance  for  Credit  Losses,"  and  Note 16 to the  Consolidated  Financial
Statements  included under Item 7 for further discussion  relating to the former
officer.  The December 31, 1998  nonperforming  loans included a number of loans
which have since been either charged off or resolved.  Net  charge-offs for 1999
through  February 28, 1999 were $372,000.  As of February 28, 1999 the Company's
nonperforming  loans totaled $1.2 million,  or .46 percent of total loans. Total
nonperforming assets as of the same date totaled $3.4 million, or .83 percent of
total assets.

Loans 90 days or more delinquent and still accruing  interest include loans over
90 days past due which management  believes,  based on its 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. These loans are monitored closely
by BNC lending and management personnel.

Nonaccrual  loans  include  loans on which  the  accrual  of  interest  has been
discontinued.  Accrual of interest is  discontinued  when  management  believes,
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.

<PAGE>

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 its
original principal will occur.

Other real estate owned represents  properties  acquired through, or in lieu of,
loan  foreclosure.  Such  properties are included in other assets in the 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,
valuations  are  periodically  performed  by  management  and the real estate is
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.

Potential  Problem Loans. In accordance with accounting  standards,  the Company
identifies loans considered impaired and the valuation allowance attributable to
these  loans.  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 due in accordance with the terms
of the loan agreement and which are analyzed for a specific  reserve  allowance.
BNC generally  considers all loans risk-graded  substandard and doubtful as well
as nonaccrual and restructured loans as impaired. Impaired loans at December 31,
1998,  not including the past due,  nonaccrual and  restructured  loans reported
above,  totaled $6.9 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 the Company's
position as creditor is protected to the fullest extent possible.

Customer Year 2000 Issues. The Company has implemented a Year 2000 due diligence
program  relating  to its major  borrowers  and  depositors  which  incorporates
guidelines established by regulatory agencies (the "Program").  Major components
of the Program  include  assignment of  accountability  for the various  Program
initiatives,  establishment of critical Program completion dates, identification
of material borrowers and depositors  (hereinafter  collectively  referred to as
"customers"),   a  risk   assessment  of  all   identified   customers  and  the
establishment of risk controls.

A number of parameters were utilized to identify  customers  whose  relationship
with the Company  could be  considered of a material  nature.  These  parameters
included,  but were not limited to,  aggregate  customer  commitments  exceeding
defined tolerances,  the risk grade assigned to the customer's credit, customers
who  have a line or lines of  business  relating  to  computerized  or  software
products  or  data  processing  services,  customers  whose  operations  rely on
technology for successful business operation,  statistically significant samples
of  customers  that do not  meet  other  parameters  but  which  are  part of an
identified  industry  or  other  concentration,   customers  with  international
exposure (i.e., those with foreign operations or who are materially  impacted by
international payment systems) and aggregate average deposit balances.

After having  identified  customers,  the risk  assessment  phase of the Program
began.  This phase involves active assessment of customer Year 2000 preparedness
and includes various initiatives aimed at tracking customer progress through the
following five stages of Year 2000 compliance:  awareness, assessment, planning,
implementation/renovation and testing/rework/certification. A detailed scorecard
of  customer  status is used to track the  progress of all  material  customers.
Customers  are  being  contacted  on a  regular  basis so that the  Company  may
ascertain  their progress with respect to each stage.  This phase of the Program
will    continue    as    customer    progress    is   tracked    through    the
testing/rework/certification stage.

The Program's risk control phase, also currently in process, includes additional
initiatives  aimed at minimizing  risks  related to material  customer Year 2000
preparedness.  Elements of this phase  include,  but are not limited to,  credit
underwriting   guidelines  which  incorporate  Year  2000  considerations,   the
incorporation of customer Year 2000  representations and other Year 2000-related

<PAGE>

language and  covenants  into loan  agreements,  the  adjustment  of credit risk
grades and, if  appropriate,  the increase of the  Company's  reserve for credit
losses to reflect customer non-compliance with Year 2000-related recommendations
and the risks associated therewith.  The Company is using the customer Year 2000
status  scorecard  to  calculate  a  composite  risk  rating  for each  material
customer.  This risk rating is then used to establish whether additional amounts
should be set aside in the Company's allowance for credit losses.

The  Company  has  thus  far been  managing  the  Program  with  current  staff.
Therefore,  no additional  salary and benefit expenses have been incurred in the
process of implementing and administering  the Program.  Other expenses incurred
to date,  such as postage and materials,  have not been, and are not expected to
be, significant.

Assessment of customer  status with respect to Year 2000 issues,  while critical
to the  banking  industry,  is by nature  subjective  and  imprecise.  While the
Company  will  use  due  diligence  in  assessing  customer  status  and  taking
appropriate  actions based on the results of such  assessments,  there can be no
assurance  that each of its  customers  will be  adequately  prepared  and, as a
result,  the potential of an adverse impact on the Company cannot be eliminated.
See also "Year 2000 Issue" for further  information  on the Company's  Year 2000
program, state of readiness and contingency plans.

Allowance for Credit Losses. An allowance for credit losses has been established
to  provide  for those  loans  which may not be  repaid  in their  entirety.  It
represents  management's  recognition  of the risks of extending  credit and its
evaluation  of the  quality of the loan  portfolio.  Loan  losses are  primarily
created from the loan  portfolio,  but may also be generated from other sources,
such as commitments to extend credit,  guarantees and standby letters of credit.
The allowance  for credit  losses is increased by provisions  charged to expense
and   decreased   by   charge-offs,   net  of   recoveries.   See   "Results  of
Operations--Provision  for Credit  Losses."  Although a loan is  charged-off  by
management when deemed  uncollectible,  collection  efforts  continue and future
recoveries may occur.

The  allowance  is  maintained  at a level  considered  adequate  to provide for
anticipated  credit  losses  based on past  loss  experience,  general  economic
conditions,  information  about specific  borrower  situations  including  their
financial position,  collateral values and other factors and estimates which are
subject  to  change  over  time.  Customer  readiness  for the  Year  2000 is an
additional  consideration  in the  analysis  of the  adequacy  of the  Company's
allowance for credit  losses.  Estimating the risk of loss and amount of loss on
any loan is  subjective  and ultimate  losses may vary from  current  estimates.
These estimates are reviewed  periodically and, as adjustments become necessary,
they are  reported in income  through  the  provision  for credit  losses in the
periods in which they become  known.  The adequacy of the  allowance  for credit
losses is monitored by management and reported to the Company's Board.  Although
management  believes  that the allowance for credit losses is adequate to absorb
any losses on  existing  loans that may  become  uncollectible,  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 the Company's
allowance for credit  losses.  Such agencies may require BNC to make  additional
provisions  to the  allowance  based  upon  their  judgments  about  information
available to them at the time of their examination.

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:


<PAGE>
<TABLE>
<CAPTION>

                          Analysis of Allowance for Credit Losses
                                             For the Years ended December 31,
                                       ----------------------------------------------
                                        1998     1997      1996      1995      1994
                                       -------  --------  --------  --------  -------
<S>                                    <C>      <C>       <C>       <C>       <C>
                                                  (dollars in thousands)
Balance of allowance for credit        
   losses at beginning of period ..... $ 3,069  $  1,594  $  1,048  $  1,021  $   713
                                       -------  --------  --------  --------  -------
Charge-offs:
   Commercial and industrial..........  1,316      1,319       104       114       22
   Real estate mortgage...............     66         24        --        --       --
   Real estate construction...........     --         --        --        --       --
   Agricultural.......................     --         --        22       130       --
   Consumer...........................     73        107         6         4        1
   Lease financing....................     --        471       218        --       --
                                       -------  --------  --------  --------  -------
      Total charge-offs...............  1,455      1,921       350       248       23
                                       -------  --------  --------  --------  -------
Recoveries:
   Commercial and industrial..........    151        744         5       116      147
   Real estate mortgage...............     26          9         6         3       --
   Real estate construction...........     --         --        --        --       --
   Agricultural.......................     --         --       146        84       --
   Consumer...........................     12         24        --         4        5
   Lease financing....................     --         --        --        --       --
                                       -------  --------  --------  --------  -------
      Total recoveries................    189        777       157       207      152
                                       -------  --------  --------  --------  -------
Net (charge-offs) recoveries.......... (1,266)    (1,144)     (193)      (41)     129
Provision for credit losses charged     
   to operations......................  1,290      2,619       739       168      179
Allowance attributable to FMB.........     --        --        --       (100)(a)   --
                                       -------  --------  --------  --------  -------
Balance of allowance for credit       
   losses at end of period............ $3,093   $  3,069  $  1,594  $  1,048  $ 1,021
                                       =======  ========  ========  ========  =======
Ratio of net (charge-offs) recoveries  
   to average loans...................  (.50%)    (.51%)    (.11%)    (.03%)     .13%
                                       =======  ========  ========  ========  =======
Average gross loans outstanding        
   during the period..................$253,282  $223,486  $171,780  $117,773  $98,749
                                       =======  ========  ========  ========  =======
Ratio of allowance for credit losses   
   to total loans.....................   1.14%     1.30%      .78%      .87%     .92%
                                       =======  ========  ========  ========  =======
Ratio of allowance for credit losses   
   to nonperforming loans............. 129.00%  205.00%   555.00%   218.00%   188.00%
                                       =======  ========  ========  ========  =======
</TABLE>
--------------------

(a)In connection  with the sale of Farmers & Merchants  Bank of Beach ("FMB") in
   October 1995, $100,000 of the Company's allowance for credit losses, together
   with  approximately  $9.2 million of loans originated by FMB, was transferred
   to Community First Bankshares, Inc.

The increases in the  Company's  provision for credit  losses,  charge-offs  and
recoveries  for the  years  ended  December  31,  1998 and  1997  are  primarily
attributable  to the  activities of a former loan officer.  Included in the data
above  relating  exclusively  to the former  officer are special  provisions  of
$454,000  and $1.9  million,  charge-offs  of  approximately  $639,000  and $1.8
million and  recoveries  of  approximately  $153,000  and $690,000 for the years
ended  December  31,  1998 and  1997,  respectively.  The  recoveries  primarily
represent payments from the Company's fidelity bond carrier. See "-Overview" and
Note 16 to the  Consolidated  Financial  Statements  included  under  Item 7 for
further  discussion  of the impact of the  former  officer's  activities  on the
Company's  financial  performance  and the current  status of legal  proceedings
related to the officer.

Management regards the allowance for credit losses as a general reserve which is
available to absorb  losses from all loans.  However,  for purposes of complying
with  disclosure  requirements  of the Securities and Exchange  Commission,  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.


<PAGE>


<TABLE>
CAPTION>


                        Allocation of the Allowance for Loan Losses


                                                  December 31,
                  ---------------------------------------------------------------------------------------------
                          1998              1997               1996              1995               1994
                  ------------------ ------------------ ----------------- ------------------ ------------------
                          Loans in           Loans in           Loans in          Loans in           Loans in
                          category           category           category          category           category
                            as a               as a               as a              as a               as a
                         percentage         percentage         percentage        percentage         percentage
                  Amount  of total   Amount  of total   Amount  of total  Amount  of total   Amount  of total
                    of     gross       of     gross       of     gross      of     gross       of      gross
                allowance  loans   allowance  loans   allowance  loans  allowance  loans   allowance   loans
                --------- -------- --------- -------- --------- ------- --------- -------- --------- ---------
  <S>           <C>       <C>      <C>       <C>      <C>       <C>     <C>       <C>      <C>       <C>
                                             (dollars in thousands)
  Commercial and 
  industrial....$  1,388       49% $   1,078      47% $     721      47% $    355    31%   $     265       35%
  Real estate        
  mortgage.......    673       29%       444      24%       306      24%      213    30%         267       30%
  Real estate        
  construction...    129        8%       311       8%        57       4%       41     5%          24        4%
  Agricultural...    252        7%       139       9%       176      10%      318    15%         395       20%
  Consumer.......    217        5%       174       8%        97       9%       58     8%          52        8%
  Leasing........    133        2%       136       4%        63       6%       41     4%          --       --
  Unallocated....    301        0%       787       0%       174       0%       22     7%          18        3%
                --------- -------- --------- -------- ---------  ------- -------- -------- --------- ---------
  Total.........$  3,093      100%  $ 3, 069     100% $   1,594    100%  $  1,048   100%   $   1,021      100%
                ========= ======== ========= ======== =========  ======= ======== ======== ========= =========


</TABLE>

Deposits.  BNC's core  deposits  consist of  noninterest-  and  interest-bearing
demand  deposits,  savings  deposits,  certificates  of deposit under  $100,000,
certain  certificates  of deposit of $100,000 and over and public  funds.  These
deposits, along with other borrowed funds are used by the Company to support its
asset base. See "--Borrowed Funds."

The following table sets forth, for the periods  indicated,  the distribution of
BNC's 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

                                           For the Years Ended December 31,
                        --------------------------------------------------------------------------
                                 1998                      1997                      1996
                        ------------------------ ------------------------  -----------------------
                                Percent  Wgtd.           Percent   Wgtd.            Percent   Wgtd.
                        Average   of      avg.   Average   of      avg.    Average    of      avg.
                        balance deposits  rate   balance deposits  rate    balance  deposits  rate
                        ------- -------  ------- ------- -------- ------  --------  -------- ------
<S>                     <C>     <C>      <C>     <C>     <C>      <C>     <C>       <C>      <C> 
                                               (dollars in thousands)
 Interest-bearing           
 demand deposits.......$ 63,115  23.90%    3.37% $ 50,582  20.36%  3.12%  $ 38,920    18.29%  2.58%
 Savings deposits......   8,717   3.30%    2.26%    8,904   3.58%  2.31%     8,498     3.99%  2.31%
 Time deposits ("CDs"):
 CDs under $100,000.... 130,759  49.50%    5.61%  127,092  51.14%  5.59%   124,682    58.61%  5.66%
 CDs $100,000 and over.  36,704  13.90%    5.86%   41,581  16.73%  5.74%    25,499    11.99%  5.82%
                        ------- -------          -------- -------         --------   -------
 Total time deposits... 167,463  63.40%    5.66%  168,673  67.87%  5.63%   150,181    70.60%  5.69%
                        ------- -------          -------- -------         --------   -------
 Total                          
 interest-bearing       
 deposits.............. 239,295  90.60%    4.93%  228,159  91.81%  4.94%   197,599    92.88%  4.93%
 Noninterest-bearing
 demand deposits.......  24,827   9.40%       --   20,357   8.19%     --    15,147     7.12%     --
                        ------- -------          -------- -------         --------   -------
 Total deposits........ 264,122  100.0%    4.47% $248,516  100.0%  4.54%  $212,746    100.0%  4.58%
                        ======= =======          ======== =======         ========   =======
</TABLE>

In recent years, earning asset growth has outpaced 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 of
December 31, 1998, BNC held a total of $5.0 million of brokered  certificates of
deposit.  Under  current FDIC  regulations,  only "well  capitalized"  financial
institutions  may fund themselves with brokered  deposits without prior approval
of regulators.  BNC--North Dakota and BNC--Minnesota  were both well capitalized
at December  31,  1998.  See Note 11 to the  Consolidated  Financial  Statements
included  under Item 7. 

Time  deposits in  denominations  of  $100,000  and more
totaled  $39.2  million at  December  31,  1998 as  compared  to $36.3 and $39.7
million at December 31, 1997 and 1996,  respectively.  The following  table sets
forth the amount and  maturities  of time  deposits  of  $100,000  or more as of
December 31, 1998:

<PAGE>

                             Time Deposits of $100,000 and Over
                                       (in thousands)
                    Maturing in:
                    3 months or less................... $  19,148
                    Over 3 months through 6 months.....     9,209
                    Over 6 months through 12 months....     9,404
                    Over 12 months.....................     1,401
                                                        ----------
                       Total........................... $  39,162
                                                        ==========

Borrowed Funds. BNC uses short-term  borrowings to support its asset base. These
borrowings  include federal funds purchased and U.S.  Treasury tax and loan note
option  accounts,  securities  sold  under  agreements  to  repurchase  and FHLB
borrowings.  At December 31, 1998,  short-term borrowings were $49.3 million, or
13% of total liabilities,  as compared to $46.5 million,  or 14 percent of total
liabilities,  at  December  31,  1997 and $11.4  million,  or 4 percent of total
liabilities,  at December 31,  1996.  See Note 9 to the  Consolidated  Financial
Statements  included  under Item 7 for a listing of  borrowings  outstanding  at
December 31, 1998 and 1997, including interest rates and terms.

The following  table provides a summary of the Company's  short-term  borrowings
and related cost information as of, or for the periods ended, December 31:

                                   Short-Term Borrowings

                                                      1998      1997       1996
                                                    --------  --------  --------
                                                        (dollars in thousands)
  Short-term borrowings outstanding at period end...$ 49,290  $ 46,503  $ 11,437
  Weighted average interest rate at period end......   4.99%     5.77%     5.60%
  Maximum month-end balance during the period.......$ 58,416  $ 46,503  $ 23,416
  Average borrowings outstanding for the period.....$ 49,576  $ 22,730  $ 14,532
  Weighted average interest rate for the period.....   5.44%     5.69%     5.60%


As of December 31, 1998, the Company's  outstanding long-term debt totaled $30.6
million and included, for BNCCORP, a $3.0 million term loan and $11.5 million on
a $12.0  million  revolving  line of credit from  Firstar Bank  Milwaukee,  N.A.
("Firstar") and the Subordinated Notes ($15.0 million less unamortized  discount
of  $621,000).  BNC Financial  had $1.7 million  outstanding  on a $10.0 million
revolving  line of credit from  Firstar.  See Notes 1 and 9 to the  Consolidated
Financial  Statements  included  under  Item 7 for more  details  regarding  the
Company's  borrowings,  debt covenants and the use of interest rate contracts to
adjust the interest rate  sensitivity of long-term debt. See also  "--Liquidity,
Market and Credit Risk--Interest Rate Risk Management."

The Company's increased usage of long-term borrowings ($30.6 million at December
31, 1998 as compared to $21.8 and $10.6  million at December  31, 1997 and 1996,
respectively) is partly  attributable to the funding of asset-based loans at BNC
Financial. As of December 31, 1998, BNC Financial had outstanding loans of $23.3
million.

<PAGE>

Capital   Resources  and  Expenditures.   BNC's  management   actively  monitors
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 11 to the
Consolidated  Financial  Statements  included under Item 7 includes a summary of
the risk-based and leverage capital ratios of BNC and its subsidiary banks as of
December  31, 1998 and 1997.  As of each of those  dates,  BNCCORP and the Banks
exceeded  capital  adequacy  requirements  and the Banks were  considered  "well
capitalized" under prompt corrective action provisions.

There where no major capital expenditures for additional facilities during 1998.
During 1999 the Company  plans to  construct  an office  building in Fargo North
Dakota. See Note 16 to the Consolidated Financial Statements included under Item
7 for further information relating to the Fargo construction project.

Liquidity, Market and Credit Risk

The  Company's  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 the
Company's  earnings or value.  The Company's  principal  market risk is interest
rate risk. Credit risk is the possibility of loss from the failure of a customer
to perform according to the terms of a contract.  BNC is 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-based securities,  deposits and
   other debt obligations.

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

   Derivative   financial   instruments,   also   generally   characterized   as
   off-balance-sheet  items,  include such instruments as interest rate, foreign
   exchange,  commodity price and equity price  contracts,  including  forwards,
   swaps and options.

The  Company's  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 the Company's
credit risk management strategies.

Liquidity Risk Management.  Liquidity risk management  encompasses the Company's
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 7  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,  BNC utilizes  brokered  deposits,  sells
securities under agreements to repurchase and borrows  overnight  federal funds.
BNC--North  Dakota  is a  member  of  the  FHLB,  which  affords  the  Bank  the
opportunity  to borrow funds in terms  ranging  from  overnight to ten years and
beyond. Borrowings from the FHLB are collateralized by the Bank's mortgage loans

<PAGE>

and  various   securities   from  the  Company's   investment   portfolio.   See
"--Investment  Securities" and Note 9 to the Consolidated  Financial  Statements
included under Item 7. The Company has also obtained funding,  primarily for the
purpose  of  funding  asset-based  loans  at BNC  Financial,  through  long-term
borrowings and the issuance of its Subordinated  Notes.  See "--Borrowed  Funds"
and Note 9 to the Consolidated Financial Statements included under Item 7.

The  following  table sets forth,  for the periods  indicated,  a summary of the
Company's major sources and (uses) of funds. This summary information is derived
from the Consolidated Statements of Cash Flows included under Item 7:

                              Major Sources and Uses of Funds
                                              For the Years Ended December 31,
                                              ----------------------------------
                                                  1998       1997        1996
                                              ----------  ----------  ----------
                                                        (in thousands)
 Proceeds from sales and maturities of
    investment securities...................  $  89,926   $  39,335   $  57,553
 Net increase in deposits...................     21,675      23,054      28,722
 Net change in long-term borrowings.........      8,750      11,151       7,261
 Increase in short-term borrowings..........      2,787      35,066      10,437
 Purchases of  investment securities........    (91,981)    (74,121)    (22,575)
 Net increase in loans......................    (37,131)    (34,124)    (82,664)


BNC's  liquidity  is measured by its ability to raise cash when it needs it at a
reasonable  cost and with a minimum of loss.  Given the uncertain  nature of our
customer's demands as well as the Company's desire to take advantage of earnings
enhancement  opportunities,  the Company 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.  BNC's
management  measures its liquidity position on a monthly basis. Key factors that
determine  the  Company's  liquidity  are the  reliability  or  stability of its
deposit base, the  pledged/nonpledged  status of its  investments  and potential
loan demand.  BNC's 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 the  Company's  liquidity.  Management  has a
targeted  range and  manages  its  operations  such that  these  targets  can be
achieved.   Management   believes  that  its  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  plan
identifies actions to be taken in response to an adverse liquidity event.

The Company's asset/liability committee has been actively involved in initiating
a liquidity plan for the period  spanning the Year 2000 date change.  See "-Year
2000 Issues."

Interest  Rate Risk  Management.  Interest  rate risk  arises  from  changes  in
interest rates. Interest rate risk can result from: (1) Re-pricing risk - timing

<PAGE>

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.  The Company has risk  management
policies  to monitor  and limit  exposure  to  interest  rate risk.  To date the
Company has not conducted  trading  activities  as a means of managing  interest
rate risk. BNC's  asset/liability  management  process is utilized to manage the
Company's  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.

Interest rate risk exposure is actively  managed with the goal of minimizing the
impact of interest rate  volatility on current  earnings and on the market value
of 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  the Company's  interest rate risk position
within  policy  guidelines.  Using  off-balance-sheet  instruments,  principally
interest  rate  floors and caps,  the  interest  rate  sensitivity  of  specific
on-balance-sheet  transactions,  as well as pools of assets or  liabilities,  is
adjusted  to  maintain  the  desired  interest  rate risk  profile.  See "--Loan
Portfolio-Interest  Rate  Floors"  and  Note  1 to  the  Consolidated  Financial
Statements  included  under  Item 7 for a summary  of the  Company's  accounting
policies pertaining to such instruments.

The Company's  primary tool in measuring and managing  interest rate risk is net
interest  income  simulation.  This  exercise  includes  management  assumptions
regarding  the  level of  interest  rate or  balance  changes  on  indeterminate
maturity deposit products (savings, NOW, 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 and mortgage-backed  securities  portfolios
in each rate  environment  are captured using  industry  estimates of prepayment
speeds for various  coupon  segments of the  portfolio.  Finally,  the impact of
planned  growth and  anticipated  new business  activities  is factored into the
simulation model.

It is the  Company's  objective  to manage its  exposure to interest  rate risk,
bearing in mind that the  Company  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.

The Company monitors the results of net interest income  simulation on a monthly
basis at regularly scheduled Asset/Liability management committee meetings. Each
month net interest  income is simulated  for the  upcoming  12-month  horizon in
seven interest  scenarios.  The scenarios 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 increase from its
current  starting  point of 7.75  percent to 8.75 percent 12 months  later.  The
prime rate in this example will increase  1/12th of the overall  increase of 100
basis points each month.

The net interest income simulation  results for the 12-month horizon that covers
the calendar year of 1999 is shown below.  The growth  assumption  used for this
simulation  was based on the growth  projections  built into the Company's  1999
budget.  The impact of each  interest  rate  scenario on projected  net interest

<PAGE>

income is displayed  before and after the impact of the $25.0  million  notional
interest rate floor on the prime rate with an 8.50 percent strike.


<TABLE>
<CAPTION>
                               Net Interest Income Simulation
                                   (amounts in thousands)

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

<S>                             <C>     <C>     <C>     <C>       <C>     <C>     <C>
Projected 12-month net         
   interest income............  $14,022 $14,379 $14,720 $15,056   $15,370 $15,660 $16,069

Dollar change from rates                                                        
   unchanged scenario.........   (1,034)   (677)   (336)      -       314     604   1,013
Percentage change from rates
   unchanged scenario.........    -6.87%  -4.50%  -2.23%   0.00%    2.09%   4.01%   6.73%

Benefit/(cost) from $25MM                                                        
   floor (1)..................       380     242     104    (34)    (161)   (196)   (208)

Total net interest income                                    
   impact with floor..........    14,402  14,621  14,824  15,022   15,209  15,464  15,861
Dollar change from flat w/
   floor......................     (620)   (401)   (198)       -      187     442     839
Percentage change from           
   unchanged w/floor..........    -4.13%  -2.67%  -1.32%    0.00%   1.24%   2.94%   5.59%

Benefit from amortization of                             
   deferred gain on sale of 
   interest rate swaps (2)....        49      49      49       49      49     49       49

Total net interest income        
   impact w/floor & swap gain.   $14,451 $14,670 $14,873 $15,071  $15,258 $15,513 $15,910
Dollar change from flat                
   w/floor & swap.............   $ (620) $ (401) $ (198) $     -  $   187 $   442 $   839
Percentage change from flat      
   w/floor & swap.............    -4.12%  -2.66%  -1.32%    0.00%   1.24%   2.93%   5.57%

POLICY LIMITS.................   -15.00% -10.00%  -5.00%    0.00%   5.00%  10.00%  15.00%

</TABLE>

(1) In  September  1998,  the  Company  purchased  an interest  rate floor.  The
notional  amount of the floor is $25.0 million with a maturity date of September
29,  2003.  The floor's  reference  rate is the prime rate with a strike of 8.50
percent.  The Company paid a premium of $1,120,000  or (4.48% per million).  The
premium is being amortized on a straight-line  basis over the 5-year term of the
option.  See  "-Loan   Portfolio-Interest   Rate  Floors"  and  Note  1  to  the
Consolidated Financial Statements included under Item 7.

(2) The swaps were sold in October and November 1997. Gains recognized upon sale
of the swaps are being  amortized  as a reduction  of interest  expense over the
remaining lives of the original swap contracts.

The Company's rate sensitivity position is asset sensitive. This is evidenced by
the  projected  increase  of net  interest  income in the rising  interest  rate
scenarios,  and the decrease in net interest  income in falling rate  scenarios.
The  primary  reason  for this  interest  rate  risk  profile  is the  volume of
floating-rate  loans made by the company that are indexed to the prime rate.  In
addition, the ability to decrease the rates offered on interest-bearing checking
and money market accounts is limited as the rates paid on these  liabilities are
already at low levels.

The Company's  general policy is to limit the percentage change in projected net
interest  income to +/- 5%, 10%, and 15% from the rates  unchanged  scenario for
the +/-100bp, 200bp, and 300bp interest rate ramp scenarios,  respectively.  The
Company was within its policy  limits for each  projected  scenario in the table
above.

Static gap  analysis is another  tool which 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

<PAGE>

period is  typically  referred  to as the "rate  sensitivity  position"  or "gap
position."  The  following  table  sets  forth the  Company's  rate  sensitivity
position as of December 31, 1998.  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, 1998
                                         ----------------------------------------------
                                           0-3      4-12     1-5      Over
                                         months    months   years    5        Total
                                                                     Years
                                         --------  -------- -------  -------  ---------
<S>                                      <C>       <C>      <C>      <C>      <C> 
                                                  (dollars in thousands)
 Interest-earning assets:
    Cash equivalents....................$   2,809       --       --       --   $  2,809
    Investment securities (1)...........   17,100  $   146  $10,443  $68,912     96,601
    Fixed rate loans (2)................    7,368   10,617   36,386   25,243     79,614
    Floating rate loans (2).............  180,129    7,515    3,952       --    191,596
                                         --------  -------- -------  -------  ----------
       Total interest-earning assets....$ 207,406  $18,278  $50,781  $94,155   $370,620
                                         ========  ======== =======  =======  ==========
 Interest-bearing liabilities:
    NOW and money market accounts.......$  82,264       --       --       --     82,264
    Savings.............................    7,623       --       --       --      7,623
    Time deposits under $100,000........   33,418   76,403   15,917    1,237    126,975
    Time deposits $100,000 and over.....   19,148   18,613    1,188      213     39,162
    Borrowings..........................   65,510       47        0   14,379     79,936
                                         --------  -------- -------  -------  ----------
       Total interest-bearing            
          liabilities...................$ 207,963  $95,063  $17,105  $15,829   $335,960
                                         ========  ======== =======  =======  ==========
 Interest rate gap......................$   (557)  $(76,785)$33,676  $78,326   $ 34,660
                                         ========  ======== =======  =======  ==========
 Cumulative interest rate gap at        
    December 31, 1998...................$   (557)  $(77,342)$(43,666)$34,660
                                         ========  ======== ======== =======
 Cumulative interest rate gap to total   
    assets..............................  (0.14)%   (19.51)% (11.02)%  8.75%
</TABLE>
-----------------

(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
collateralized  mortgage  obligations 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.

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

The table does not  necessarily  indicate the future impact of general  interest
rate  movements on the  Company's 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
cannot  be used in  isolation  to  determine  the  level of  interest  rate risk
exposure in more complex banking institutions.

<PAGE>

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,  this analysis is based on the
Company's  assets  and  liabilities  as  of  December  31,  1998  (with  forward
adjustments for planned growth and anticipated business activities) and does not
contemplate  any actions the Company  might  undertake in response to changes in
market interest rates.

                                      Year 2000 Issue

Like other financial and business organizations,  the Company could be adversely
affected if its  information  technology  ("IT") and non-IT systems and those of
its  customers  and other  businesses  with which the Company  interacts  do not
properly process and calculate  date-related  information  beginning in the Year
2000.  Therefore,  the company is taking steps that it believes  are  reasonably
designed to address any problems with respect to the IT and non-IT  systems that
it uses and to obtain  satisfactory  assurances that comparable  steps are being
taken by material customers, vendors and other business partners.

IT and  non-IT  Systems.  The IT  systems  maintained  by  the  Company  consist
primarily of its core application  system, item processing system and local area
networks  ("LANs") in branches and operating units which are connected through a
wide area network  ("WAN").  Core application  processing is performed  in-house
using a core application  system provided by a third party vendor which has over
1,300 customers  nationally.  The item processing  system operates on a separate
platform  from  the  core  applications  and  communicates  to them  through  an
interface. The initial design, installation and maintenance of the LAN's and WAN
are  provided  by internal IT  personnel  who also manage the basic  support and
configurations for the systems.

Non-IT systems include embedded circuitry found in telephone equipment, security
and alarm systems,  copiers, fax machines,  heating and air conditioning systems
and other infrastructure systems that are used by the Company in connection with
the operation of its business.

Year 2000 Program / State of Readiness.  The Company has implemented a Year 2000
program which includes the following phases: awareness, assessment,  renovation,
testing / validation and  implementation  (the "Y2K  Program").  The Y2K Program
applies to all IT and non-IT  systems,  as well as any providers who service and
maintain these systems.

Awareness  Phase.  During the awareness  phase,  which has been  completed,  the
Company  defined the Year 2000 problem,  gained  executive level support for the
commitment  of  resources  necessary  to  perform  Year  2000  compliance  work,
established a Y2K Program team, and developed an overall  strategy  encompassing
all in-house IT and non-IT systems and equipment,  outsourced systems, customers
and vendors.

Assessment  Phase.  The assessment  phase has been  completed  (except for those
activities  considered  ongoing  in  nature,  such as  monitoring  the status of
customers and vendors with respect to their own Year 2000 programs). During this
phase the Company performed an assessment of the size and complexity of the Year
2000  issue,  developed  details of the  magnitude  of the effort  necessary  to
address Year 2000 issues, identified all hardware, software, networks, automated
teller machines,  other  processing  platforms and equipment as well as customer
and vendor  interdependencies  affected by the Year 2000 date change,  evaluated
the Year 2000 effect on other strategic  business  initiatives  (such as mergers
and acquisitions or planned hardware or software revisions), identified resource
needs and established a Year 2000 budget,  assigned  accountability for the life
of the Y2K Program,  established  deadlines for Y2K Program  phases,  identified
those systems  considered  "mission  critical"  (i.e.,  applications  or systems
considered  vital to the  successful  continuance  of any of the Company's  core
business activities), communicated with customers, vendors and correspondents to

<PAGE>

request  information  regarding  the  status  of their  Year 2000  programs  and
outlined a contingency  plan to be implemented in the event internal or external
systems are not ready for the Year 2000.

Renovation Phase. During the renovation phase, which is substantially  complete,
the  Company  made  necessary  hardware  or  software  upgrades,   replaced  any
non-compliant system components and obtained  certifications  regarding the Year
2000 readiness of vendor-provided  software or equipment employed by the Company
in its  business  operations.  The Company  established  a Year 2000 testing lab
which  mirrors the systems  and  software  used by the Company in its day to day
processing. In addition, the Company replaced a number of non-compliant personal
computers in its North Dakota rural branch offices. See "-Costs."

Testing /  Validation  and  Implementation.  The testing /  validation  phase is
currently  in process.  The  Company's  written  testing  strategy and plan were
completed prior to June 30, 1998.  Testing of mission critical systems commenced
prior to September 30, 1998. The Company  completed  testing of mission critical
systems by December 31, 1998.  By March 31, 1999,  testing of systems  where the
Company  relies on service  providers  for mission  critical  systems  should be
substantially  complete.  By June 30,  1999,  testing  of  non-mission  critical
systems  should be complete  with the  implementation  stage also  substantially
completed.  The  objective  of the testing is to minimize  business  risk due to
operational failures.  This phase is considered to be the most critical phase of
the Company's Y2K Program.

Costs.  The Company has managed the Y2K Program with available staff (other than
a few  isolated  instances  where  consultants  have been engaged for a specific
activity). Therefore, the Company has not incurred excessive salary and benefits
expenses related to the development and implementation of the Y2K Program.

The Company has invested  approximately  $45,000 in hardware  (primarily for the
Y2K lab and the non-compliant personal computers which were replaced). Other Y2K
Program  costs  incurred to date have not been of a material  nature  (less than
$30,000)  and have  included  costs for items such as  materials,  supplies  and
postage. Based on information currently available,  management feels its initial
projection of $200,000 to $400,000 remains a reasonable estimate for Y2K Program
expenses.  All costs  associated  with the Y2K Program are expected to be funded
through current operating profits.

Risks.  The major  risks  posed by the Year 2000  issue are the  failure of core
applications systems or utility or telecommunications  failures.  For example, a
failure of the Company's core application  system would impair access to Company
data or the ability to process certain business transactions. The Company's core
application  provider  revised  all of its  programs  in 1992 and, at that time,
changed from a two digit date format to a four digit date format. All subsequent
updates have included date information in the four digit format. All systems and
programs   are  being   tested  even  though  the  Company  may  have   received
certifications attesting to Year 2000 compliance. Utility and telecommunications
failures  would also  impact the  Company  (for  example,  a source of power and
telecommunications  connections  are crucial to running  core  applications  and
processing business transactions).

While the company has been in close  communication  with customers,  vendors and
other  intermediaries,  it has no control over the remediation  efforts of these
third parties with whom it has material  business  relationships and the failure
of certain of these  parties to  successfully  remediate  their Year 2000 issues
could have a material  adverse  affect on the Company.  The Company has received
initial  assurances  from certain of these third  parties that their  ability to
perform  their  obligations  to the  Company are not  expected to be  materially
adversely affected by the Year 2000 problem. The Company is also testing, to the
extent  possible,  systems,  software  and  interfaces  through  which  business
transactions with such third parties are effected.  The Company will continue to
request  updated  information  from these third parties in order to assess their
Year 2000  readiness.  If a material third party  business  partner is unable to

<PAGE>

provide  reassurance  to the  Company  that it is or will be ready  for the Year
2000, the Company intends to seek an alternative  business partner to the extent
practical.

Contingency Plan. The Company is in the process of completing a contingency plan
to handle its most  reasonably  likely worst case Y2K scenarios.  Phases of this
plan include organization and planning,  business impact analysis,  Y2K business
resumption  planning and testing.  The Year 2000 contingency plan is intended to
provide assurance that the Company's mission critical functions will continue if
one or more systems  fail. In  developing  the plan,  the Company is taking into
consideration  the  impact  of  external  systems,  including  those of  service
providers,  other  financial  institutions,  customers,  business  partners  and
infrastructure providers such as suppliers of power and telecommunications.

An important part of the Company'  contingency plan is the liquidity  management
plan.  The  asset/liability  committee  has taken an active roll in planning and
approving implementation of elements of this plan.

All  forecasts,  estimates  and  other  statements  relating  to the  Year  2000
readiness of the Company and its  customers  and business  partners are based on
information  and  assumptions   about  future  events.   Such  "forward  looking
statements"  are subject to various  known and unknown  risks and  uncertainties
that may cause actual events to differ from such statements. These uncertainties
include,  but are not limited to, the understanding of the Company that its core
application and other systems are or will be Year 2000 compliant, the ability to
identify,  repair or  replace  mission  critical  non-IT  equipment  in a timely
fashion,  the ability of certain  third parties to ensure their systems are Year
2000 compliant and the ability of the Company to test interfaces with certain of
these third parties,  the performance of  telecommunications,  data transmission
and utilities providers, the failure or impairment of certain third parties with
which the  Company  transacts  business,  systemic  occurrences  in the  banking
industry which could impact the Company's liquidity and undiscovered problems in
the  Company's  Year 2000 testing  plans and  processes.  While the Company will
exercise  due  diligence  in the  development  of its Year  2000  plans and take
appropriate  actions based on the best  available  information,  there can be no
assurance  that events and  circumstances  will  transpire as expected and, as a
result,  the  potential of a material  adverse  impact on the Company  cannot be
completely eliminated.

Forward Looking Statements

Statements included in Item 6, "Management's  Discussion and Analysis or Plan of
Operation,"  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  21E of the  Securities  Exchange  Act of 1934,  as
amended. The Company cautions readers that forward looking statements, including
without  limitation,  those relating to the Company's future business prospects,
revenues, working capital, liquidity,  capital needs, interest costs, income and
the anticipated  impact of the Year 2000 Issue, 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  associated  with the
Company's  acquisition  strategy;  risks of  loans  and  investments,  including
dependence on local economic conditions; competition for the Company's customers
from other providers of financial services;  possible adverse effects of changes
in interest rates; risks of unanticipated  consequences related to the impact of
the Year 2000 Issue on the Company or its customers and business  partners;  and
other  risks  which are  difficult  to predict  and many of which are beyond the
control of the Company.


<PAGE>


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. 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  generally  accepted
accounting  principles.  Fluctuations  in the  relative  value of  money  due to
inflation or recession are generally not considered.

Recent Accounting Pronouncements

Note 1 to the Consolidated  Financial  Statements included under Item 7 includes
discussions of recent accounting pronouncements applicable to the activities and
financial reporting of BNC.


Item 7. Financial Statements

                         INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:                                          Page

Report of Independent Public Accountants..................................   41

Consolidated Balance Sheets - December 31, 1998 and 1997..................   42

Consolidated Statements of Income - the years ended December 31, 1998, 
   1997 and 1996..........................................................   43

Consolidated Statements of Comprehensive Income - the years ended 
   December 31, 1998, 1997 and 1996.......................................   44

Consolidated Statements of Stockholders' Equity - the periods ended 
   December 31, 1998, 1997, 1996 and 1995.................................   45

Consolidated Statements of Cash Flows - the years ended December 31, 
   1998, 1997 and 1996....................................................   46

Notes to Consolidated Financial Statements................................   47


<PAGE>
                                             




                     REPORT OF INDEPENDENT PUBLIC ACCOUNTS


To BNCCORP, Inc.:

We have audited the accompanying consolidated balance sheets of BNCCORP, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the  three  years  in the  period  ended  December 31,  1998.  These
financial  statements  are  the  responsibility  of  BNCCORP's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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,  1998  and  1997,  and the  results  of  their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

                                                     ARTHUR ANDERSEN LLP


Minneapolis, Minnesota,
   January 22, 1999


<PAGE>


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


                          ASSETS                             1998        1997
                                                         -----------  ----------

CASH AND DUE FROM BANKS.................................... $  7,475    $13,184
INTEREST-BEARING DEPOSITS WITH BANKS.......................    2,809      2,231
INVESTMENT SECURITIES AVAILABLE FOR SALE...................   96,601     94,624
LOANS AND LEASES, net of unearned income...................  270,876    235,200
ALLOWANCE FOR CREDIT LOSSES................................   (3,093)    (3,069)
                                                          ----------- ----------
   Net loans and leases....................................  267,783    232,131
PREMISES, LEASEHOLD IMPROVEMENTS AND
   EQUIPMENT, net..........................................    8,827      8,617
INTEREST RECEIVABLE........................................    2,618      2,865
OTHER ASSETS...............................................    6,163      2,721
DEFERRED CHARGES AND INTANGIBLE ASSETS, net................    4,056      4,630
                                                          ----------- ----------
                                                            $396,332   $361,003
                                                          =========== ==========
           LIABILITIES AND STOCKHOLDERS' EQUITY


DEPOSITS:
   Noninterest-bearing..................................... $ 28,475   $ 25,795
   Interest-bearing --
      Savings, NOW and money market........................   89,887     75,630
      Time deposits $100,000 and over......................   39,162     36,334
      Other time deposits..................................  126,975    125,065
                                                          ----------- ----------
   Total deposits..........................................  284,499    262,824
NOTES PAYABLE..............................................   79,936     68,315
OTHER LIABILITIES..........................................    6,642      6,716
                                                          ----------- ----------
         Total liabilities.................................  371,077    337,855
                                                          ----------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 15 and 16)
STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value, 2,000,000 shares
      authorized; no shares issued or outstanding..........       --        --
   Common stock, $.01 par value, 10,000,000 shares
      authorized; 2,390,184 and 2,402,126 shares issued 
      and outstanding (excluding 42,880 and 25,380 
      shares held in treasury) in 1998 and 1997, 
      respectively.........................................       24         24
   Capital surplus.........................................   13,951     13,786
   Retained earnings.......................................   11,651      9,384
   Treasury stock (42,880 and 25,380 shares, respectively).    (513)      (216)
   Accumulated other comprehensive income,
      net of income tax effects............................      142        170
                                                          ----------- ----------
         Total stockholders' equity........................   25,255     23,148
                                                          ----------- ----------
                                                            $396,332   $361,003
                                                          =========== ==========

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

<PAGE>


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

                                                     1998      1997     1996
                                                   --------- -------- --------
INTEREST INCOME:
   Interest and fees on loans...................... $24,799   $22,003  $16,383
   Interest and dividends on investment securities--
      Taxable......................................   4,977     3,714    3,739
      Tax-exempt...................................      95        71       94
      Dividends....................................     304       446      576
   Other...........................................     292       309      170
                                                   ---------- -------- --------
         Total interest income.....................  30,467    26,543   20,962
INTEREST EXPENSE:
   Interest on deposits............................  11,809    11,282    9,738
   Interest on short-term borrowings...............   2,694     1,294      815
   Interest on long-term debt......................   2,246     1,339      555
                                                   ---------- -------- --------
         Total interest expense....................  16,749    13,915   11,108
                                                   ---------- -------- --------
         Net interest income.......................  13,718    12,628    9,854
PROVISION FOR CREDIT LOSSES........................   1,290     2,619      739
                                                   ---------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
   CREDIT LOSSES...................................  12,428    10,009    9,115
                                                   ---------- -------- --------
NONINTEREST INCOME:
   Insurance commissions...........................   1,769     1,694    1,606
   Fees on loans...................................   1,551     1,040    1,296
   Service charges.................................     566       471      418
   Net gain on sales of securities.................     130         8       19
   Rental income...................................      43        56       34
   Other...........................................     991       855      357
                                                   ---------- -------- --------
         Total noninterest income..................   5,050     4,124    3,730
                                                   ---------- -------- --------
NONINTEREST EXPENSE:
   Salaries and employee benefits..................   7,770     6,473    5,448
   Depreciation and amortization...................   1,525     1,327    1,106
   Occupancy.......................................   1,046       997      785
   Professional services...........................     785       564      401
   Office supplies, telephone and postage..........     769       661      582
   Marketing and promotion.........................     455       365      362
   FDIC and other assessments......................     184       171      239
   Other...........................................   1,384     1,105    1,583
                                                   ---------- -------- --------
         Total noninterest expense.................  13,918    11,663   10,506
                                                   ---------- -------- --------
INCOME BEFORE TAXES................................   3,560     2,470    2,339
INCOME TAXES.......................................   1,293     1,044    1,169
                                                   ---------- -------- --------
NET INCOME......................................... $ 2,267    $1,426   $1,170
                                                   ========== ======== ========
BASIC EARNINGS PER COMMON SHARE.................... $  0.95     $0.59    $0.49
                                                   ========== ======== ========
DILUTED EARNINGS PER COMMON SHARE.................. $  0.91     $0.59    $0.49
                                                   ========== ======== ========
  The accompanying notes are an integral part of these consolidated financial
                                  statements.


<PAGE>


                               BNCCORP, INC. AND SUBSIDIARIES
                Consolidated Statements of Comprehensive Income
                               For the Year Ended December 31
                                        (In thousands)


                                                 1998       1997       1996
                                              ---------  ---------- ----------

NET INCOME............................          $2,267     $1,426     $1,170
OTHER COMPREHENSIVE INCOME --
   Unrealized gains on securities:
      Unrealized holding gains (losses)
      arising during the period, net of
      income tax effects..............            (28)        127       (91)


      Less: reclassification adjustment
      for gains included in net income,
      net of income tax effects.......            (79)         (5)      (12)
                                             ----------  ----------- ---------
OTHER COMPREHENSIVE INCOME (LOSS).....           (107)         122     (103)
                                             ----------  ----------- ---------

COMPREHENSIVE INCOME..................          $2,160      $1,548    $1,067
                                             ==========  =========== =========



   The accompanying notes are an integral part of these consolidated financial
                                  statements.


<PAGE>
<TABLE>
<CAPTION>


                               BNCCORP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Stockholders' Equity
                             (In thousands, except share data)


                                                                              Accumulated
                                                                                 Other
                                 Common Stock     Capital  Retained Treasury  Comprehensive
                                Shares   Amount   Surplus  Earnings  Stock       Income      Total
                              -----------------  --------- -------- --------  ------------- --------  
<S>                           <C>       <C>      <C>       <C>      <C>       <C>           <C>
BALANCE, December 31, 1995, as
   Previously presented...... 2,364,100 $    23  $  13,776 $  7,170 $  (216)  $         134 $20,887

    Effects of  business
       combination accounted 
       for as a pooling of
       interests (Note 2)....    63,406       1         17     (382)     --              --    (364)
                             ---------- -------- --------- --------- -------- ------------- ---------
BALANCE, December 31, 1995,
       restated.............. 2,427,506      24     13,793    6,788    (216)            134  20,523
   Net income................        --      --         --    1,170      --              --   1,170
    Other comprehensive income- 
       Change in unrealized
       holding gain  on 
       securities available
       for sale, net of income
       tax effects..........         --       --        --        --     --             (91)    (91)
   Initial public offering 
     costs..................         --       --        (7)       --     --              --      (7)
                            ----------- --------- --------- -------- -------- -------------- --------
BALANCE, December 31, 1996..  2,427,506       24    13,786     7,958    (216)            43   21,595
   Net income...............         --       --        --     1,426      --             --    1,426
   Other comprehensive income-
      Change in unrealized
      holding gain on 
      securities available   
      for sale, net of 
      income tax effects....         --       --        --        --      --            127      127
                            ----------- --------- --------- -------- -------- -------------- --------
BALANCE, December 31, 1997..  2,427,506       24    13,786     9,384    (216)           170   23,148
   Net income...............         --       --        --     2,267      --             --    2,267
   Other comprehensive income-
     Change in unrealized
     holding gain on
     securities available 
     for sale, net of 
     income tax effects.....         --       --        --        --      --            (28)     (28)
Restricted stock forfeited/
  retired...................     (1,377)      --        --        --      --             --
Options exercised...........      1,935       --        19        --      --             --       19
Compensation expense -
   restricted stock.........      5,000       --       146        --      --             --      146
Purchase of treasury stock..         --       --        --        --    (297)            --     (297)
                            ----------- --------- --------- -------- -------- -------------- ---------
BALANCE, December 31, 1998..  2,433,064 $     24  $  13,951 $ 11,651 $  (513) $          142 $25,255
                            =========== ========= ========= ======== ======== ============== =========

</TABLE>
   The accompanying notes are an integral part of these consolidated financial
                                  statements.




<PAGE>


                                BNCCORP, INC. AND SUBSIDIARIES
                        Consolidated Statements of Cash Flows
                           For the Years Ended December 31
                                   (In thousands)

                                                         1998     1997    1996
                                                        ------   ------  ------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income...........................................$2,267   $1,426  $1,170
   Adjustments to reconcile net income to net cash 
     provided by operrating activities --
      Provision for credit losses....................... 1,290    2,619     739
      Depreciation and amortization.....................   901      718     542
      Amortization of intangible assets.................   606      599     564
      Net premium amortization (discount accretion) on           
      investment securities.............................   172     (131)   (110)
      Proceeds from loans recovered.....................   189      777     157
      Change in interest receivable and other assets, 
         net........................................... (3,047)  (1,998) (2,313)
      (Gain) loss on sale of bank premises and equipment.  117       (2)    (10)
      Net realized gains on sales of investment 
        securities.....................................   (130)      (8)    (19)
      Deferred income taxes............................   (190)    (367)   (182)
      Change in other liabilities, net.................    (74)     654   1,077
      Originations of loans to be sold.................(47,412) (58,305)(45,238)
      Proceeds from sale of loans...................... 47,412   58,305  45,238
                                                       -------- -------- -------
         Net cash provided by operating activities.....  2,101    4,287   1,615
                                                       -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of investment securities..................(91,981) (74,121)(22,575)
   Proceeds from sales of investment securities........ 58,855   27,198  48,700
   Proceeds from maturities of investment securities... 31,071   12,137   8,853
   Net increase in loans...............................(37,131) (34,124)(82,664)
   Additions to premises, leasehold improvements and         
      equipment........................................ (1,254)  (2,693) (1,462)
   Proceeds from sale of premises and equipment........     26       82      70
                                                       -------- -------- -------
         Net cash used in investing activities.........(40,414) (71,521)(49,078)
                                                       -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in demand, savings, NOW and money 
     market accounts................................... 16,937   26,724   7,095
   Net increase (decrease) in time deposits............  4,738   (3,670) 21,627
   Net increase in short-term borrowings...............  2,787   35,066  10,437
   Repayments of long-term borrowings..................(13,492) (23,293) (1,954)
   Proceeds from long-term borrowings.................. 22,242   34,444   9,215
   Amortization of discount on subordinated notes......     84       46      -- 
   Amortization of deferred charges....................     18       10      --
   Repurchase of stock.................................   (297)      --      --
   Other, net..........................................    165       --      (7)
                                                       -------- -------- -------
         Net cash provided by financing activities..... 33,182   69,327  46,413
                                                       -------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (5,131)   2,093  (1,050)
CASH AND CASH EQUIVALENTS, beginning of year........... 15,415   13,322  14,372
                                                       -------- -------- -------
CASH AND CASH EQUIVALENTS, end of year.................$10,284  $15,415 $13,322
                                                       ======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid.......................................$14,091  $13,689 $11,422
                                                       ======== ======= ========
   Income taxes paid...................................$ 1,648  $ 1,664 $   972
                                                       ======== ======= ========

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


<PAGE>


                           BNCCORP, INC. AND SUBSIDIARIES
                     Notes to Consolidated Financial Statements
                             December 31, 1998 and 1997


1.  Summary of Significant Accounting Policies

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. and BNC Asset
Management,   Inc.,   "BNC-North  Dakota"),   BNC  National  Bank  of  Minnesota
("BNC-Minnesota"  and,  together with BNC-North  Dakota,  "the Banks"),  and BNC
Financial Corporation ("BNC Financial"),  a commercial finance company.  Through
these wholly-owned subsidiaries, which operate from seventeen locations in North
Dakota and  Minnesota,  BNCCORP  provides a broad range of banking and financial
services  to small  and  mid-size  businesses  and  individuals.  An  additional
wholly-owned subsidiary, Bismarck Properties, Inc., is inactive.

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

Business Combinations. Business combinations which 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.  Other  business  combinations  have been  accounted  for under the
pooling-of-interests method of accounting which requires the assets, liabilities
and stockholders' equity of the merged entity to be retroactively  combined with
the Company's  respective  accounts at recorded  value.  Prior period  financial
statements have been restated to give effect to business combinations  accounted
for under this method.

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.

Cash and Cash  Equivalents.  For the purpose 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"   and
Ainterest-bearing deposits with banks" to be cash equivalents.

Investment  Securities.  Investment  and  mortgage-backed  securities  which the
Company  intends to hold for indefinite  periods of time,  including  securities
that  management  intends  to use as  part  of  its  asset/liability  management
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,
as well as securities on which call options have been written, are classified as
available for sale.  Available-for-sale  securities  are measured at fair value.
Net unrealized  gains and losses,  net of deferred  income taxes, on investments
and   mortgage-backed   securities   available  for  sale,   while  included  in
comprehensive  income (see "Comprehensive  Income"),  are excluded from earnings
and reported as a separate component of stockholders= equity until realized. All
securities  were  classified  as available  for sale as of December 31, 1998 and
1997.  Investment and  mortgage-backed  securities  which the Company intends to
hold until maturity are stated at cost,  adjusted for  amortization  of premiums
and  accretion  of  discounts  using a method  that  approximates  level  yield.
Declines in the fair value of individual  available-for-sale or held-to-maturity
securities  below  their  cost which are other than  temporary  could  result in
write-downs of the individual  securities to their fair value. Such write-downs,
should they occur, would be included in earnings as realized losses.  There were
no such write-downs during 1998, 1997 or 1996.

<PAGE>

Securities  purchased and sold for purposes of generating  profits on short-term
differences  in market  prices are  classified  as trading  securities.  Trading
securities  are stated at fair value and  adjustments to fair value are reported
in non-interest  income.  The Company held no securities for trading purposes as
of December 31, 1998 or 1997.

Realized  gains and losses on sales of investment  securities are computed using
the  specific  identification  method  at the time of sale and are  recorded  in
non-interest income.

Loans and Leases. Loans are stated at their outstanding  principal amount net of
unearned income and an allowance for credit losses.

Loans are generally  placed on a nonaccrual  status for  recognition of interest
income when, in the opinion of management, uncertainty exists as to the ultimate
collection of principal or interest.  At the time 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 credit  loss  reserve.  While a loan is  classified  as
nonaccrual,  collections  of principal and interest are  generally  applied as a
reduction to principal outstanding.

Provision for Credit Losses and the Allowance for Credit  Losses.  The provision
for credit losses in the income  statement  results from the  combination  of an
estimate by management of loan losses that  occurred  during the current  period
and the ongoing adjustment of prior estimates of losses.

To  serve as a basis  for  making  this  provision  each  quarter,  the  Company
maintains a credit risk  monitoring  process  that  considers  several  factors,
including current economic  conditions  affecting the Company's  customers,  the
payment  performance of individual  large loans and pools of  homogeneous  small
loans,  portfolio seasoning,  changes in collateral values, and detailed reviews
of specific large loan relationships.  For large loans deemed to be impaired due
to an expectation  that all contractual  payments will probably not be received,
impairment  is measured by comparing the  Company's  recorded  investment in the
loan to the  present  value of  expected  cash  flows  discounted  at the loan's
effective  interest  rate,  the  fair  value  of the  collateral  or the  loan=s
observable market price.

The  provision for credit losses  increases the allowance for credit  losses,  a
valuation  account which is netted  against loans on the balance  sheet.  As the
specific  customer  and  amount  of a  credit  loss is  confirmed  by  gathering
additional  information,  taking collateral in full or partial settlement of the
loan,  bankruptcy of the borrower,  etc., the loan is written down, reducing the
allowance for credit losses. If, subsequent to a writedown,  the Company is able
to collect  additional  amounts from the customer or from the sale of collateral
worth more than  earlier  estimated,  a recovery  is  recorded,  increasing  the
allowance for credit losses.

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.   Loan  commitment  fees  are  generally  deferred  and  amortized  into
non-interest income on a straight-line basis over the commitment period.

Mortgage  Servicing  and  Transfers of  Financial  Assets.  The Company  adopted
Statement of Financial  Accounting  Standards No. 125, "Accounting for Transfers
and Servicing of Financial  Assets and  Extinguishments  of Liabilities"  ("SFAS
125") on January 1,  1997.  SFAS 125  establishes  accounting  methods  aimed at
ensuring that entities recognize only assets controlled and liabilities incurred
and  derecognize  assets only when control has been  surrendered and liabilities
only when  they  have  been  extinguished.  Statement  of  Financial  Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement  No. 125,"  deferred  certain  provisions of SFAS 125 until January 1,
1998.

<PAGE>

The Banks regularly sell loans to others on a non-recourse basis. Sold loans are
not included in the accompanying  balance sheets. The Banks generally retain 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,  1998 and 1997,  the Banks were
servicing  loans for the  benefit  of others  with  aggregate  unpaid  principal
balances  of $73.8 and $65.8  million,  respectively.  The vast  majority of the
loans sold by the Banks 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
Banks.

Premises, Leasehold Improvements and Equipment. Premises, leasehold improvements
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 non-interest expense as incurred.

Other Real Estate Owned. Real estate properties 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 cost to sell.  When a
property is acquired, the excess of the recorded investment in the property over
fair value,  if any, is charged to the allowance for credit  losses.  Subsequent
declines in the estimated fair value, net operating results and gains and losses
on disposition of the property are included in other non-interest  expenses. The
Company=s  investment in such  properties at December 31, 1998 was $2.1 million.
There were no such properties held at December 31, 1997.

Deferred Charges and Intangible  Assets.  Deferred charges and intangible assets
includes  premiums  paid for deposits  assumed,  goodwill,  debt related  costs,
organization  costs and other  miscellaneous  intangibles.  Deposit premiums are
being amortized over their estimated lives of ten years using the  straight-line
method.  Goodwill  represents the aggregate  excess of the cost of  subsidiaries
acquired over the fair value of their net assets at dates of acquisition  and is
being  amortized  over its  estimated  useful  life of 15 to 25 years  using the
straight-line  method. Debt related costs represent legal,  accounting and other
fees and expenses associated with the issuance of such indebtedness. These costs
are being amortized over the term of the notes using the effective interest rate
method. Organization costs represent incorporation,  legal, accounting and other
similar fees associated with establishment of BNCCORP or its subsidiaries.  Such
costs are being amortized over five years using the  straight-line  method.  The
Company's intangible assets are monitored to assess recoverability and determine
whether events and circumstances  require  adjustment to the recorded amounts or
amortization periods. See "Impairment of Long-Lived Assets."

Impairment of Long-Lived  Assets.  The Company  periodically  reviews long-lived
assets including property and equipment,  certain  identifiable  intangibles and
goodwill for  impairment.  If impairment is  identified,  the assets are written
down to their  fair  value  through a charge to  non-interest  expense.  No such
impairment losses were recorded during 1998, 1997 or 1996.

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 balance sheets.  The cost of securities  underlying the agreements remain
in the asset accounts.

<PAGE>

Fair Values of Financial Instruments. The following methods and assumptions were
used by the  Company in  estimating  fair  values of  financial  instruments  as
disclosed herein:

   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 NOW,
   savings and money market  accounts,  is equal to the amount payable on demand
   at the reporting date.

   Securities.  The fair value of the Company's  securities  equals the quoted
   market price.

   Loans.  Fair values for loans 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.

   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.

   Borrowings.  The carrying amount of short-term  borrowings  approximates fair
   value due to the short maturity and 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.

Derivative  Financial  Instruments.  The Company  uses  interest  rate swaps and
contracts to manage its interest rate risk. Such instruments  enable the Company
to synthetically  alter the repricing  characteristics  of designated assets and
interest-bearing  liabilities.  The contracts subject the Company to market risk
associated  with  changes in interest  rates as well as the risk of default by a
counterparty to the contract. The Company does not conduct trading activities or
hold derivative financial instruments for speculative purposes.

Income or  expense  on swaps  and  contracts  designated  as hedges of assets or
liabilities is recorded as an adjustment to interest income or expense.  Changes
in market value of contracts qualifying as hedges of interest rate exposures are
not recognized in the period of change. If a swap or contract is terminated, the
gain or loss is deferred and amortized  over either the remaining  original life
of the  derivative  instrument or the expected life of the  underlying  asset or
liability.  If the  hedged  instrument  is  disposed  of,  the swap or  contract
agreement is marked to market with any resulting gain or loss included with gain
or loss from the disposition.  Unamortized deferred gains or losses are included
in the balance sheet as deferred income or deferred charges.

The Company entered into three interest rate swap agreements during 1997. One of
the swaps effectively converted the Company's fixed rate subordinated notes into
variable-rate  borrowings.  The  Company  received a fixed rate of  interest  of
6.6650 percent on the notional  amount of $15.0 million and paid a variable rate
based on 3-month  LIBOR.  The swap was sold on October 30, 1997.  The  resulting
gain of $372,000 was deferred and is being  amortized as a reduction of interest
expense over the remaining  life of the original swap  contract.  Two additional
swaps with  notional  amounts  totaling  $10.0  million  were used to adjust the
interest rate  sensitivity of time  deposits.  These swaps were also sold during
1997 and resulting  gains are being  amortized  over the  remaining  life of the
contracts.

In September 1998, the Company  purchased a prime based interest rate floor with
a notional amount of $25.0 million. The contract is for a term of five years and
is designated as a hedge of floating rate commercial  loans.  The strike rate on
the floor is 8.50 percent.  A $1.1 million premium paid upon  acquisition of the
contract is being  amortized over the life of the contract.  Market value of the
contract,  defined as the contract=s current  replacement value, was $934,000 at
December 31, 1998.

<PAGE>

The Company had no interest rate swap contracts outstanding at December 31, 1998
or 1997. At December 31, 1998 and 1997, deferred gains of $332,000 and $423,000,
respectively,  resulting  from the sale of interest rate swap  contracts  during
1997 were included in the balance sheet and were being  amortized as a reduction
of interest expense over the original lives of the swap contracts.

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

Income Taxes.  BNCCORP and its subsidiaries  file a consolidated  federal income
tax return. State income tax returns are filed separately by each subsidiary. In
accordance with a tax sharing arrangement,  BNCCORP collects for or pays to each
of its subsidiaries  the tax or tax benefit  resulting from its inclusion in the
consolidated federal return.

Deferred  income taxes are reported for temporary  differences  between items of
income or expense reported for financial  statement  purposes and those reported
for income tax purposes.  The  differences  relate  primarily to  differences in
accounting for loan 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 capital  leases for  financial
statement purposes.

Earnings Per Common Share.  Basic earnings per share is computed by dividing net
income by the weighted average common shares  outstanding  during the applicable
period. Diluted earnings per share is computed based on the amount of net income
that would be available for each common share,  assuming all dilutive  potential
common shares were issued.  Such dilutive  potential common shares include stock
options and warrants (see Note 18).

Comprehensive  Income.  Pursuant to Statement of Financial  Accounting Standards
No.  130,  "Reporting  Comprehensive  Income"  adopted on  January 1, 1998,  the
Company has prepared  consolidated  statements of comprehensive income detailing
changes in the  amounts of items  which  bypass  the  income  statement  and are
reported with a balance in stockholders' equity.  Financial statements for prior
periods have been reclassified for comparative purposes.

Segment  Disclosures.  Statement  of  Financial  Accounting  Standards  No. 131,
"Disclosures  about Segments of an Enterprise and Related  Information,"  became
effective  for the year ended  December  31,  1998.  The  Company  has  provided
disclosure of financial and descriptive  information about reportable  operating
segments in Note 19.

Other  Recently  Issued  Accounting  Standards.  In  June  1998,  the  Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
No. 133, "Accounting for Derivative  Instruments and Hedging Activities," ("SFAS
133"). SFAS 133 establishes  accounting and reporting  standards  requiring that
every derivative instrument  (including certain derivative  instruments embedded
in other  contracts)  be  recorded  in the  balance  sheet as either an asset or
liability  measured at its fair value.  SFAS 133  requires  that  changes in the
derivative=s  fair value be  recognized  currently in earnings  unless  specific
hedge  accounting  criteria are met.  Special  accounting for qualifying  hedges
allows a derivative=s  gains and losses to offset related  results on the hedged
item  in the  income  statement,  and  requires  that a  company  must  formally
document,  designate,  and assess the effectiveness of transactions that receive
hedge accounting.

SFAS 133 is effective for fiscal years  beginning after June 15, 1999. A company
may also  implement  SFAS 133 as of the  beginning of any fiscal  quarter  after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS
133 cannot be applied retroactively.  SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative  instruments embedded in hybrid contracts
that were issued,  acquired,  or substantively  modified after December 31, 1997
(and, at the company's election, before January 1, 1998).

<PAGE>

The Company  has not yet  quantified  the  impacts of  adopting  SFAS 133 on its
financial  statements and has not determined the timing of or method of adoption
of SFAS  133,  however,  adoption  of the  accounting  standard  could  increase
volatility in earnings and other comprehensive income.

Statement  of Position  98-5,  "Reporting  on the Costs of Start-Up  Activities"
("SOP 98-5"), requires costs of start-up activities and organization costs to be
expensed as incurred. The Company intends to adopt SOP 98-5 effective January 1,
1999.  The adoption is not expected to have a material  effect on the  Company's
financial position or results of operations.

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 its  subsidiary  banks are also  subject  to
minimum  regulatory capital  requirements.  At December 31, 1998, capital levels
exceed minimum capital requirements (see Note 11).

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

Use of  Estimates.  The  preparation  of  consolidated  financial  statements in
conformity with generally accepted accounting  principles 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.  The  actual  results  could  differ  from those
estimates.

2.  Acquisitions and Divestitures:

The following mergers and acquisitions  were consummated  during the three years
ended December 31, 1998:

In May  1996,  BNCCORP  acquired  a  nonbank  commercial  finance  company,  BNC
Financial,  St.  Cloud,  Minnesota,  for  $85,000.  The  subsidiary  is  engaged
primarily in asset-based  commercial  financing.  Goodwill of $66,000  resulting
from the transaction is being amortized over 25 years.

In December 1996,  BNC-North  Dakota  acquired the accounting firm of Gregory K.
Cleveland & Company,  Bismarck, North Dakota (the "Firm") for $368,000. The Firm
was owned by an  executive  officer/director  of  BNCCORP.  Goodwill of $265,000
resulting from the  transaction is being  amortized over 15 years.  Employees of
the Firm now staff the trust and private banking division of BNC-North Dakota.

In January 1997,  BNC-North  Dakota  acquired the stock of J.D. Meier  Insurance
Agency, Inc., Linton,  North Dakota ("J.D. Meier") for $34,000.  Three executive
officers of the Company owned stock in J.D. Meier.

In August  1997,  BNC-North  Dakota  purchased a  management  agreement  between
Preferred  Investment  Services,  Inc., and Preferred Pension Investors I-87, an
Illinois   Partnership   (the   "Agreement")   for   $394,000.    An   executive
officer/director of BNCCORP owned stock in Preferred Investment  Services,  Inc.
Under the Agreement,  BNC-North  Dakota,  through its trust and private  banking
division,  provides  administrative  management  services  for  pension  assets.
Goodwill of $394,000  resulting from the  transaction is being amortized over 15
years.

On January 1, 1998, the Company  acquired Lips & Lahr, Inc. ("Lips & Lahr") in a
business combination accounted for as a pooling of interests. Lips & Lahr, which
engages in the insurance business was merged into J.D. Meier and became a wholly
owned  subsidiary of BNC-North  Dakota  through the exchange of 63,406 shares of

<PAGE>

BNCCORP common stock for all of the  outstanding  stock of Lips & Lahr. The name
of the combined  agency was  subsequently  changed to BNC Insurance,  Inc. ("BNC
Insurance"). Under the provisions of the agreement and plan of merger related to
the business  combination,  former  stockholders of Lips & Lahr had the right to
receive  additional  shares of BNCCORP common stock on the first  anniversary of
the  initial  share  distribution  date  based on a  formula  relating  to final
resolution of contingencies  pending at the consummation  date. The accompanying
financial  statements for 1997 and 1996 have been restated to give effect to the
combination.

Following is a  reconciliation  of the amounts of total  revenues and net income
previously reported for 1997 and 1996 with restated amounts:


                                        Year ended December 31,
                                            1997         1996
                                        ----------- -----------
                                            (In thousands)
            Total revenues:
               BNCCORP, Inc. and             
               subsidiaries............ $  28,984   $  23,053
               Lips & Lahr.............     1,682       1,639
                                        ----------- -----------
                                        $  30,666   $  24,692
                                        =========== ===========
            Net income (loss):
               BNCCORP, Inc. and         
               subsidiaries............ $   1,512   $   1,847
               Lips & Lahr.............       (86)       (667)
                                        ----------- -----------
                                           $1,426      $1,180
                                        =========== ===========
            Basic and diluted earnings 
            per common share...........    $ 0.59      $ 0.49
                                        =========== ===========

3. Restrictions on Cash and Due From Banks:

BNCCORP's  subsidiary  banks are required to maintain  reserve  balances in cash
with Federal  Reserve Banks.  The amount of those reserve  balances was $1.3 and
$1.4 million as of December 31, 1998 and 1997, respectively.

4.  Debt and Equity Securities:

Debt and equity  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, 1998
or 1997.

The carrying  amount of securities and their  approximate  market values were as
follows as of December 31 (in thousands):


<PAGE>


                                                Gross       Gross     Estimated
                                  Amortized   Unrealized  Unrealized    Market
                                    Cost        Gains       Losses      Value
                                  ----------  ----------  ---------- ----------
     Available-for-Sale Securities
                 1998
   U.S. Treasury securities.......$   5,098   $      11    $      -- $    5,109
   U.S. government agency mortgage-
      backed securities...........   51,194         329          (79)    51,444
   U.S. government agencies           
   securities.....................   13,096           5          (103)   12,998
   Collateralized mortgage             
   obligations....................   19,602         127          (122)   19,607
   State and municipal bonds......    3,355          72            (7)    3,420
   Equity securities..............    4,024          --            (1)    4,023
                                  ----------  ----------   ---------- ---------
                                  $  96,369   $     544     $    (312)$  96,601
                                  ==========  ==========   ========== =========

     Available-for-Sale Securities
                 1997
   U.S. Treasury securities.......$  12,489   $      43    $       -- $  12,532
   U.S. government agency mortgage-
      backed securities...........   32,136         100            --    32,236
   U.S. government agencies           
   securities.....................   20,039          --           (33)   20,006
   Collateralized mortgage           
   obligations....................   21,291          34            --    21,325
   State and municipal bonds......    1,166         123            --     1,289
   Equity securities..............    7,236          --            --     7,236
                                  ----------  ----------   ----------  --------
                                  $  94,357   $     300    $      (33) $ 94,624
                                  ==========  ==========   ==========  ========

The scheduled  contractual  maturities  of securities  available for sale (other
than equity securities) at December 31, 1998, were as follows:



<PAGE>


                                     Available-for-Sale
                                         Securities
                                    ----------------------
                                    Estimated
                                    Amortized    Market
                                      Cost       Value
                                    ---------- -----------
Due in one year or less...........  $  17,229  $   17,246
Due after one year through five        
years.............................     10,385      10,442
Due after five years through ten       
years.............................     15,176      15,230
Due after ten years...............     49,555      49,660
                                    ---------- -----------
   Total..........................  $  92,345  $   92,578
                                    ========== ===========

Securities,  carried at  approximately  $83.8 and $80.1  million at December 31,
1998 and 1997, respectively,  were pledged as collateral for public deposits and
borrowings, including borrowings with the Federal Home Loan Bank ("FHLB").

<PAGE>

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

                                     1998          1997         1996
                                  -----------   -----------  -----------
        Sales proceeds........    $   58,855    $   27,198   $   48,700
        Gross realized gains..    $      164    $       40   $       32
        Gross realized losses.    $       34    $       32   $       13

5. 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):

                                   1998         1997
                                 ----------  -----------
Commercial and industrial.....   $ 131,165    $ 111,429
Real estate:
   Mortgage...................      77,254       56,875
   Construction...............      20,831       18,215
Agricultural..................      19,777       21,064
Consumer......................      14,345       18,173
Lease financing...............       7,422        9,211
Other.........................         416          553
                                 ----------  -----------
   Total......................     271,210      235,520
Less:
   Allowance for credit losses     (3,093)      (3,069)
   Unearned income............       (334)        (320)
                                 ----------  -----------
      Net loans and leases....   $ 267,783    $ 232,131
                                 ==========  ===========

Geographic  Location and Types of Loans.  Loans were to borrowers located in the
following market areas as of December 31 (in thousands):

                                             1998         1997
                                            --------     -------
                  North Dakota............      38%         52%
                  Minnesota...............      52          38
                  Other...................      10          10
                                            ========     =======
                        Totals............     100%        100%
                                            ========     =======


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 $77.3 and $56.9 million real estate
mortgages as of December 31, 1998 and 1997,  respectively,  approximately  $35.0
and $31.0 million,  respectively,  were 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

<PAGE>

estate mortgage loans can be characterized as commercial loans which are secured
by real estate.  Single- and  multi-family  residential  mortgage loans totaling
$9.6 and $14.7 million at December 31, 1998 and 1997, respectively, were pledged
as collateral for FHLB borrowings.

The  Company's  credit  policies   emphasize   diversification   of  risk  among
industries,  geographic  areas and borrowers.  The only  concentration  of loans
exceeding 10 percent of total loans at December 31, 1998 is construction  loans.
Loans  within  this  category  are   diversified   across   different  types  of
contractors,  geographically  dispersed and secured by many  different  types of
collateral.

Loans to Officers,  Directors,  Employees  and Other Related  Parties.  Loans to
officers,  directors and employees and to other related  parties were as follows
as of December 31 (in thousands):

                                             1998         1997
                                            --------     -------
    Loans to officers, directors and        
    employees............................   $ 1,494      $ 1,114
    Loans to other related parties.......       502          310
                                            --------     -------
       Total loans to officers, directors
       and employees and other related      
       parties...........................   $ 1,996      $ 1,424
                                            ========     =======

Impaired Loans. As of December 31, the Company's recorded investment in impaired
loans and the related valuation allowance were as follows (in thousands):

                                        1998                      1997
                               ------------------------  -----------------------
                               Recorded     Valuation     Recorded     Valuation
                               Investment   Allowance    Investment    Allowance
                               -----------  -----------  ----------   ----------
Impaired loans --
   Valuation allowance         
   required..................  $   8,639    $     960    $  12,544    $     762
   No valuation allowance             
   required..................        624           --          116           --
                               -----------  -----------  ----------   ----------
      Total impaired loans...  $   9,263    $     960    $  12,660    $     762
                               ===========  ===========  ==========   ==========

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  allowance  for
credit losses noted above.

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):


<PAGE>



                                               1998       1997       1996
                                             ---------  ---------  ---------
    Average recorded investment in impaired  
    loans.................................   $  9,542   $ 7,308    $ 3,555
                                             =========  =========  =========
    Interest income recognized on impaired   
    loans.................................   $    992   $   747    $   216
                                             =========  =========  =========
    Average recorded investment in impaired
    loans as a percentage of average total
       loans..............................        3.8%       3.3%       2.1% 
                                             =========  =========  =========

Nonaccrual and Restructured Loans. As of December 31, 1998 and 1997, the Company
had $2.0 million and $376,000, respectively, of nonaccrual loans and $44,000 and
$104,000,  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):

                                                  1998       1997       1996
                                                ---------  ---------  ---------
       Interest income that would have been     
       recorded..............................   $    224   $    56    $     18
       Interest income recorded..............   $    175   $    26    $      6
                                                ---------  ---------  ---------
       Effect on interest income.............   $     49   $    30    $     12
                                                =========  =========  =========

As of December 31, 1998, the Company had no commitments to lend additional funds
to  borrowers  with  loans  whose  terms have been  modified  in  troubled  debt
restructurings.

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

                                               1998       1997       1996
                                             ---------  ---------  ---------
    Balance, beginning of year.............  $ 3,069     $1,594     $1,048
       Provision for credit losses.........    1,290      2,619        739
       Loans charged off...................   (1,455)    (1,921)      (350)
       Loans recovered.....................      189        777        157
                                             ---------  ---------  ---------
    Balance, end of year...................  $ 3,093     $3,069     $1,594
                                             =========  =========  =========

The increases in the Company's provision for credit losses and loans charged off
for the years ended December 31, 1998 and 1997 relate  primarily to questionable
loan  practices by a former loan officer at BNC-North  Dakota.  During a routine
audit  of the  subsidiary's  loan  portfolio,  the  Company  discovered  lending
practices  conducted in violation of normal Company policy.  After  conducting a
review of the affected loans, the Company  terminated the loan officer.  For the
years ended December 31, 1998 and 1997,  provisions  for credit losses  totaling
$454,000 and $1.9  million,  respectively,  related to loans  originated  by the
officer.  Approximately  $1.8  million  and  $639,000  in loans  related  to the
dismissed   officer's   activities  were  charged  off  during  1998  and  1997,
respectively.  

In December 1997,  following  negotiations  with its fidelity bond carrier,  the
carrier made a payment of $762,000 to be applied  against any covered  losses of
the  Company.  Approximately  $690,000  of  this  payment  was  credited  to the
Company's allowance for credit losses. A second payment of $124,000 was received
from the fidelity bond carrier in September 1998. This payment was also credited
to the Company's  allowance  for credit  losses.  A final  settlement of covered

<PAGE>

losses with the fidelity bond carrier has not been reached and negotiations with
the carrier are continuing.  There can be no assurances concerning the amount of
final recovery on the claim.

6. Premises, Leasehold Improvements and Equipment:

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

                                                       1998           1997
                                                    ----------     ----------
   Land and improvements..........................  $     530      $     520
   Buildings and improvements.....................      5,046          4,894
   Leasehold improvements.........................        892            881
   Furniture, fixtures and equipment..............      5,969          5,076
                                                    ----------     ----------
      Total cost..................................     12,437         11,371
   Less accumulated depreciation and amortization.     (3,610)        (2,754)
                                                    ----------     ----------
      Net premises, leasehold improvements and      
   equipment......................................  $   8,827      $   8,617
                                                    ==========     ==========

Depreciation and amortization  expense on premises,  leasehold  improvements and
equipment totaled approximately  $901,000,  $718,000, and $542,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.

7. Deferred Charges and Intangible Assets:

Deferred charges and intangible assets consisted of the following at December 31
(in thousands):

                                                       1998          1997
                                                    -----------   -----------
   Premiums paid for deposits assumed.............  $    4,022    $    4,022
   Goodwill.......................................       1,182         1,182
   Covenants not to compete.......................         480           480
   Debt related costs.............................         211           161
   Organization costs and other miscellaneous              
   intangibles....................................         472           472
                                                    -----------   -----------
      Total costs.................................       6,367         6,317
   Less accumulated amortization .................      (2,311)       (1,687)
                                                    -----------   -----------
      Net deferred charges and intangible assets..  $    4,056    $    4,630
                                                    ===========   ===========

Amortization  expense charged to operations was $624,000,  $609,000 and $564,000
for the years ended December 31, 1998, 1997 and 1996, respectively.

8. Income Taxes:

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

<PAGE>


                                                1998        1997       1996
                                              --------   ---------   --------
   Current..................................  $ 1,483    $ 1,411     $ 1,351
   Deferred income taxes from the following
      timing differences:
         Provision for credit losses........     (121)       (570)      (274)
         Depreciation.......................       46          42         87
         Leases.............................      (38)         18        129
         Other..............................      (77)        143       (124)
                                              --------   ---------   --------
                                              $ 1,293    $  1,044    $ 1,169
                                              ========   =========   ========

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

                                              1998        1997       1996
                                            --------   ---------   --------
Tax at 34% statutory rate................   $ 1,210    $    840    $   795
Increase (decrease) resulting from:
   State taxes (net of federal benefit)..        86         169        131
   Tax-exempt interest...................       (28)        (20)       (27)
   Other, net............................        25          55        270
                                            --------   ---------   --------
                                            $ 1,293    $  1,044    $ 1,169
                                            ========   =========   ========

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):

                                                            1998       1997
                                                          --------   --------
   Deferred tax asset:
      Loans, primarily due to differences in accounting   
         for credit losses..............................  $ 1,331    $ 1,207
      Net operating loss carry forwards.................       18         --
      Other.............................................      294        106
                                                          --------   --------
            Deferred tax asset..........................    1,643      1,313
                                                          --------   --------
   Deferred tax liability:
      Unrealized gain on securities available for sale..       90         97
      Leases, primarily due to differences in accounting      
         for leases.....................................      504        542
      Premises and equipment, primarily due to
         differences in original cost basis and               
         depreciation...................................      539        493
            Other.......................................      222         83
                                                          --------   --------
            Deferred tax liability......................    1,355      1,215
                                                          --------   --------
            Net deferred tax asset......................  $   288    $    98
                                                          ========   ========


<PAGE>


9. Notes Payable:

The  Company's  notes  payable  consist of the  following  as of December 31 (in
thousands):
<TABLE>
<CAPTION>

                                                                           1998       1997
                                                                         -------    --------
<S>                                                                      <C>        <C> 
BNCCORP:
Notes payable to Firstar Bank Milwaukee, N.A. ("Firstar") including a 
   term note for $3.0 million and a revolving line of credit up to 
   $12.0 million, interest payable quarterly at either the prime rate 
   or 90 day LIBOR rate plus 2.00% at BNCCORP's option (7.28% and 7.88% 
   at December 31, 1998 and 1997, respectively), secured by stock of
   subsidiary banks..................................................... $14,520    $  7,435
8 5/8% subordinated notes, due May 31, 2004, interest payable monthly
   (plus unamortized discount of $621 and $705 at December 31, 1998 and 
   1997, repectively-effective rate 9.61%), unsecured (see below).......  14,379      14,295
                                                                         -------    --------
            Total BNCCORP...............................................  28,899      21,730
Subsidiaries:
Federal funds purchased and U. S. Treasury tax and loan note option 
   accounts.............................................................   6,030       5,504
Floating rate advances from FHLB repaid during 1998.....................      --      25,000
Repurchase advance from FHLB, renewable weekly, interest payable at
    renewal, 5.28% at December 31, 1998, secured by mortgage loans
    and government agency  securities...................................  15,000          --
Fixed rate advances from FHLB, callable quarterly, principal due July 
    2000 and January and April 2008, interest payable monthly at rates 
    ranging from 4.75% and 5.54%, secured by mortgage loans and 
    government agency securities........................................  26,500      15,000
Revolving line of credit up to the lessor of $10 million or 40% of
    the unpaid and  outstanding  principal  amount of certain of BNC 
    Financial's asset based loans, payable to Firstar,  interest payable 
    quarterly at either the prime  rate or 90 day LIBOR rate plus  2.00% 
    at BNC  Financial's  option (7.28% at December 31,  1998),  secured 
    by certain  assets of BNC  Financial................................   1,700          --
Other...................................................................   1,807       1,081
                                                                         -------    --------
              Total..................................................... $79,936     $68,315
                                                                         =======    ========
</TABLE>

In January 1999,  BNC-North Dakota increased its repurchase advance with FHLB to
$21.0 million and reduced its volume of federal funds purchased.

The  Firstar  notes were  renewed in  February  1999 and mature in August  1999.
Collateral,  interest rates and timing of payments on the notes are as indicated
above.

In May 1997,  BNCCORP  sold $15.0  million of 8 5/8 percent  subordinated  notes
pursuant to a public  offering (the  "Subordinated  Notes" or "Notes").  The net
proceeds of the offering of $14.3 million were used to repay  approximately $9.6
million of indebtedness then outstanding under revolving lines of credit and for
general  corporate  purposes.  The Subordinated  Notes,  which qualify as Tier 2
capital up to a certain  limit  under the  Federal  Reserve  Board's  risk-based
capital  guidelines (73 percent at December 31, 1998), are considered  unsecured
general obligations of BNCCORP.  They are redeemable,  at the option of BNCCORP,
at par plus  accrued  interest to the date of  redemption,  beginning on May 31,
2000.  Payment of principal of the Notes may be accelerated  only in the case of
certain events relating to bankruptcy,  insolvency or reorganization of BNCCORP.

<PAGE>

An initial  discount of $750,000 is being amortized to interest expense over the
term of the Notes using the effective interest rate method.

The loan agreements of BNCCORP and BNC Financial,  and the indenture pursuant to
which the Subordinated  Notes were issued,  contain covenants which, among other
matters,  restrict or limit the ability of BNCCORP and its  subsidiaries,  under
certain circumstances, to pay cash dividends, redeem or repurchase stock or make
other  capital   distributions,   incur  indebtedness,   allow  liens  or  other
encumbrances on property owned or acquired,  or guarantee  obligations of others
(other  than in the  ordinary  course  of  banking  business).  BNCCORP  and its
subsidiaries must also maintain certain ratios regarding capital,  nonperforming
loans,  loan  loss  reserve  coverage,  and  other  matters.   BNCCORP  and  its
subsidiaries  were in  compliance  with or had  obtained  a waiver  for all debt
covenants as of December 31, 1998 and 1997.

10.   Stockholders' Equity:

BNCCORP  and its  subsidiary  banks  are  subject  to  certain  minimum  capital
requirements (see Note 11). In addition,  certain regulatory  restrictions exist
regarding the ability of the  subsidiary  banks to transfer  funds to BNCCORP in
the  form of cash  dividends,  loans  or  advances.  Approval  of the  principal
regulator is required for the Banks to pay dividends to BNCCORP in excess of the
subsidiary  banks'  earnings  retained in the  current  year plus  retained  net
profits for the preceding two years.

11.   Regulatory Capital:

BNCCORP  and its  subsidiary  banks 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  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
BNCCORP and its  subsidiary  banks 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 its banks 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 its banks 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, 1998, BNCCORP and its banks meet all capital adequacy  requirements
to which they are subject.

As of December 31, 1998,  the most recent  notifications  from the Office of the
Comptroller  of the  Currency  categorized  BNCCORP's  subsidiary  banks as well
capitalized under the regulatory  framework for prompt corrective  action. To be
categorized  as  well  capitalized,   the  banks  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 institutions' categories.

Actual  capital  amounts  and ratios of BNCCORP and its  subsidiary  banks as of
December 31 are also presented in the tables (dollar amounts in thousands):


<PAGE>
<TABLE>
<CAPTION>


                                                                            To be Well
                                                       For Capital       Capitalized Under
                                      Actual        Adequacy Purposes    Prompt Corrective
                                                                         Action Provisions
                                 -----------------  ------------------  --------------------
                                  Amount   Ratio     Amount    Ratio    Amount      Ratio
                                 --------- -------  --------- --------  --------  ----------
                                                              Greater             Greater 
                                                              than or             than or
                                                              equal to            equal to
<S>                              <C>       <C>      <C>       <C>       <C>       <C>
     As of December 31, 1998
Total Capital (to risk-weighted 
   assets):
   Consolidated................  $ 34,680    11.0 % $ 25,216      8.0 %      N/A        N/A
   BNC-North Dakota............    21,900    10.3     17,091      8.0   $ 21,364       10.0 %
   BNC-Minnesota...............     7,433    10.3      5,778      8.0      7,223       10.0
Tier I Capital (to risk-weighted 
   assets):
   Consolidated................    21,058     6.7     12,608      4.0        N/A        N/A
   BNC-North Dakota............    19,859     9.3      8,546      4.0     12,818        6.0
   BNC-Minnesota...............     6,621     9.2      2,889      4.0      4,334        6.0
Tier I Capital (to average 
   assets):
   Consolidated................    21,058     5.5     15,278      4.0        N/A        N/A
   BNC-North Dakota............    19,859     6.5     12,242      4.0     15,303        5.0
   BNC-Minnesota...............     6,621     9.1      2,913      4.0      3,642        5.0
     As of December 31, 1997
Total Capital (to risk-weighted 
   assets):
   Consolidated................  $ 32,849    12.2 % $ 21,551      8.0 %      N/A        N/A
   BNC-North Dakota............    21,535    10.8     16,014      8.0    $20,017       10.0 %
   BNC-Minnesota...............     5,742    10.2      4,482      8.0      5,603       10.0
Tier I Capital (to risk-weighted 
   assets):
   Consolidated................    19,853     7.4     10,776      4.0        N/A        N/A
   BNC-North Dakota............    19,168     9.6      8,007      4.0     12,010        6.0
   BNC-Minnesota...............     5,191     9.3      2,241      4.0      3,362        6.0
Tier I Capital (to average 
   assets):
   Consolidated................    19,853     5.9     13,380      4.0        N/A        N/A
   BNC-North Dakota............    19,168     6.8     11,238      4.0     14,047        5.0
   BNC-Minnesota...............     5,191     9.4      2,200      4.0      2,750        5.0
</TABLE>

12.   Fair Value of Financial Instruments:

The estimated fair values of the Company's financial  instruments are as follows
as of December 31 (in thousands):


<PAGE>





                                            1998                    1997
                                    ----------------------  --------------------
                                    Carrying      Fair      Carrying     Fair
                                     Amount       Value      Amount      Value
                                    ----------  ----------  ---------- ---------
Assets:                                                        
   Cash, due from banks and federal
      funds sold....................$  10,284   $  10,284   $  15,415  $  15,415
   Investment securities available
      for sale......................   96,601      96,601      94,624     94,624
   Loans and leases, net............  267,783     266,790     232,131    232,329
                                    ---------   ---------   --------- ----------
                                      374,668   $ 373,675     342,170  $ 342,368
                                                ==========             =========
   Other assets.....................   21,664                  18,833
                                    ---------                ---------
                                    $ 396,332               $ 361,003
                                    =========               ==========
Liabilities:
   Deposits, noninterest-bearing....$  28,475   $  28,475   $  25,795  $  25,795
   Deposits, interest-bearing.......  256,024     256,775     237,029    237,493
   Notes payable....................   79,936      80,672      68,315     68,833
                                    ----------  ---------   ---------- ---------
                                      364,435   $ 365,922     331,139  $ 332,121
                                                =========              =========
   Other liabilities................    6,642                   6,716
   Stockholders= equity.............   25,255                  23,148
                                    ----------              ----------
                                    $ 396,332               $ 361,003
                                    ==========              ==========

13.   Financial Instruments With Off-Balance-Sheet Risk:

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal course of business to meet the financing needs of its customers.

These financial instruments include commitments to extend credit, including loan
commitments and unused portions of lines of credit, and letters of credit. These
instruments  involve,  to varying degrees,  elements of credit risk in excess of
the amount  recognized  in the  consolidated  balance  sheets.  The  contract or
notional  amounts of these  instruments  reflect the extent of  involvement  the
Company has in particular classes of financial instruments.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other  party  for  commitments  to  extend  credit  and  letters  of  credit  is
represented by the  contractual  or notional  amount of those  instruments.  The
Company generally requires collateral or other security  specifically to support
off-balance-sheet financial instruments with credit risk.

Financial  instruments  with contract  amounts  representing  credit risk are as
follows as of December 31 (in thousands):
                                                  1998         1997
                                                ----------   ----------
         Commitments to extend credit........   $  82,311    $  52,168
         Letters of credit...................       1,840        1,418
                                                ----------   ----------
                                                $  84,151    $  53,586
                                                ==========   ==========


<PAGE>

14.   Related-Party Transactions:

The Company has entered  into  transactions  with its  stockholders,  directors,
officers and other affiliates  including the accounting firm,  insurance agency,
and  management  agreement  purchases  discussed  in Note 2. In the  opinion  of
management,  such  transactions have been fair and reasonable to the Company and
have been  entered  into under terms and rates  substantially  the same as those
offered by the Company in the ordinary course of business.

15.   Benefit Plans:

BNCCORP has a 401(k) plan covering all employees of BNCCORP and its subsidiaries
who meet specified age and service requirements. Eligible employees may elect to
defer up to 15 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   compensation.   The  Company  made  matching
contributions  of  $180,000,  $132,000,  and  $99,000  in 1998,  1997 and  1996,
respectively.  Under the  investment  options  available  under the 401(k) plan,
employees may elect to invest their salary deferrals in BNCCORP stock.

16.   Commitments and Contingencies:

Employment  Agreements and Noncompete  Convenants.  The Company has entered into
three-year  employment  agreements  with its chief  executive  officer  ("CEO"),
president  and chief  operating  officer  ("COO"),  the  presidents of BNC-North
Dakota, BNC-North Dakota's Fargo Branch and BNC-Minnesota and the executive vice
president of BNC-North Dakota's  financial services division and general counsel
of the Company (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 of the CEO and COO, 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 CEO and COO will be paid a
lump-sum  amount equal to three times their current annual  compensation.  Under
the  remaining  agreements,  except  for the  agreement  with the  president  of
BNC-North  Dakota's  Fargo  branch,  if status as employees  with the Company is
terminated  for any  reason  other than  death,  disability,  cause,  or if they
terminate their  employment for good reason,  except in the event of a change in
control of the Company,  then these  executives  will be paid a lump-sum  amount
equal to 1/12th of their current annual compensation multiplied by the number of
partial or full  months  remaining  in the  employment  agreement.  If status as
employees  with the Company is  terminated  following a change in control of the
Company,  then these  executives  will be paid a lump-sum  amount equal to three
times their current annual compensation.

In  conjunction  with the  business  combination  with 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  commission  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 runs through December 31, 2000.
Additionally, the contracts 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  Officer's  book 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.  One of the  Officers  resigned

<PAGE>

subsequent  to  December  31,  1998 and is now  acting  as a  consultant  to BNC
Insurance  pursuant  to  a  consulting  agreement.  Under  this  agreement,  the
Officer's  annual  salary  is  replaced  with an annual  consulting  fee 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.

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, 1998,  1997 and 1996, was $359,000,  $350,000,  and $339,000,
respectively.  Minimum  annual base lease  payments  for  operating  leases with
remaining terms of greater than one year are as follows:

                        1999...............   $ 463,000
                        2000...............     434,000
                        2001...............     371,000
                        2002...............     300,000
                        2003...............     258,000
                        Thereafter.........     303,000

Property and  Equipment.  The Company  plans to construct an office  building in
Fargo, North Dakota during 1999. The total cost to complete the construction and
provide  furniture  and  equipment for the building is estimated at between $4.0
and $4.5  million  and will be  funded  though  current  operating  profits.  At
December 31, 1998,  the Company was not committed to any portion of this amount,
however,  a  construction  contract was signed during  January 1999. The Company
anticipates  that excess  office  space in the new  building  will be rented out
until  such  time as the  Company's  Fargo  operations  require  use of the full
building.

Legal Proceedings. On September 21, 1998 BancInsure, BNC-North Dakota insurer of
employee  fidelity,  brought a  declaratory  judgment  action in  federal  court
against the bank and a former loan officer.  The bank filed a proof of loss with
BancInsure  claiming  a loss  of  $2.9  million  resulting  from  the  officer's
unauthorized  activities  while she was a senior loan officer with the bank. The
bank   alleges   that  the   officer's   unauthorized   activities   consist  of
misrepresentations to management,  conflicts of interest and breach of fiduciary
duties in conjunction  with her handling of her loan portfolio.  BancInsure paid
the bank the sum of $886,000  under a  reservation  of rights and in its lawsuit
BancInsure  requests that the court  determine  BancInsure's  obligations to the
bank under the fidelity  insurance  agreement it issued to the bank.  BancInsure
also requests that in the event the court determines that it is obligated to pay
the bank under its insuring  agreement,  that a judgment of indemnity be entered
for that amount  against the officer.  The bank filed a cross claim  against the
officer in the federal  action for the losses  sustained by the bank as a result
of the  officer's  unauthorized  activities.  The state court action  previously
filed by the bank against the officer has been  dismissed  and the bank's claims
against the officer will be litigated in the federal court action. The matter is
set for trial in February 2000.

17.   Stock-Based Compensation:

BNCCORP's  Stock  Incentive  Plan (the  "Stock  Plan"),  is  intended to provide
long-term incentives to its key employees,  including officers and directors who
are  employees  of the Company.  The 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.
Under the Stock Plan, 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 Plan  provided  that the exercise  price may not be less

<PAGE>

than the fair market value of a share of common  stock on the date of grant.  As
of December 31, 1998,  25,000 restricted shares had been awarded under the Stock
Plan. 20,000 shares of restricted stock vest in 33 1/3 percent increments during
1998,  1999 and 2000 and the remaining  5,000 shares vest 60 percent in 2001 and
an  additional  20 percent in each of 2002 and 2003.  The  Company  records  the
compensation  expense  related to restricted  stock over the applicable  service
period.  A total of 172,200  options had been awarded under the Stock Plan as of
December 31, 1998.

The Company's Nonemployee Director Stock Option Plan (the "Directors' Plan") was
adopted during 1998 and is also  administered  by the Committee.  The Directors'
Plan  provides  for 650  options to be issued to each  nonemployee  director  of
BNCCORP and its subsidiaries who is serving as a director immediately  following
each annual meeting of stockholders. The exercise price of stock options granted
under the Directors' Plan is equal to the fair market value of a share of common
stock on the date of grant.  As of December  31,  1998,  4,550  options had been
awarded under the  Directors'  Plan.  The options are  exercisable at a price of
$17.75 per share and became fully vested on December 17, 1998.

The Company  applies  Accounting  Principles  Board  Opinion No. 25, and related
interpretations  in accounting for both the Stock Plan and the Directors'  Plan.
Accordingly,  no  compensation  cost has been  recognized for the options issued
under the plans in 1998,  1997, or 1996. For the  restricted  stock issued under
the Stock Plan,  compensation  cost charged to operations  was $146,000 in 1998.
There was no compensation cost related to restricted stock charged to operations
during 1997 or 1996. Had compensation  cost been determined on the basis of fair
value  pursuant to  Statement  of Financial  Accounting  Standards  No. 123, net
income and earnings per share ("EPS") would have been reduced as follows:

                                    1998            1997            1996
                                 -----------     ------------    -----------
Net Income:
   As Reported................   $2,267,000      $ 1,426,000     $1,170,000
   Pro Forma..................    2,118,000        1,412,000      1,137,000
Basic EPS:
   As Reported................         0.95             0.59           0.49
   Pro Forma..................         0.85             0.58           0.47
Diluted EPS:
   As reported................         0.91             0.59           0.49
   Pro Forma..................         0.80             0.58           0.47

A summary of the status of stock options under the Stock Plan and the Directors'
Plan at December 31, 1998 and 1997 and changes  during the years then ended,  is
presented in the tables and narrative below:


<PAGE>



             Stock Plan                  1998                  1997
                                 ---------------------  --------------------
                                 Options    Weighted    Options    Weighted
                                    To       Average       to      Average
                                 Purchase   Exercise    Purchase   Exercise
                                  Shares      Price      Shares     Price
                                 ---------  ----------  ---------  ---------
    Outstanding, beginning of      
    year.......................    27,926   $   10.00     30,000   $  10.00
    Granted....................   142,200       17.00         --         --
    Exercised..................     1,935       10.00         --         -- 
    Forfeited..................    21,981       15.92      2,074      10.00
                                 ---------  ----------  ---------  ---------
    Outstanding, end of year...   146,210   $   15.92     27,926   $  10.00
                                 ---------  ----------  ---------  ---------
    Exercisable, end of year...    18,088   $   10.00     16,756   $  10.00
                                 =========  ==========  =========  =========
    Weighted average fair value 
      of options:
         Granted...............  $   7.60                     --
                                 =========              =========
         Exercised.............  $   4.50                     --
                                 =========              =========
         Forfeited.............  $   7.12               $   4.50
                                 =========              =========

          Directors' Plan                1998
                                 ---------------------
                                 Options    Weighted
                                    To       Average
                                 Purchase   Exercise
                                  Shares      Price
                                 ---------  ----------
    Outstanding, beginning of               
    year.......................        --         --
    Granted....................     4,550   $  17.75
                                 ---------  ----------
    Outstanding, end of year...     4,550   $  17.75
                                 =========  ==========
    Exercisable, end of year...     4,550   $  17.75
                                 =========  ==========
    Weighted average fair value
    of options granted.........   $  6.58
                                 =========

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:

                              Stock      Stock Plan     Director's
       Assumption           Plan 1998    1995 Grant      Plan 1998
                              Grant                        Grant
-------------------------  -----------  ------------  --------------
Dividend yield..........        0.00%         0.00%           0.00%
Risk-free interest rate.        5.63%         6.08%           5.49%
Expected life...........      7 years       7 years         5 years
Expected volatility.....       29.79%        28.69%          30.39%

Following  is a summary of the status of options  outstanding  under each of the
Company's plans at December 31, 1998:


<PAGE>



                           Outstanding Options               Exercisable Options
                ------------------------------------------  --------------------
                                 Weighted
                                 Average         Exercise               Exercise
                  Number        Remaining         Price      Number       Price
                             Contractual Life
                -----------  -----------------   ---------  ----------  --------
Stock Plan:         22,610          6.5 years     $ 10.00      18,088   $ 10.00
                   123,600          9.0 years     $ 17.00          --        --
Director's Plan:     4,550          9.5 years     $ 17.75       4,550   $ 17.75

18.  Earnings Per Common 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:

                                          Net
                                        Income         Shares       Per-Share
                                      (Numerator)   (Denominator)     Amount
                                      ------------  --------------  -----------
                1998
     Basic earnings per share
Income available to common            
stockholders.......................   $ 2,267,000       2,397,340     $   0.95
                                                                    ===========
Effect of dilutive shares
   Options.........................                        58,013
   Warrants........................                        48,182
                                                    --------------
     Diluted earnings per share:
Income available to common            
stockholders.......................   $ 2,267,000       2,503,535   $     0.91
                                      ============  ==============  ===========

                1997
      Basic earnings per share:
Income available to common            
stockholders.......................   $ 1,426,000       2,402,126   $     0.59
                                                                    ===========
Effect of dilutive shares                            
   Options.........................                         5,831
   Warrants........................                         4,791
                                                    --------------
     Diluted earnings per share:                                     
Income available to common            
stockholders.......................   $ 1,426,000       2,412,748   $     0.59
                                      ============  ==============  ===========

                1996
      Basic earnings per share:
Income available to common            
stockholders.......................   $ 1,170,000      2,404,944    $     0.49
                                                                    ===========
Effect of dilutive shares                            
   Options.........................                         1,027
   Warrants........................                            --
                                                    --------------
     Diluted earnings per share:
Income available to common            
stockholders.......................   $ 1,170,000       2,405,971   $     0.49
                                      ============  ==============  ===========

<PAGE>

Warrants  to  purchase  50,000  shares  of common  stock at $12 per  share  were
outstanding   during  all  periods  presented  but  were  not  included  in  the
computation  of diluted EPS for 1996 and portions of 1997 and 1998 because their
effects were antidilutive.  Additionally, options to purchase between 23,000 and
30,000  shares of common  stock at $10 per share  were  outstanding  during  all
periods  presented but were not included in the  computation  of diluted EPS for
the  first  half of 1996  and a  portion  of 1997  because  their  effects  were
antidilutive. Finally, options to purchase between 124,000 and 138,000 shares of
common  stock at $17 per share and 4,550  shares of common  stock at $17.75  per
share were  outstanding  during 1998 but were not included in the computation of
diluted EPS for the second half of 1998 because their effects were antidilutive.

The following  transaction occurred after December 31, 1998, which, had it taken
place during  fiscal  1998,  would have changed the number of shares used in the
EPS  computations:  10,500 shares of restricted  stock were issued on January 1,
1999.

19.  Segment Disclosures:

BNCCORP segments its operations into three separate business  activities,  based
on the nature of the products and services for each segment: BNC - North Dakota,
BNC - Minnesota, and BNC Financial.

The  operations  of BNC - North Dakota  provide  traditional  community  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 providing servicing of loans to others. In addition
to these banking services,  BNC - North Dakota also provides brokerage and trust
services along with selling insurance products.

BNC - Minnesota also provides traditional banking services,  but this segment is
identified primarily from its commercial banking activities in Minnesota.

BNC - Financial offers asset-based  commercial  financing.  In addition, it also
manages a  consulting  services  division,  which  provides a number of services
including pre-funding due diligence, collateral review, problem loan consulting,
bankruptcy support and asset valuation.

The accounting policies of the three segments are the same as those described in
the summary of  significant  accounting  policies,  which  conform to  generally
accepted  accounting  principles.  The information shown in the following tables
have been  restated to give the effect of any  business  combinations  that have
been accounted for under the pooling-of-interests method.

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  management  has  organized the business for making  operating
decisions and assessing performance.

The following tables present segment profit or loss, assets and a reconciliation
of  segment  information  as of,  and for the  periods  ended,  December  31 (in
thousands):


<PAGE>



                                                   1998
                           -----------------------------------------------------
                              BNC-                      
                             North       BNC-      BNC-       Other       
                            Dakota    Minnesota  Financial     (a)       Total
                           ---------  ---------  ---------  ---------  ---------
Net interest income........$   9,830  $   3,422  $   1,069  $   (603)   $ 13,718
Other revenue-external
   customers...............    3,944        868        208        30       5,050
Other revenue - from other
   segments................      216         --         --     4,423       4,639
Depreciation and
   amortization............    1,303        124         27        71       1,525
Equity in the net income
   of investees............       --         --         --     2,997       2,997
Other significant noncash
items:                           
   Provision for loan
   losses..................      871        330         89        --       1,290
Income tax expense.........      710        661        263      (341)      1,293
Segment profit.............    1,662        950        385     2,267       5,264
Segment assets.............  318,216     74,226     24,768    55,334     472,544
Expenditures for additions
   to assets...............      877        176         10        74       1,137



                                                   1998
                           -----------------------------------------------------
                                                  Inter-
                           Reportable   Other    segment           Consolidated
                            Segments    (a)    Elimination  Other      Total
                           ---------- -------- ----------- ------- -------------
Net interest income........$   14,321 $  (603)          --      -- $      13,718
Other revenue-external
   customers...............     5,020      30           --      --         5,050
Other revenue - from
   other segments..........       216   4,423   $   (4,639)     --             0
Depreciation and  
   amortization............     1,454      71           --      --         1,525
Equity in the net income
   of investees............        --   2,997       (2,997)     --             0
Other significant noncash
items:
   Provision for loan
   losses..................     1,290      --           --      --         1,290
Income tax expense.........     1,634    (341)          --      --         1,293
Segment profit.............     2,997   2,267       (2,997)     --         2,267
Segment assets.............   417,210  55,334      (76,212)     --       396,332
Expenditures for additions                   
   to assets...............     1,063      74           --      --         1,137
---------------

(a) The financial  information  presented in the "Other"  column is for the bank
holding  company.  This component of the Company is not intended to earn revenue
and does not qualify as an operating segment.

<PAGE>


                                                   1997
                           -----------------------------------------------------
                              BNC-                      
                             North       BNC-      BNC-       Other       
                            Dakota    Minnesota  Financial     (a)       Total
                           ---------  ---------  ---------  ---------  ---------
Net interest income........$ 10,168   $   2,388  $     528  $   (501)  $  12,583
Other revenue-external
   customers...............   3,469         450        196         9       4,124
Other revenue - from
   other segments..........     155          --         --     2,972       3,127
Depreciation and
   amortization............   1,141         111         17        58       1,327
Equity in the net income
   of investees............      --          --         --     2,006       2,006
Other significant noncash
items:                             
   Provision for loan
   losses..................   2,260         258        101        --       2,619
Income tax expense.........     909         328         89      (282)      1,044
Segment profit.............   1,405         474        127     1,381       3,387
Segment assets............. 309,946      57,796     15,373    45,768     428,883
Expenditures for additions
   to assets...............   2,628          46          7        12       2,693


                                                   1997
                           -----------------------------------------------------
                                                  Inter-
                           Reportable   Other    segment           Consolidated
                            Segments    (a)    Elimination  Other      Total
                           ---------- -------- ----------- ------- -------------
Net interest income........$   13,084 $  (501)          -- $   45  $      12,628
Other revenue-external
   customers...............     4,115       9           --     --          4,124
Other revenue - from
   other segments..........       155   2,972  $    (3,127)    --              0
Depreciation and
amortization...............     1,269      58           --     --          1,327
Equity in the net income
   of investees............        --   2,006       (2,006)    --              0
Other significant noncash
items:                        
   Provision for loan
   losses..................     2,619      --           --     --          2,619
Income tax expense.........     1,326    (282)          --     --          1,044
Segment profit.............     2,006   1,381       (2,006)    45          1,426
Segment assets.............   383,115  45,768      (67,880)    --        361,003
Expenditures for additions
   to assets...............     2,681      12           --     --          2,693
---------------

(a) The financial  information  presented in the "Other"  column is for the bank
holding  company.  This component of the Company is not intended to earn revenue
and does not qualify as an operating segment.

<PAGE>

                                                   1996
                           -----------------------------------------------------
                              BNC-                      
                             North       BNC-      BNC-       Other       
                            Dakota    Minnesota  Financial     (a)       Total
                           ---------  ---------  ---------  ---------  ---------
Net interest income........$   8,827  $   1,160  $     203  $   (336)  $   9,854
Other revenue-external
   customers...............    3,379        149        108       139       3,775
Other revenue - from
   other segments..........      294         --         --     2,668       2,962
Depreciation and
   amortization............      931         92         16        49       1,088
Equity in the net income
   of investees............       --         --         --     1,741       1,741
Other significant noncash
items:                    
   Provision for loan
   losses..................      525        294         50        --         869
Income tax expense.........    1,536       (102)        16      (281)      1,169
Segment profit.............    1,910       (193)        24     1,215       2,956
Segment assets.............  258,662     39,086      5,763    31,311     334,882
Expenditures for additions
   to assets...............      838        553         57        14       1,462



                                                   1997
                           -----------------------------------------------------
                                                  Inter-
                           Reportable   Other    segment           Consolidated
                            Segments    (a)    Elimination  Other      Total
                           ---------- -------- ----------- ------- -------------
Net interest income........$   10,190 $  (336)         --       -- $       9,854
Other revenue-external
   customers...............     3,636     139          --  $   (45)        3,730
Other revenue - from
   other segments..........       294   2,668  $   (2,962)      --             0
Depreciation and 
   amortization............     1,039      49          --       --         1,088
Equity in the net income
   of investees............        --   1,741      (1,741)      --             0
Other significant noncash
items:                        
   Provision for loan
   losses..................       869      --        (130)      --           739
Income tax expense.........     1,450    (281)         --       --         1,169
Segment profit.............     1,741   1,215      (1,741)     (45)        1,170
Segment assets.............   303,511  31,311     (45,343)      --       289,479
Expenditures for additions                                            
   to assets...............     1,448      14          --       --         1,462
---------------

(a) The financial  information  presented in the "Other"  column is for the bank
holding  company.  This component of the Company is not intended to earn revenue
and does not qualify as an operating segment.

<PAGE>


20. Condensed Financial Information-Parent Company Only:

Condensed financial  information of BNCCORP on a parent company only basis is as
follows:

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

                                                        1998         1997
                                                      ----------  ------------
  Assets:
     Cash and short-term investments...............   $     353   $     1,068
     Investment in subsidiaries....................      33,151        28,847
     Loans.........................................         341           499
     Receivable from subsidiaries..................      20,106        14,248
     Deferred changes and intangible assets, net...         360           407
     Other.........................................       1,023           699
                                                      ----------  ------------
                                                      $  55,334   $    45,768
                                                      ==========  ============
  Liabilities and stockholders= equity:
     Notes payable.................................   $  29,148   $    21,979
     Accrued expenses and other liabilities........         931           641
                                                      ----------  ------------
                                                         30,079        22,620
                                                      ----------  ------------
     Preferred stock, $.01 par value, 2,000,000 shares
        Authorized; no shares issued or outstanding..        --            --
     Common stock, $.01 par value, 10,000,000 shares
        authorized; 2,390,184 and 2,402,126 shares 
        issued and outstanding (excluding 42,880 and 
        25,380 shares held in treasury) in 1998 and 
        1997, respectively..........................         24            24
     Capital surplus...............................      13,951        13,786
     Retained earnings.............................      11,651         9,384
     Treasury stock (42,880 and 25,380 shares,  
        respectively)..............................       (513)          (216)
     Unrealized holding gain on securities available        
        for sale...................................         142           170
                                                      ----------  ------------
                                                         25,255        23,148
                                                      ----------  ------------
                                                      $  55,334   $    45,768
                                                      ==========  ============




<PAGE>



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

                                                   1998        1997       1996
                                                 ----------  ---------- --------
Income:
   Management fee income.......................  $   1,426  $      965 $     927
   Interest....................................      1,623         847       210
   Other.......................................         30           9       138
                                                 ----------  ---------- --------
      Total income.............................      3,079       1,821     1,275
                                                 ----------  ---------- --------
Expenses:                                                                
   Interest....................................      2,226       1,348       546
   Personnel expense...........................      1,268         849       965
   Legal and other professional................        188         103       155
   Depreciation and amortization...............         71          58        49
   Other.......................................        397         370       367
                                                 ----------  ---------- --------
      Total expenses...........................      4,150       2,728     2,082
                                                 ----------  ---------- --------
Loss before income tax benefit and equity in
   undistributed income of subsidiaries........     (1,071)       (907)    (807)
Income tax benefit.............................        341         282       281
                                                 ----------  ---------- --------
Loss before equity in undistributed income of         
   subsidiaries................................       (730)       (625)    (526)
Equity in undistributed income of subsidiaries.      2,997       2,006     1,741
                                                 ----------  ---------- --------
      Net income...............................  $   2,267   $   1,381  $  1,215
                                                 ==========  ========== ========



<PAGE>


                                 Parent Company Only
                         Condensed Statements of Cash Flows
                           For the Years Ended December 31
                                   (In thousands)
                                                        1998     1997     1996
                                                      -------- -------- --------
Cash flows from operating activities:
   Net income.......................................  $  2,267 $  1,381 $ 1,215
   Adjustments to reconcile net income to net cash                          
      used in operating activities -
      Depreciation and amortization.................        53       48      49
      Equity in undistributed income of subsidiaries    (2,997)  (2,006) (1,741)
      Change in prepaid expenses and other             
         receivables................................    (5,858) (10,174) (3,816)
      Change in accrued expenses and other    
         liabilities................................       290      456     (71)
      Other.........................................         7       64    (392)
                                                      --------- -------- -------
         Net cash used in operating activities......    (6,238) (10,231) (4,756)
                                                      --------- -------- -------
Cash flows from investing activities:
   Net increase (decrease) in loans.................      (158)     (46)      1
   Increase in investment in subsidiaries ..........    (1,307)    (641) (8,700)
   Sale (purchases) of premises, leasehold
      improvements and equipment....................       (67)     (12)     50
   Dividends received...............................        --       --     700
                                                      --------- -------- -------
         Net cash used in investing activities......    (1,532)    (699) (7,949)
                                                      --------- -------- -------
Cash flows from financing activities:
   Repayments of long-term borrowings...............    (9,785) (21,190) (1,004)
   Proceeds from long-term borrowings...............    16,870   32,875   7,899
   Amortization of discount on subordinated notes...        84       46      -- 
   Amortization of deferred charges.................        18       10      --
   Purchase of treasury stock                             (297)      --      --
   Other, net.......................................       165       --      (7)
                                                      --------- -------- -------
         Net cash provided by financing activities..     7,055   11,741   6,888
                                                      --------- -------- -------
Net increase (decrease) in cash and cash equivalents      (715)     811  (5,817)
Cash and cash equivalents, beginning of year........     1,068      257   6,074
                                                      ========= ======== =======
Cash and cash equivalents, end of year..............  $    353  $ 1,068  $  257
                                                      ========= ======== =======
Supplemental cash flow information:
   Interest paid....................................  $  2,187  $ 1,262  $  524
                                                      ========= ======== =======
   Income tax payments received from subsidiary
      banks, net of income taxes paid...............  $    438  $   322  $  441
                                                      ========= ======== =======


<PAGE>


Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

None

                                          PART III

Item 9. Directors,  Executive Officers,  Promotors and Control Persons;  Section
16(a) Beneficial Ownership Reporting Compliance

Information  concerning the Company's  directors and officers called for by this
item will be included in the Company's  definitive  Proxy Statement  prepared in
connection  with the 1999 Annual  Meeting of  Stockholders  and is  incorporated
herein by reference.

Item 10.  Executive Compensation

Information  concerning the compensation of the Company's  executives called for
by this  item will be  included  in the  Company's  definitive  Proxy  Statement
prepared in  connection  with the 1999  Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

Item 11.  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 the Company's  definitive
Proxy  Statement  prepared  in  connection  with  the  1999  Annual  Meeting  of
Stockholders and is incorporated herein by reference.

Item 12.  Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions called for
by this  item will be  included  in the  Company's  definitive  Proxy  Statement
prepared in  connection  with the 1999  Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

                                          PART IV


         Item 13.             Exhibits and Reports on Form 8-K

   (a)   Exhibits.
      Reference is made to the Exhibit Index  beginning on page E-1 hereby.  The
      Company 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 the Company's 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,
      1998.


<PAGE>



                                         Signatures

Pursuant to the  requirements  of Section 13 or 15(d) of the  Exchange  Act, the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized, on March 24, 1999.

                                                      Name of Issuer
                                                      By:   /s/ Tracy Scott     
                                                      Chief Executive Officer

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the Registrant and in the capacities  indicated,
on March 29, 1999.

                                          Chairman of the Board, Chief Executive
             /s/ Tracy Scott                         Officer and Director
                                                 (Principal Executive Officer)
                                          President, Chief Operating Officer and
       /s/ Gregory K. Cleveland                            Director
                                                 (Principal Financial Officer)
                                                (Principal Accounting Officer)
   /s/ Jon E. Strinden                                     Director

   /s/ Kevin D. Pifer                                      Director

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

   /s/ Richard M. Johnson, Jr.                             Director

   /s/ John M. Schaffer                                    Director

   /s/ Jerry R. Woodcox                                    Director

   /s/ Brad J. Scott                                       Director



<PAGE>


                                 EXHIBIT INDEX


--------------------------------------------------------------------------------
 Exhibit
   No.                             Exhibit Description
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      2.1 Plan of merger of BNCCORP, Inc., a North Dakota corporation into
          BNCCORP, INC., a Delaware corporation, incorporated by reference to
          Exhibit 2.1 to the Registrant's Registration Statement on Form SB-2
          (Registration No. 33-92369).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      2.2 Branch Purchase and Assumption Agreement dated as of January 31,
          1995 between Metropolitan Federal Bank, fsb and Bismarck National
          Bank, a national banking association, incorporated by reference to
          Exhibit 2.2 to the Registrant's Registration Statement on Form SB-2
          (Registration No. 33-92369).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      2.3 Stock  Purchase  Agreement  dated as of June 7, 1995, by and among the
          Company,   Gregory   Cleveland,   Tracy  Scott  and  Community   First
          Bankshares,   Inc.,  incorporated  by  reference  to  Exhibit  2.3  to
          Amendment No. 1 to the Registrant's Registration Statement on Form
          SB-2 (Registration No. 33-92369).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      2.4 Agreement and Plan of Merger of the First National Bank of Linton
          with and into BNC National Bank dated as of July 28, 1995,
          incorporated  by  reference  to Exhibit 2.4 to the  Registrant's  Form
          10-KSB dated as of March 29, 1996.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      2.5 Contract for Sale of Assets dated December 31, 1996 by and between
          Gregory K. Cleveland, P.C. and BNC National Bank, incorporated by
          reference to Exhibit 2.5 to the  Registrant's  Form 10-KSB dated as of
          March 26, 1997.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      2.6 Stock Purchase Agreement dated February 26, 1997 by and between BNC
          National Bank and Shareholders of J.D. Meier Insurance Agency,
          incorporated  by  reference  to Exhibit 2.6 to the  Registrant's  Form
          10-KSB dated as of March 26, 1997.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      2.7 Amended and Restated  Agreement and Plan of Merger dated  December 19,
          1997 among BNCCORP, Inc., J.D. Meier Insurance Agency, Inc. and Lips &
          Lahr, Inc., William Wade, Dale Ely, Laif Olson, Richard Lahr and David
          Clausnitzer,   incorporated   by  reference  to  Exhibit  2.7  to  the
          Registrant's Form 10-KSB dated as of March 25, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      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).


                                      E-1
<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      4.2 Warrant to Subscribe for and Purchase Common Stock of BNCCORP, Inc.
          by and between the Company and Dain Bosworth Incorporated,
          incorporated  by  reference  to Exhibit 4.2 to the  Registrant's  Form
          10-KSB dated as of March 29, 1996.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
      4.3 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).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     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, Gregory K. Cleveland, and Brad J. Scott, 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. 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 Employment Agreement between the Company, Bismarck National Bank and
          Thomas Resch, incorporated by reference to Exhibit 10.8 to Amendment
          No. 1 to the Registrant's Registration Statement on Form SB-2
          (Registration No. 33-92369) as amended by Amendment dated June 1,
          1996.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     10.5 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     10.6 Term Loan Agreement dated February 19, 1996 by and between Firstar
          Bank Milwaukee, N.A. and BNCCORP, Inc., incorporated by reference to
          Exhibit  10.6 to the  Registrant's  Form 10-KSB  dated as of March 29,
          1996.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     10.7 Revolving Credit Agreement dated February 19, 1996 by and between
          Firstar Bank Milwaukee, N.A. and BNCCORP, Inc., incorporated by
          reference to Exhibit 10.7 to the Registrant's  Form 10-KSB dated as of
          March 29, 1996.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     10.8 Amendment to Term Loan Agreement and Term Note dated February 11,
          1997 by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.,
          incorporated  by reference to Exhibit  10.8 to the  Registrant's  Form
          10-KSB dated as of March 26, 1997.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     10.9 Amendment to Revolving  Credit  Agreement  and  Revolving  Credit Note
          dated February 11, 1997 by and between  Firstar Bank  Milwaukee,  N.A.
          and BNCCORP,  Inc.,  incorporated  by reference to Exhibit 10.9 to the
          Registrant's Form 10-KSB dated March 26, 1997.

                                      E-2

<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.10 Revolving Credit Agreement dated September 27, 1996 by and between
          BNC Financial Corporation and Bank Windsor, incorporated by
          reference to Exhibit 10.10 to the Registrant's Form 10-KSB dated March
          26, 1997.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.11 Second Amendment to Term Loan Agreement and Term Note dated July 16,
          1997 by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.,
          incorporated  by reference to Exhibit 10.11 to the  Registrant's  Form
          10-QSB dated August 13, 1997.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.12 Second  Amendment to Revolving  Credit  Agreement and Revolving Credit
          Note dated July 16, 1997 by and between Firstar Bank  Milwaukee,  N.A.
          and BNCCORP,  Inc.,  incorporated by reference to Exhibit 10.12 to the
          Registrant's Form 10-QSB dated August 13, 1997.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.13 Third Amendment to Term Loan Agreement and Term Note dated February
          19, 1998 by and between Firstar Bank Milwaukee, N.A. and BNCCORP,
          Inc.,  incorporated by reference to Exhibit 10.13 to the  Registrant's
          Form 10-KSB dated as of March 25, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.14 Third  Amendment to Revolving  Credit  Agreement and Revolving  Credit
          Note dated  February 19, 1998 by and between  Firstar Bank  Milwaukee,
          N.A. and BNCCORP, Inc.,  incorporated by reference to Exhibit 10.14 to
          the Registrant's Form 10-KSB dated as of March 25, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.15 Form of  Stock  Option  Agreement  for the  Grant of  Incentive  Stock
          Options Under the BNCCORP,  Inc. 1995 Stock Incentive Plan dated as of
          January  2,  1998  between  the  Company  and each of Tracy J.  Scott,
          Gregory  K.  Cleveland,  Brad J.  Scott,  Thomas J.  Resch and John A.
          Malmberg,   incorporated   by  reference  to  Exhibit   10.15  to  the
          Registrant's Form 10-KSB dated as of March 25, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.16 Contract  of Sale  dated as of August 29,  1997,  by and  between  BNC
          National Bank and Preferred Investment Services, Inc., incorporated by
          reference to Exhibit 10.16 to the Registrant's Form 10-KSB dated
          as of March 25, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.17 Assignment Agreement dated as of August 29, 1997, by and between
          Preferred Investment Services, Inc. and BNC National Bank,
          incorporated by reference to Exhibit 10.17 to the Registrant's Form
          10-KSB dated as of March 25, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.18 Form of Amended and Restated Employment Agreement Between J.D. Meier
          Insurance Agency, Inc. and each of David Clausnitzer, Dale Ely,
          Richard Lahr and Laif Olson, dated as of June 30, 1998, incorporated
          by reference to Exhibit 10.18 to the Registrant's Form 10-QSB dated as
          of August 13, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.19 Letter of Amendment to Term Loan Agreement and  Subsequent  Amendments
          by and between Firstar Bank Milwaukee,  N.A. and BNCCORP,  Inc., dated
          as of July 14, 1998, incorporated by reference to Exhibit 10.19 to the
          Registrant's Form 10-QSB dated as of August 13, 1998.

                                      E-3

<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.20 Letter of Amendment  to  Revolving  Credit  Agreement  and  Subsequent
          Amendments by and between  Firstar Bank  Milwaukee,  N.A. and BNCCORP,
          Inc. dated as of July 14, 1998,  incorporated  by reference to Exhibit
          10.20 to the Registrant's Form 10-QSB dated as of August 13, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.21 Restricted  Stock  Agreement  Under  the  BNCCORP,   Inc.  1995  Stock
          Incentive  Plan dated as of June 15, 1998  between  BNCCORP,  Inc. and
          Kevin  Pifer,  incorporated  by  reference  to  Exhibit  10.21  to the
          Registrant's Form 10-QSB dated as of August 13, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.22 Employment Agreement Among BNCCORP, Inc., BNC National Bank and
          Kevin D. Pifer dated as of June 15, 1998, incorporated by reference
          to Exhibit 10.22 to the Registrant's Form 10-QSB dated as of August
          13, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.23 Employment Agreement Among BNCCORP, Inc., BNC National Bank and
          David J. Sorum dated as of October 13, 1998, incorporated by
          reference to Exhibit 10.23 to the Registrant's Form 10-QSB dated as of
          November 13, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.24 Revolving Credit Agreement dated August 14, 1998 by and between BNC
          Financial Corporation and Firstar Bank Milwaukee, N.A., incorporated
          by reference to Exhibit 10.24 to the Registrant's Form 10-QSB dated as
          of November 13, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.25 Employment Agreement Among BNCCORP, Inc., BNC National Bank of
          Minnesota and James LaBreche dated as of March 1, 1999, incorporated
          by reference to Exhibit 10.25 to the Registrant's Form 10-KSB dated as
          of March 29, 1999.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.26 Employment Agreement Among BNCCORP, Inc., BNC National Bank and
          Kevin D. Pifer, amended, dated as of June 15, 1998, incorporated by
          reference to Exhibit 10.26 to the Registrant's Form 10-KSB dated as of
          March 29, 1999.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.27 Employment Agreement Among BNCCORP, Inc., BNC National Bank and Jon
          Strinden, dated as January 1, 1999, incorporated by reference to
          Exhibit  10.27 to the  Registrant's  Form 10-KSB dated as of March 29,
          1999.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.28 Form of Restricted Stock Agreement Under the BNCCORP,  Inc. 1995 Stock
          Incentive Plan dated as of October 15, 1998, January 1, 1999 and March
          1, 1999 between BNCCORP,  Inc. and David J. Sorum, Jon E. Strinden and
          James D. LaBreche,  incorporated  by reference to Exhibit 10.28 to the
          Registrant's Form 10-KSB dated as of March 29, 1999.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.29 Amendment to Term Loan Agreement and Term Note by and between  Firstar
          Bank Milwaukee, N.A. and BNCCORP, Inc., dated as of February 19, 1999,
          incorporated  by reference to Exhibit 10.29 to the  Registrant's  Form
          10-KSB dated as of March 29, 1999.

                                      E-4

<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
    10.30 Amendment to Revolving  Credit  Agreement and Revolving Credit Note by
          and between Firstar Bank Milwaukee,  N.A. and BNCCORP,  Inc., dated as
          of February 19, 1999,  incorporated  by reference to Exhibit  10.30 to
          the Registrant's Form 10-KSB dated as of March 29, 1999.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     21.1 Subsidiaries of Company.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
     23.1 Consent of Arthur Andersen LLP
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
       27 Financial Data Schedule
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

                                      E-5