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

                                    FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 for the fiscal year ended December 31, 2004

                                       or

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

                          Commission File No. 0-26290

                                  BNCCORP, INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

     The aggregate market value of the voting and non-voting  common equity held
by non-affiliates of the Registrant, computed by reference to the price at which
the common equity was last sold, as of the last business day of the Registrant's
most recently completed second fiscal quarter was $31,867,968.00.

     The  number of shares  of the  Registrant's  common  stock  outstanding  on
March 15, 2005 was 2,885,976.

     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 2005 annual meeting of stockholders
              are incorporated by reference into Part III hereof.

<PAGE>
<TABLE>
<CAPTION>


                                  BNCCORP, INC.

                           ANNUAL REPORT ON FORM 10-K
                     FOR FISCAL YEAR ENDED DECEMBER 31, 2004

                                TABLE OF CONTENTS
                                                                            Page

                                     PART I
<S>  <C>                                                                      <C>
Item 1. Business .........................................................    3

Item 2. Properties........................................................   16

Item 3. Legal Proceedings.................................................   16

Item 4. Submission of Matters to a Vote of Security Holders...............   17

                                     PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder
        Matters and Issuer Purchases of Equity Securities.................   17

Item 6. Selected Financial Data ..........................................   18

Item 7. Management's Discussion and Analysis of Financial
        Condition and Results of Operations...............................   20

Item 7A.Quantitative and Qualitative Disclosures about Market Risk........   57

Item 8. Financial Statements and Supplementary Data.......................   61

Item 9. Changes in and Disagreements with Accountants on
        Accounting and Financial Disclosure...............................  114

Item 9A.Controls and Procedures...........................................  114

Item 9B.Other Information.................................................  115

                                    PART III

Item 10.Directors and Executive Officers of the Registrant................  116

Item 11.Executive Compensation............................................  116

Item 12.Security Ownership of Certain Beneficial Owners and Management....  116

Item 13.Certain Relationships and Related Transactions....................  116

Item 14.Principal Accounting Fees and Services............................  116

                                     PART IV

Item 15.Exhibits, Financial Statement Schedules...........................  116
</TABLE>
<PAGE>
                                     PART I

The  discussions  contained  in this  Annual  Report on Form 10-K  which are not
historical  in nature  may  constitute  forward-looking  statements  within  the
meaning  of  Section  27A of  the  Securities  Act  of  1933,  as  amended  (the
"Securities  Act"),  and Section 21E of the Securities  Exchange Act of 1934, as
amended (the "Exchange Act"), and, as such, may involve risks and uncertainties.
We caution  readers that these  forward-looking  statements,  including  without
limitation,  those  relating to future  business  prospects,  revenues,  working
capital,  liquidity,  capital needs,  interest costs, income and expenses of the
Company are subject to certain risks and  uncertainties  that could cause actual
results  to  differ  materially  from  those  indicated  in the  forward-looking
statements due to several important factors.  These factors include, but are not
limited to: risks of loans and  investments,  including  dependence on local and
regional economic conditions; competition for our customers from other providers
of financial  services;  possible  adverse  effects of changes in interest rates
including  the effects of such changes on derivative  contracts  and  associated
accounting  consequences;  risks  associated  with our  acquisition  and  growth
strategies; and other risks which are difficult to predict and many of which are
beyond our control.  For a  discussion  of some of the  additional  factors that
might cause such  differences,  see Item 1. Business  "-Factors  That May Affect
Future Results of Operations."

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

Item 1. Business

General

BNCCORP is a bank holding company  registered under the Bank Holding Company Act
of 1956 (the "BHCA")  headquartered in Bismarck,  North Dakota. We are dedicated
to providing a broad range of financial  products and superior  customer service
to businesses and consumers within the communities we serve. BNCCORP operates 26
locations in Arizona,  Minnesota,  North  Dakota,  Colorado and Utah through its
subsidiary,  BNC  National  Bank.  The  Company  also  provides  a wide array of
insurance,  brokerage  and trust and  financial  services  through BNC  National
Bank's subsidiaries, Milne Scali and BNC AMI, and the Bank's trust and financial
services  division.  The  Company  offers  a wide  variety  of  traditional  and
nontraditional  financial  products and services in order to meet the  financial
needs of its current customer base,  establish new  relationships in the markets
it serves and expand its business opportunities.

We will  continue  to  emphasize  internally  generated  growth by  focusing  on
increasing our market share within the market areas we now serve.  Acquisitions,
de novo branches and mergers have also played an important role in our strategy.
During the three years ended  December  31,  2004,  we  completed  several  such
transactions. See Note 2 to the Consolidated Financial Statements included under
Item 8 of Part II for further information related to these transactions.  We may
seek additional growth  opportunities  through select  acquisitions of financial
services companies that we believe complement our businesses.

At December 31, 2004,  we had total assets of $673.7  million,  total loans held
for sale of $60.2 million, total loans held for investment of $293.8 million and
total deposits of $455.3 million.

Mission Statement

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

Operating Strategy

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

     o    Emphasize individualized, high-level customer service.
     o    Encourage an entrepreneurial  attitude among the employees who provide
          products and services.
     o    Maintain high asset quality with strong loan policies and continuously
          monitoring loans and the loan review process.
     o    Maintain centralized administrative and support functions.

Strategic Vision

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

     o    Diversified    business    base    of    banking,     insurance    and
          brokerage/trust/financial services;
     o    Presence in multiple attractive  markets:  Arizona,  Minnesota,  North
          Dakota, Colorado and Utah;

In  this  section  of  this  annual   report  on  Form  10-K,  we  detail  these
distinguishing  strengths,  which we expect will help  customers  to reach their
financial  goals,  and allow us to  establish a solid  foundation  upon which to
build shareholder value.

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

Banking  segment.  BNC  National  Bank  operates  20 banking  branch  offices in
Arizona,  Minnesota and North Dakota.  Known for its business  banking  services
such as business financing and commercial  mortgages,  corporate cash management
and merchant programs, our banking division also offers a full range of consumer
lending and deposit options.  The Bank is  differentiated by its service culture
of "high personal touch," supported by effective technology.  Among the services
offered are online, bill pay and telephone banking operations, and products such
as  the  "Sweep/Repo"  account,  the  "Wealthbuilder"  family  of  variable-rate
interest  checking and money market deposit products and the BNC cash back debit
card. During 2004, the Bank initiated a mortgage loan financing program in which
the Bank purchases  short-term  participation  interests in residential mortgage
loans originated by a mortgage  company.  Also during 2004, the Bank initiated a
student loan financing program in which the Bank purchases  short-term interests
in student loans originated by a student loan origination company.

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

Each of our bank  branches  offers the usual and  customary  range of depository
products provided by commercial  banks,  including  checking,  savings and money
market  deposits and  certificates  of deposit.  During 2004, we increased  core
deposits $30.8 million, or 8.4 percent  (noninterest-bearing  deposits increased
$18.7 million, or 41.7 percent).  Our Wealthbuilder  family of interest checking
and  money  market  deposit  accounts   continues  to  be  popular.   These  are
competitively   priced  floating  rate  accounts  with  rates  variable  at  our
discretion.  The Bank's  deposits  are not received  from a single  depositor or
group  of  affiliated  depositors,  the loss of any one of  which  would  have a
material  adverse effect on our business.  Rates paid on deposits vary among the
categories  of  deposits  due to  different  terms,  the size of the  individual
deposit,  the nature of other  banking  relationships  with the  depositor,  the
current  interest  rate  environment  and rates paid by  competitors  on similar
deposits.  The Bank also offers customer repurchase  agreements to acquire funds
from  customers  where the  customers  require  or desire  to have  their  funds
supported by collateral consisting of investment securities of the Bank.

The  Bank  also  accepts  brokered  deposits  and  obtains  direct  non-brokered
certificates  of deposit  through  national  deposit  networks  when  management
believes such transactions are beneficial to the Bank. Additionally, through the
Certificate of Deposit Account Registry  ServiceSM  (CDARSSM),  the Bank can now
place large customer  deposits into smaller  denomination  (fully  FDIC-insured)
certificates of deposit at multiple institutions. This provides the Bank's large
deposit  customers  with FDIC  insurance on their entire  balances (up to $ 10.0
million)  and  the  convenience  of  managing  their   certificates  of  deposit
investments through a single bank relationship.  This service was made available
beginning  in 2003 and we had $16.8  million of such  deposits at  December  31,
2004.  For  more  information  on  our  deposit  activities,  see  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Financial Condition - Deposits" included under Item 7 of Part II.

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

Insurance  segment.  Our insurance  segment has offices in the  following  major
cities: Phoenix, Tucson, Minneapolis,  Bismarck, Salt Lake City and Englewood (a
suburb of Denver). Our insurance subsidiary,  Milne Scali (which merged with BNC
Insurance during 2004) is an independent  insurance agency  representing many of
the nation's leading insurance carriers.  Our insurance  operations were greatly
expanded in 2002  through the  acquisition  of Milne  Scali,  one of the largest
independent  insurance  agencies  in  the  Arizona  market.  Several  additional
insurance  acquisitions were made during 2003 and 2004. These are all summarized
in Note 2 to the Consolidated Financial Statements included under Item 8 of Part
II. The acquisitions have helped to increase the scope of our insurance segment,
adding to insurance  commission income volume,  and opening new markets (such as
Colorado and Utah) to our insurance segment.

Milne Scali serves local,  regional and national  businesses.  Its clients range
from large, established companies with hundreds of millions in sales to emerging
businesses  with growing  needs.  It serves  clients in nearly  every  industry,
including construction, real estate development, manufacturing, distribution and
wholesale, professionals, government, financial institutions, retail and service
industries.  The only industry in which Milne Scali has a concentration (defined
as 35% of  commissions  or more) is the  construction  industry  in the  Arizona
market.  This customer base includes  general  contractors and commercial  trade
contractors.

Acquisitions  during 2003 and 2004 have  broadened  its  geographical  reach and
added a surety business based in Colorado.  Milne Scali can provide a full range
of  services  from the  self-insured  multinational  client  to the  local  sole
proprietor.  Milne  Scali  provides  a wide  array  of  products  and  services,
including but not limited to:

Business   insurance  such  as  property,   liability,   fleet  auto,   workers'
compensation,   errors  and  omissions,   directors  and  officers,   employment
practices,  crime and  employee  dishonesty,  umbrella  and  excess,  boiler and
machinery, surety and bonds, flood and earthquake.

Risk management such as risk and loss control services,  risk transfer analysis,
risk consulting, risk management program design and implementation.

Group benefits insurance such as health, life, dental,  disability,  401(k)s and
SEPs,  prepaid  legal,  key man  protection,  buy/sell  protection,  estate  and
business continuation.

Association  and  affinity  group  insurance  programs  such as  group  auto and
homeowners,  benefit plans,  product liability programs,  workers'  compensation
groups,  self-insured  pools, risk retention groups,  captive and rent-a-captive
operations.

Personal  lines such as  homeowners  and  renters,  personal  articles  floater,
automobile, watercraft, aircraft, flood and earthquake, umbrella and life.

The North Dakota/Minnesota division of Milne Scali (formerly BNC Insurance) also
provides  a wide  range of  commercial  and  personal  lines of  insurance.  The
division  can look to Milne  Scali's  Phoenix  division  to assist in  providing
expertise  and  insurance  coverage  and risk  management  products and services
beyond what was available to our  customers  prior to our  acquisition  of Milne
Scali.

The insurance segment will typically have its strongest performance in the first
quarter of each fiscal year as profit sharing  payments from insurance  carriers
are generally  received during that quarter.  The insurance segment continues to
be an important and significant part of our business.

Brokerage/trust/financial  services  segment.  BNC AMI and the Bank's  trust and
financial services  divisions provide customers with an extensive  complement of
financial  services  options.   The  trust  and  financial  services  divisions,
presently  operating  primarily  out  of  Bismarck,  provide  trust,  financial,
business,  estate and tax  planning,  estate  administration,  agency  accounts,
payroll  services,   accounting  services,  employee  benefit  plan  design  and
administration,  individual  retirement accounts ("IRAs"),  individual custodial
self-directed  IRAs,  asset  management,  tax  preparation  and the  BNC  Global
Balanced  Collective  Investment  Fund,  a  proprietary  investment  vehicle for
qualified  retirement plans. BNC AMI, operating out of Bismarck and Minneapolis,
in affiliation  with Raymond James Financial  Services,  Inc.  offers  financial
services  alternatives  such as  securities  trading,  investment  management of
institutional and individual accounts, mutual funds and annuities.
<PAGE>
Revenues  from  external  customers,  measures  of profit  and/or loss and total
assets for each of the  segments  listed  above are  presented in Note 16 to the
Consolidated Financial Statements included under Item 8 of Part II.

Attractive  Markets.  We operate primarily in three distinct  markets:  Arizona;
Minnesota; and North Dakota. While these areas have very different fundamentals,
each enjoys a solid economic base and what we believe are  compelling  long-term
growth dynamics.

Our Arizona  market has been one of the fastest  growing areas of the country in
population  and personal  income for the past several  years.  The population is
expected to continue  increasing at a rate of more than 100,000 per year. During
2004, the Phoenix metropolitan area surged ahead of Atlanta as the country's top
new-home  builder.  The housing sector's strength is expected to continue due to
the Phoenix  metropolitan  area's large stretches of undeveloped  land, new jobs
and resort  climate.  Low interest  rates and  affordable  home prices have also
helped to make the Phoenix housing market more attractive.  Tourism,  retirement
and job creation in such industries as software and  biotechnology are among the
additional  drivers of the economy,  according to studies by the  University  of
Arizona.  Segments with  significant  operations in the Arizona  market  include
banking and insurance.

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

Bismarck-Mandan  (our largest  market in North Dakota) is  characterized  by low
unemployment and generally favorable economic  conditions.  Bismarck is not only
the state capital,  but also the trade and  transportation hub for South Central
North Dakota. The area is experiencing strong residential and commercial growth,
and its diverse economic base includes energy,  health care,  agriculture and an
expanding data  processing/customer  service component.  Several national retail
chains  also are  planning to open new  locations  in the  Bismarck-Mandan  area
during  2005 and 2006.  The  banking,  insurance  and  brokerage/trust/financial
segments are all represented in the North Dakota market.

Our insurance segment also began operations in Englewood, Colorado and Salt Lake
City, Utah during 2004.  These markets also exhibit growth  characteristics  and
good fundamentals.

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

As of December  31, 2004,  33 percent of our loans were to borrowers  located in
North  Dakota,  30  percent  to  borrowers  located  in  Arizona,  30 percent to
borrowers  located in Minnesota,  4 percent to borrowers located in South Dakota
and the  remainder to borrowers in various  other  states.  Other than  brokered
deposits  and  direct  non-brokered  certificates  of deposit  obtained  through
national deposit  networks,  each banking branch draws most of its deposits from
its general market area.

The following table presents total deposits and net loans outstanding at each of
our locations as of December 31, 2004 (in thousands):
<TABLE>
<CAPTION>
                                            Net Loans Held
                                 Total      for Investment
           Location              Deposits    Outstanding 1
-----------------------------   ----------  --------------
<S>                             <C>           <C>
  Bismarck, ND.............     $ 130,823     $ 100,253
  Crosby, ND...............        17,345           188
  Ellendale, ND............        10,173           484
  Garrison, ND.............        15,664           467
  Golden Valley, MN........        12,954         4,779
  Kenmare, ND..............        10,428           189
  Linton, ND...............        41,297         8,949
  Minneapolis, MN..........        43,144        83,602
  Phoenix, AZ..............        31,272        76,804
  Scottsdale, AZ...........        41,512        17,312
  Stanley, ND..............        16,792           791
  Tempe, AZ................        13,614           785
  Watford City, ND.........        11,536            84
  Brokered deposits........        55,010            --
  National market deposits.         3,779            --
                                ----------    ----------
     Total ................     $ 455,343     $ 294,687
                                ==========    ==========
------------------
<FN>
1 Before  allowance  for credit  losses,  unearned  income  and net  unamortized
deferred fees and costs.
</FN>
</TABLE>
<PAGE>

Regional Community Banking Philosophy

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

Distribution methods

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

Risk Management

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

Competition

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

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

Supervision and Regulation

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

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

Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is  subject  to  regulation,  supervision  and  examination  by the Board of
Governors of the Federal Reserve System ("Federal Reserve"). BNCCORP is required
to file periodic  reports with the Federal Reserve and such other reports as the
Federal Reserve may require pursuant to the BHCA. The Bank is a national banking
association  and is subject to  supervision,  regulation and  examination by the
Office of the  Comptroller of the Currency  ("OCC").  Since the Federal  Deposit
Insurance  Corporation  ("FDIC")  insures the deposits of the Bank,  the Bank is
also subject to regulation and supervision by the FDIC.  Additionally,  the Bank
is a member of the  Federal  Reserve  System.  Every state has a  Department  of
Insurance that primarily acts as a consumer  advocate.  Milne Scali as a company
has an insurance  resident license in Arizona,  North Dakota and Minnesota and a
non-resident  license in almost every other state.  All insurance  producers are
licensed by the state and most other Milne Scali  employees  also have insurance
licenses.

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

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

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

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

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

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

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

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

Prompt  Corrective  Action and Other  Enforcement  Mechanisms.  Federal  banking
agencies possess broad powers to take corrective and other supervisory action to
resolve  the  problems of insured  depository  institutions,  including  but not
limited to those  institutions  that fall below one or more  prescribed  minimum
capital ratios. Each Federal banking agency has promulgated regulations defining
the following five categories in which an insured depository institution will be
placed, based on its capital ratios: well capitalized;  adequately  capitalized;
undercapitalized;     significantly     undercapitalized;     and     critically
undercapitalized.  At December 31, 2004,  the Bank exceeded the required  ratios
for classification as well capitalized.

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

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

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

Dividend  Restrictions.  Dividends  from bank  subsidiaries  often  constitute a
principal  source of income to a bank  holding  company.  Federal  rules limit a
bank's ability to pay dividends to its parent bank holding  company in excess of
amounts  generally  equal to the bank's net profits  from the current  year plus
retained net profits for the  preceding two years or if the payment would result
in  the  bank  being  considered  "undercapitalized"  under  regulatory  capital
guidelines. Bank regulatory agencies also have authority to prohibit a bank from
engaging in activities  that, in the opinion of the applicable  bank  regulatory
authority, constitute unsafe or unsound practices in conducting its business. It
is possible,  depending upon the financial condition of the bank in question and
other factors,  that the applicable bank regulatory  authority could assert that
the payment of dividends or other payments might, under some  circumstances,  be
such an unsafe or unsound  practice.  At December 31, 2004  approximately  $14.1
million of  retained  earnings  were  available  for Bank  dividend  declaration
without prior regulatory approval.
<PAGE>

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

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

All  FDIC-insured  depository  institutions  must pay an  annual  assessment  to
provide  funds for the  payment of  interest  on bonds  issued by the  Financing
Corporation,  a Federal corporation chartered under the authority of the Federal
Housing  Finance  Board.  The bonds,  commonly  referred to as FICO bonds,  were
issued to capitalize  the Federal  Savings and Loan Insurance  Corporation.  The
FDIC  established the FICO assessment  rates effective for the fourth quarter of
2004 at  approximately  $0.00360  per  $100 of  assessable  deposits.  The  FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the  FDIC's   insurance  funds  and  do  not  vary  depending  on  a  depository
institution's capitalization or supervisory evaluations.

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

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

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

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

Bank Secrecy Act. The Bank Secrecy Act requires  financial  institutions to keep
records and file reports that are determined to have a high degree of usefulness
in  criminal,  tax  and  regulatory  matters,  and  to  implement  counter-money
laundering  programs  and  compliance  procedures.  The Bank Secrecy Act and its
implementing regulations are presently the subject of increased regulatory focus
and several  financial  institutions  have been penalized due to deficiencies in
their Bank Secrecy Act programs.

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

Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the "Financial Modernization
Act")  expands  the  powers  of banks  and bank  holding  companies  to sell any
financial  product or service,  closes the unitary thrift loophole,  reforms the
Federal Home Loan Bank ("FHLB")  System to increase  community  banks' access to
loan funding,  protects banks from discriminatory state insurance regulation and
establishes a new framework for the regulation of bank and bank holding  company
securities brokerage and underwriting  activities.  The Financial  Modernization
Act also includes  provisions in the privacy  area,  restricting  the ability of
financial  institutions to share nonpublic  personal  customer  information with
third parties.

USA  Patriot  Act of 2001.  The USA  Patriot  Act of 2001  (the  "Patriot  Act")
contains  sweeping  anti-money  laundering and financial  transparency  laws and
requires various regulations including: due diligence requirements for financial
institutions  that  administer,  maintain  or manage  private  bank  accounts or
correspondent  accounts for non-U.S.  persons;  standards for verifying customer
identification  at the time of account  opening;  rules to  promote  cooperation
among  financial  institutions,  regulators,  and law  enforcement  entities  in
identifying  parties  that may be involved  in  terrorism  or money  laundering;
reports by nonfinancial trades and business filed with the Treasury Department's
Financial Crimes  Enforcement  Network for transactions  exceeding  $10,000 and;
filing of suspicious  activity  reports by brokers and dealers if they believe a
customer may be violating U.S. laws and regulations.

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

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

Employees

At December 31, 2004, we had 344 employees,  including 336 full-time  equivalent
employees.  None  of  our  employees  is  covered  by  a  collective  bargaining
agreement.  We consider our relationships with our employees to be satisfactory.
Approximate  employees  by  segment  were as follows as of  December  31,  2004:
banking, 180; insurance, 153; and brokerage/trust/financial, 11.

Factors That May Affect Future Results of Operations

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

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

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

Changes in market interest rates can significantly impact our earnings.  Changes
in  interest  rates  impact  the demand  for new  loans,  the credit  profile of
existing  loans,  the rates received on loans and investment  securities,  rates
paid on deposits and borrowings  and the value of our  derivative  contracts and
their  associated  impact on  earnings.  The  relationship  between the interest
income received on loans and investment  securities and interest expense paid on
deposits  and  borrowings  is known as net  interest  income.  The  level of net
interest income can fluctuate given changes in market interest rates. We measure
interest rate risk under various rate scenarios and using specific  criteria and
assumptions.  A summary  of this  process,  along  with the  results  of our net
interest  income  simulations  is presented  at  "Quantitative  and  Qualitative
Disclosures  About Market Risk" included  under Item 7A of Part II.  Although we
believe our  current  level of  interest  rate  sensitivity  is  reasonable  and
effectively  managed,  significant  fluctuations  in interest  rates may have an
adverse effect on our business, financial condition and results of operations.

Changes in market interest rates can directly influence the performance of our
insurance segment. Interest rate movements directly affect insurance company
investment in bonds and, as a result, the rates they subsequently charge for
insurance policies. A rising interest rate environment increases investment
returns for insurers and generally allows those insurers to compete more
aggressively with lower insurance rates. During the past three years, interest
rates have been low and insurance rates were up. Over the next several years,
interest rates could move up and lower insurance rates would be expected, which
in turn would create lower premiums and commissions. We cannot predict, with any
degree of certainty, interest rate developments, and the resulting impact on
insurance premiums and commissions, in future periods.

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

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

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

Loss of key  employees may disrupt  relationships  with certain  customers.  Our
business is primarily relationship-driven in that many of our key employees have
extensive  customer  relationships.  Loss of a key employee  with such  customer
relationships  may lead to the loss of business if the customers  were to follow
that employee to a competitor.  While we believe our  relationship  with our key
producers is good, we cannot guarantee that all of our key personnel will remain
with our  organization.  Loss of such key  personnel,  should they enter into an
employment relationship with one of our competitors, could result in the loss of
some of our customers.
<PAGE>

Impairment  of goodwill or other  intangible  assets  could  require  charges to
earnings,  which could result in a negative impact on our results of operations.
Under current accounting standards, goodwill and certain other intangible assets
with indeterminate lives are no longer amortized but, instead,  are assessed for
impairment periodically or when impairment indicators are present. Assessment of
goodwill and such other intangible  assets could result in  circumstances  where
the  applicable  intangible  asset  is  deemed  to be  impaired  for  accounting
purposes.  Under such circumstances,  the intangible asset's impairment would be
reflected as a charge to earnings in the period during which such  impairment is
identified. Further information regarding intangible assets is presented in Note
9 to the Consolidated Financial Statements included under Item 8 of Part II.

Recent  accounting  changes may give rise to a future  regulatory  capital event
that  would  entitle  the  trusts  created  to  facilitate  our trust  preferred
securities offerings to redeem the trust preferred securities which would result
in a reduction  to our  consolidated  capital  ratios.  In  accordance  with the
provisions  of  Financial  Accounting  Standards  Board  Interpretation  No. 46,
"Consolidation of Variable Interest  Entities," we have  deconsolidated  the two
subsidiary  trusts that have issued  trust  preferred  securities  for  BNCCORP.
Accordingly,  the trust  preferred  securities  are now reported as a liability.
Under  applicable  regulatory  guidelines,  a  portion  of the  trust  preferred
securities  qualifies as Tier 1 capital (to certain  limits),  and the remaining
portion  qualifies as Tier 2 capital (to certain  limits).  On July 2, 2003, the
Federal  Reserve  issued  Supervisory  Letter (SR 03-13),  which  preserves  the
historical  capital  treatment of trust preferred  securities as capital despite
the  deconsolidation  of these securities.  That Supervisory  Letter remained in
effect at December 31, 2004, and we continue to include these  securities in our
capital base. A final rule regarding  trust  preferred  securities has just been
issued and is under review.

Item 2.     Properties

The principal offices of BNCCORP are located at 322 East Main Avenue,  Bismarck,
North Dakota.  The Bank owns the building.  The principal  office of the Bank is
located at 2425 East Camelback Road, Phoenix,  Arizona, which it is leasing. The
Bank owns branch offices at 219 South 3rd Street and 801 East Century Avenue and
an additional office building at 116 North 4th Street in Bismarck. The Bank also
owns a branch office at 17045 North Scottsdale Road, Scottsdale, Arizona and 650
Douglas Drive, Golden Valley,  Minnesota. It also owns its banking facilities in
Crosby, Ellendale,  Kenmare, Linton, Stanley and Watford City, North Dakota. The
Bank has also  purchased  a property at 6515 East Grant in Tucson,  Arizona.  We
anticipate  construction  of a banking  branch at this location  sometime in the
future. The Bank has also purchased land at 4155 Dean Lakes Boulevard, Shakopee,
Minnesota  where  construction of a branch office is expected to commence during
2005.

The Bank's  facilities  at 502 West Main Street  (Mandan)  and  Garrison,  North
Dakota are leased. The facilities  occupied by the Bank, BNC AMI and Milne Scali
at 333 South Seventh Street,  Minneapolis,  Minnesota, and the Bank's facilities
at 640 and 660 South Mill Avenue, Tempe, Arizona, along with 2425 East Camelback
Road, Phoenix, Arizona are also leased.

Milne Scali  occupies  five  locations in Arizona:  1750 East  Glendale  Avenue,
Phoenix; 660 South Mill Avenue,  Tempe; 2400 East Highway 89A, Cottonwood;  6751
East Camino Principal,  Tucson; and 8101 East Florentine Road,  Prescott Valley.
Milne Scali also  occupies  locations at 8310 South Valley  Highway,  Englewood,
Colorado and 175 South Main, Salt Lake City,  Utah. The Bank owns the properties
in Phoenix and Tucson and the remaining five facilities are presently leased.

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

Item 3.     Legal Proceedings

Terrence M. Scali v.  BNCCORP,  Inc.,  Milne Scali & Company,  Inc.,  Gregory K.
Cleveland and  Jacquelyn L.  Cleveland,  husband and wife,  Tracy Scott and Myrt
Scott,  husband  and wife,  and Richard W.  Milne,  Jr. and Robin  Jayne  Milne,
husband and wife, AAA No. 76 166 00014 05 JAFA (the "Arbitration"). The American
Arbitration  Association is administering  the  Arbitration.  Terrence M. Scali,
former  executive  vice  president of BNCCORP,  and former  President and CEO of
Milne Scali, a subsidiary of the Bank,  which is a subsidiary of BNCCORP,  and a
former director of BNCCORP, has commenced an arbitration against BNCCORP,  Milne
Scali,  and three current  executives  and members of the Boards of Directors of
BNCCORP and Milne Scali.  Mr. Scali alleges that his damages exceed $500,000 and
arise out of the  termination of his employment  with BNCCORP and Milne Scali in
July 2004.  In his claims  against  BNCCORP and Milne Scali,  Mr. Scali  alleges
breach of contract,  wrongful  termination,  and conversion.  Mr. Scali has also
brought a claim for a declaration  of his rights under an employment  agreement,
seeking to have his noncompete,  nonsolicitation,  and nondisclosure  agreements
nullified.  For his claims against the  executives,  Mr. Scali alleges  tortuous
interference with contract and defamation. Mr. Scali has also named the wives of
the three  executives as  respondents  to the  Arbitration  in their capacity as
potential holders of community property interests with their husbands.  BNCCORP,
Milne Scali and the executives  deny any wrongdoing and will  vigorously  defend
against Mr. Scali's claims.

Terrence M. Scali v. Gregory K.  Cleveland and Jane Doe  Cleveland,  husband and
wife,  Tracy Scott and Jane Doe Scott,  husband and wife,  and Richard W. Milne,
Jr. and Robin Jayne Milne,  husband and wife,  State of Arizona  Superior Court,
Maricopa  County,  Case No.  CV2005-001741.  Mr. Scali has  commenced a parallel
action in Arizona  Superior  Court against  BNCCORP and Milne Scali  executives,
asserting  the same claims in court that were asserted in the  Arbitration.  The
executives  intend to vigorously  defend against Mr. Scali's claims in the court
case, as they will do in the Arbitration.

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

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

No matters were submitted to a vote of security holders during the quarter ended
December 31, 2004.

                                     PART II

Item 5. Market for the Registrant's  Common Equity,  Related Stockholder Matters
and Issuer Purchases of Equity Securities.

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

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

                            2004               2003
                     -----------------  ------------------
Period                High      Low      High       Low
                     -------   -------  --------   -------
<S>                  <C>       <C>       <C>       <C>
First Quarter......  $18.40    $15.16    $11.10    $ 7.00
Second Quarter.....   17.51     15.00     13.49     10.64
Third Quarter......   18.10     13.62     15.25     12.23
Fourth Quarter.....   16.60     14.38     19.20     14.62
</TABLE>
<PAGE>

On January 28, 2005, there were 104 record holders of the Company's Common Stock
as reported by the Company's stock transfer agent and registrar,  American Stock
Transfer & Trust Company.

BNCCORP's  policy  is to  retain  its  earnings  to  support  the  growth of its
business. Our board of directors has never declared cash dividends on our Common
Stock  and does not  plan to do so in the  foreseeable  future.  In  making  the
determination to pay dividends, we will consider all relevant factors including,
among other  things,  our capital  position and current tax law as it relates to
the treatment of dividends. "Supervision and Regulation - Dividend Restrictions"
included under Item 1 of Part I discusses  regulatory  restrictions on dividends
payable by the Bank to BNCCORP.

Pursuant to an asset  purchase and sale  agreement  dated  December 31, 2003, on
December 31, 2004,  BNCCORP issued 15,692 shares of its Common Stock to IASW for
the second installment related to Milne Scali's acquisition of certain assets of
IASW. The shares of Common Stock were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.

Pursuant to an asset  purchase and sale  agreement,  on June 30,  2004,  BNCCORP
issued  26,607  shares of its Common  Stock to  Finkbeiner  Insurance,  Inc.  in
connection  with Milne Scali's  acquisition  of certain assets and assumption of
certain  liabilities  of the insurance  agency.  The shares of Common Stock were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act.

Pursuant to an asset  purchase and sale  agreement,  on March 31, 2004,  BNCCORP
issued  22,470  shares of its Common  Stock to The  Richard  Q. Perry  Agency in
connection  with Milne Scali's  acquisition  of certain assets and assumption of
certain  liabilities  of the insurance  agency.  The shares of Common Stock were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act.

Pursuant to an asset purchase and sale  agreement,  on January 5, 2004,  BNCCORP
issued  2,888  shares of its Common  Stock to Lynk  Financial  LLC  ("Lynk")  in
connection with the Bank's  acquisition of certain assets of Lynk. The shares of
Common  Stock were  issued in  reliance  upon the  exemption  from  registration
provided by Section 4(2) of the Securities Act.

BNCCORP did not purchase any of its Common Stock during 2004.

Item 6. Selected Financial Data

The selected  consolidated  financial  data  presented  below under the captions
"Income  Statement  Data" and "Balance Sheet Data" as of and for the years ended
December 31, 2004,  2003,  2002,  2001 and 2000 are derived from the  historical
audited  consolidated  financial  statements  of the Company.  The  Consolidated
Balance  Sheets as of December  31, 2004,  2003,  2002,  2001 and 2000,  and the
related Consolidated Statements of Income,  Comprehensive Income,  Stockholders'
Equity and Cash Flows for each of the five  years in the period  ended  December
31, 2004 were audited by KPMG LLP, independent public accountants. The financial
data  below  should  be  read  in  conjunction  with  and  is  qualified  by the
Consolidated Financial Statements and the notes thereto included under Item 8.

The adoption of Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial  Instruments with  Characteristics of both Liabilities and
Equity" ("SFAS 150") in 2003,  which requires that the expense  associated  with
BNCCORP's subordinated  debentures be included in interest expense, is reflected
as such in all applicable periods in the table below.

The data  presented in the table below  includes the  financial  performance  of
Milne Scali since its acquisition in April 2002. The data presented in the table
below also includes the financial  performance of our other  acquisitions  since
their respective acquisition dates.  Additionally,  the financial performance of
the Bank's Fargo,  North Dakota branch (which was sold on September 30, 2003) is
not  reflected  in the  data  below.  All  data  presented  is  from  continuing
operations as of and for all periods presented.


<PAGE>
<TABLE>
<CAPTION>
                           Selected Financial Data (1)

                                                For the Years Ended December 31,
                                   ----------------------------------------------------------
                                      2004         2003        2002        2001       2000
                                   ---------    ---------   ----------   ---------  ---------
                                         (dollars in thousands, except share and
                                                    per share data)
Income Statement Data:
<S>                                <C>          <C>         <C>          <C>        <C>
Total interest income............. $  30,141    $  28,646   $   31,818   $  37,586  $  40,658

Total interest expense............    14,100       15,268       18,736      24,033     27,679
                                   ---------    ---------   ----------   ---------  ---------
Net interest income...............    16,041       13,378       13,082      13,553     12,979
Provision for credit losses.......       175        1,475        1,202       1,699      1,202
Noninterest income................    23,450       20,812       16,296       8,714      7,683
Noninterest expense...............    34,768       27,290       25,329      18,182     15,821
Income tax provision..............     1,144        1,581          822         691      1,183
                                   ---------    ---------   ----------   ---------  ---------
Income from continuing operations. $  3,404     $   3,844   $    2,025   $   1,695  $   2,456
                                   =========    =========   ==========   =========  =========
Balance Sheet Data: (at end of
  period)
Total assets...................... $ 673,710    $ 621,477   $  602,228   $ 555,967  $ 547,447

Investments.......................   235,916      262,568      208,072     211,801    253,566
Federal Reserve Bank and Federal
   Home Loan Bank stock...........     7,541        7,596        7,071       7,380      9,619
Loans held for sale...............    60,197           --           --          --         --
Loans held for investment, net of
   unearned income................   293,814      283,555      335,794     297,924    252,753
Allowance for credit losses.......   (3,335)      (4,763)      (5,006)     (4,325)    (3,588)
Total deposits....................   455,343      395,942      398,245     375,277    330,894
Short-term borrowings.............    33,697       31,833       28,120         760     33,228
Federal Home Loan Bank advances...    97,200      112,200       97,200     117,200    117,200
Long-term borrowings..............    10,079        8,640        8,561          13     12,642
Guaranteed preferred beneficial
   interests in Company's
   subordinated debentures........    22,509       22,397       22,326      22,244      7,606
Common stockholders' equity.......    42,596       38,686       36,223      30,679     29,457
Book value per common share
   outstanding.................... $   14.77    $   14.07   $    13.41   $   12.79  $   12.30
Earnings Performance /
   Share Data (1):
Return on average total assets....     0.54%        0.64%        0.36%       0.31%      0.47%
Return on average common
   stockholders' equity...........     8.01%        9.92%        5.77%       5.51%     10.02%
Net interest margin...............     2.86%        2.47%        2.51%       2.63%      2.65%
Net interest spread...............     2.72%        2.29%        2.29%       2.25%      2.35%
Basic earnings per
   common share (1)............... $    1.18    $    1.38   $     0.74   $    0.71  $    1.02

Diluted earnings per common
   share (1)...................... $    1.14    $    1.35   $     0.74   $    0.70  $    1.02
Cash dividends per common share...        --           --           --          --         --
Cash dividends per preferred
   share.......................... $  700.00    $  800.00   $   526.67          --         --

Total cash dividends - preferred
   stock.......................... $      93    $     120   $       79          --         --
Average common shares
   outstanding.................... 2,813,531    2,705,602    2,611,629   2,395,353  2,397,356
Average common and common
   equivalent shares.............. 2,896,241    2,764,816    2,628,798   2,421,113  2,398,553
Shares outstanding at yearend..... 2,884,876    2,749,196    2,700,929   2,399,170  2,395,030
Balance Sheet and Other Key
   Ratios (1):
Nonperforming assets to total
   assets.........................     0.08%        1.28%      1.27%      0.80%         0.12%
Nonperforming loans to
   total loans....................     0.19%        2.80%      2.27%      1.47%         0.23%
Net loan charge-offs to average
   loans..........................   (0.58)%      (0.56)%    (0.17)%    (0.33)%       (0.20)%
Allowance for credit losses to
   total loans....................     1.14%        1.68%      1.49%      1.45%         1.42%
 Allowance for credit losses
   to nonperforming loans.........      607%          60%        66%        99%          619%
Average common stockholders'
   equity to average
   total assets...................     6.50%        6.25%      5.93%      5.64%         4.71%

-------------------------
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>
<PAGE>
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
     of Operations

Overview

The following table summarizes income from continuing operations, net income and
basic  and  diluted  earnings  per share for the 12  months  ended  December  31
(amounts in thousands):
<TABLE>
<CAPTION>
                                         2004          2003         2002
                                      ------------  -----------  ------------
<S>                                     <C>          <C>           <C>
Income from continuing operations....   $   3,404    $   3,844     $   2,025
Net income...........................       3,404        3,844         2,039
Basic earnings per common share......        1.18         1.38          0.75
Diluted earnings per common share....        1.14         1.35          0.75
</TABLE>

Executive  Summary - 2004 vs. 2003.  The following  information  highlights  key
developments during 2004:

o    2004 net income  was $3.40  million  ($1.14  per share on a diluted  basis)
     compared with $3.84 million ($1.35 per share) for 2003.

o    Our insurance  segment again  provided a significant  contribution  to 2004
     profitability.

o    Net interest income for 2004 rose $2.66 million to $16.04 million  compared
     with  $13.38  million in 2003  primarily  due to an  increase  in  interest
     income,  a decrease  in  interest  expense  and a  decrease  in the cost of
     interest-bearing liabilities.

o    Noninterest  income for 2004 rose $2.64 million to $23.45 million  compared
     with $20.81 million in 2003.

o    Noninterest  income  represented  59.4  percent of gross  revenues  in 2004
     compared with 60.9 percent in 2003.

o    Insurance  commission income accounted for $17.49 million,  or 74.6 percent
     of noninterest  income,  compared with $14.57  million,  or 70.0 percent in
     2003.

o    Net  interest  margin  widened to 2.86 percent in 2004  compared  with 2.47
     percent in 2003.

o    Noninterest  expense rose 27.4 percent to $34.77  million for 2004 compared
     with $27.29  million  for 2003.  The  increase  primarily  reflected  costs
     associated with expanded banking  operations in Arizona and Minnesota along
     with expanded insurance operations in Arizona,  Colorado and Utah. $688,000
     of the  increase  related  to the  termination  of  employment  of a former
     officer of Milne Scali.  The payment  represented  the  acceleration of the
     remaining salary due under his multi-year employment contract.

o    Total assets  reached  $673.71  million at December 31, 2004  compared with
     $621.48 million one year earlier.

o    Total  loans held for sale were  $60.20  million at December  31,  2004,  a
     result  of the  inception  of  mortgage  loan and  student  loan  financing
     programs during 2004.

o    Total  loans held for  investment  increased  $10.26  million  in 2004,  to
     $293.81 million.

o    The  provision  for credit  losses was  $175,000 in 2004  compared to $1.48
     million in 2003,  the  reduction  reflecting  a  significant  reduction  in
     nonperforming loans during 2004.

o    Nonperforming  loans  declined to $549,000 at December  31, 2004 from $7.95
     million at December  31, 2003  primarily  reflecting  the full pay-off of a
     $4.5 million loan and the  resolution  of a $2.2 million loan that resulted
     in a  charge-off  of $1.2  million (of which  $975,000  was reserved for at
     December 31, 2003).

o    Loan  charge-offs were $1.88 million in 2004 compared with $1.82 million in
     2003 with $1.2 million of the charge-offs  related to the $2.2 million loan
     referred to above.

o    The ratio of the allowance for credit losses to total  nonperforming  loans
     was 607 percent at December 31, 2004  compared  with 60 percent at December
     31, 2003.

o    Investment securities available for sale declined $26.65 million to $235.92
     million at  December  31,  2004  compared  with  $262.57  million  one year
     earlier.
<PAGE>

o    Core deposits  increased  $30.8  million,  or 8.4 percent over the 12-month
     period ended  December 31, 2004. The growth was primarily  attributable  to
     our Arizona market and our new branch office in Golden Valley, Minnesota.

o    Noninterest-bearing  deposits increased $18.7 million, or 41.7 percent over
     the 12-month period ended December 31, 2004.

o    Total deposits  increased $59.40 million to $455.34 million at December 31,
     2004 compared with $395.94 million at December 31, 2004.

o    Total  common  stockholders'  equity was  approximately  $42.60  million at
     December  31,  2004,  equivalent  to book value per common  share of $14.77
     (tangible book value per common share of $4.42).

During 2004, we continued to take actions which we believe will  strengthen  the
performance of our core businesses.

In banking,  we opened our Golden Valley,  Minnesota branch office and completed
our acquisition of a mortgage banking operation.

In insurance,  we increased the volume of insurance  commission  income and made
acquisitions in several different market areas.

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

Looking  forward  to 2005,  we hope to  continue  to  derive  benefits  from our
investments in expanding our banking and insurance operations,  and implementing
programs to encourage cross-selling across all of our business lines.

Results of Operations

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

The following table sets forth, for the periods indicated,  certain  information
relating to our average  balance sheet and reflects the yield on average  assets
and cost of average  liabilities.  Such yields and costs are derived by dividing
income and expense by the average balance of assets and liabilities. All average
balances have been derived from monthly averages,  which are indicative of daily
averages.
<PAGE>
<TABLE>
<CAPTION>
           Analysis of Average Balances, Interest and Yields/Rates (1)

                                               For the Years ended December 31,
                               ---------------------------------------------------------------------------------------------------
                                            2004                              2003                           2002
                               ------------------------------   ------------------------------- ----------------------------------
                                          Interest    Average               Interest   Average               Interest    Average
                                Average    earned      yield     Average     earned     Yield     Average     earned      yield
                                balance    or paid    or cost    balance    or paid    or cost    balance    or paid     or cost
                               ---------  --------   --------   ---------   --------  ---------  ---------  ----------  ----------
                                                          (dollars in thousands)
Assets
<S>                            <C>        <C>           <C>     <C>         <C>           <C>    <C>        <C>              <C>
Federal funds
  sold/interest-bearing due
    from...................... $    495   $      8      1.62%   $  1,447    $    11       0.76%  $  3,795   $       66       1.74%
  Taxable investments.........  236,854      9,664      4.08%    203,051      7,803       3.84%   193,972        9,997       5.15%
  Tax-exempt investments......   34,538      1,604      4.64%     32,982      1,535       4.65%    19,979          977       4.89%
  Loans held for sale.........   15,818        718      4.54%         --         --                    --           --
  Loans and leases held for
    investment (2)............  276,653     18,147      6.56%    308,115     19,297       6.26%   307,227       20,778       6.76%
  Allowance for credit losses.   (3,757)        --                (4,909)        --                (4,579)          --
                               ---------  --------              ---------   --------             ---------  ----------
    Total interest-earning
     assets (3)...............  560,601     30,141      5.38%    540,686     28,646       5.30%   520,394       31,818       6.11%
  Noninterest-earning assets:
     Cash and due from banks..   11,938                           11,733                           13,706
     Other....................   63,600                           48,249                           34,946
                               ---------                        ---------                        ---------
  Total assets from
     continuing operations....  636,139                          600,668                          569,046
  Assets from discontinued
     Fargo branch.............       --                               --                           22,258
                               ---------                        ---------                        ---------
         Total assets......... $636,139                         $600,668                         $591,304
                               =========                        =========                        =========
Liabilities and Stockholders'
 Equity
  Deposits:
    Interest checking and
      money market accounts... $198,992      2,130      1.07%   $186,796      2,189       1.17%  $174,108        2,849       1.64%
    Savings...................    6,695         47      0.70%      6,052         51       0.84%     4,511           39       0.86%
  Certificates of deposit:
    Under $100,000............   95,509      2,439      2.55%     94,820      3,012       3.18%   104,964        4,068       3.88%
    $100,000 and over.........   58,625      1,916      3.27%     55,928      2,186       3.91%    73,639        3,286       4.46%
                               ---------  --------              ---------   --------             ---------  ----------
  Total interest-bearing
    deposits..................  359,821      6,532      1.82%    343,596      7,438       2.16%   357,222       10,242       2.87%

  Borrowings:
    Short-term borrowings.....   29,663        519      1.75%     21,942        382       1.74%     7,799          141       1.81%
    FHLB advances.............  109,195      4,898      4.49%    111,777      5,333       4.77%    97,711        6,214       6.36%
    Long-term borrowings......    9,371        393      4.19%      8,623        387       4.49%     6,063          310       5.11%
    Subordinated debentures...   22,239      1,758      7.91%     22,141      1,728       7.80%    22,056        1,829       8.29%
                               ---------  --------              ---------   --------             ---------  ----------
  Total interest-bearing
    liabilities...............  530,289     14,100      2.66%    508,079     15,268       3.01%   490,851       18,736       3.82%
    Noninterest-bearing
     demand accounts..........   52,822                           40,022                           33,951
                               ---------                        --------                         ---------
     Total deposits and
       interest-bearing
       liabilities............  583,111                          548,101                          524,802
Other noninterest-bearing
  liabilities.................   10,551                           13,542                           11,336
Liabilities from discontinued
  Fargo branch................       --                               --                           20,476
                               ---------                        --------                         ---------
         Total liabilities....  593,662                          561,643                          556,614
Stockholders' equity..........   42,477                           39,025                           34,690
                               ---------                        --------                         ---------
         Total liabilities
           and stockholders'
           equity............. $636,139                         $600,668                         $591,304
                               =========                        ========                         =========
Net interest income...........             $16,041                          $13,378                           $ 13,082
                                          ========                          ========                         =========
Net interest spread...........                          2.72%                             2.29%                              2.29%
                                                     ========                          ========                             ======
Net interest margin (4).......                          2.86%                             2.47%                              2.51%
                                                     ========                          ========                             ======
  Ratio of average
    interest-earning
    assets to average
    interest-bearing
    liabilities...............   105.72%                         106.42%                          106.02%
                               =========                        ========                         =========
 --------------------
</TABLE>
<PAGE>
(1)  From continuing operations for all periods presented.
(2)  Average  balances of loans and leases include  nonaccrual loans and leases,
     and are presented net of unearned income.  Loan fee  amortization  totaling
     approximately  $2.0,  $1.5 and $1.3  million is included  in loan  interest
     income for the 12-month  periods  ended  December 31, 2004,  2003 and 2002,
     respectively.
(3)  Tax-exempt  income has not been  presented on a taxable  equivalent  basis.
     Tax-exempt  income of $1.6 and $1.5  million and  $982,000  was  recognized
     during the years ended December 31, 2004, 2003 and 2002, respectively.
(4)  Net  interest   margin  equals  net  interest  income  divided  by  average
     interest-earning assets for the period.

The following table illustrates, for the periods indicated, the dollar amount of
changes in our interest income and interest  expense for the major components of
interest-earning  assets  and  interest-bearing  liabilities  and  distinguishes
between the increase related to higher  outstanding  balances and the volatility
of interest  rates.  Changes  attributable  to the combined impact of volume and
rate have been  allocated  proportionately  to the  change due to volume and the
change due to rate:
<TABLE>
<CAPTION>
                   Analysis of Changes in Net Interest Income (1)

                                                For the Years Ended December 31,
                                      ----------------------------------------------------------
                                        2004 Compared to 2003          2003 Compared to 2002
                                      ---------------------------   ----------------------------
                                         Change Due to                 Change Due to
                                      -------------------           --------------------
                                        Volume     Rate     Total    Volume     Rate       Total
                                      ---------  --------  -------  ---------  ---------  --------
                                                        (in thousands)
Interest Earned on Interest-Earning
 Assets
<S>                                    <C>        <C>      <C>      <C>        <C>        <C>
  Federal funds sold/interest-bearing
    due from.......................... $     4    $   (7)  $   (3)  $    (30)  $   (25)   $   (55)
  Taxable investments.................   1,358       503    1,861        493    (2,687)    (2,194)
  Tax-exempt investments..............      72        (3)      69        603       (45)       558
  Loans held for sale.................     665         1      666         --        --         --
  Loans held for investment...........  (2,065)      967   (1,098)        60    (1,541)    (1,481)
                                      ---------  --------  -------  ---------  ---------  --------
    Total increase (decrease) in
      interest income.................      34     1,461    1,495      1,126    (4,298)    (3,172)
                                      ---------  --------  -------  ---------  ---------  --------
Interest Expense on Interest-Bearing
 Liabilities
  Interest checking and money market
    accounts..........................     181      (240)     (59)       228     ( 888)      (660)
  Savings............................        7       (11)      (4)        13        (1)        12
  Certificates of Deposit:
    Under $100,000....................      22      (595)    (573)      (368)     (688)    (1,056)
    $100,000 and over.................     112      (382)    (270)      (726)     (374)    (1,100)
  Short-term borrowings...............     135         1      136        246        (5)       241
  FHLB advances.......................    (121)     (314)    (435)     1,198    (2,079)      (881)
  Long-term borrowings................      25       (19)       6        108       (31)        77
  Subordinated debentures.............       8        23       31          7      (108)      (101)
                                      ---------  --------  -------  ---------  ---------  --------
  Total increase (decrease) in
    interest expense..................     369    (1,537)  (1,168)       706    (4,174)    (3,468)
                                      ---------  --------  -------  ---------  --------- --------
  Increase (decrease) in net interest
    income............................ $  (335)   $2,998   $2,663   $    420   $  (124)   $   296
                                      =========  ========  =======  =========  ========= ========

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

Year ended  December 31, 2004  compared to year ended  December  31,  2003.  Net
interest  income  increased  $2.7 million,  or 19.9  percent,  and totaled $16.0
million for 2004. Net interest  spread and net interest  margin adjusted to 2.72
and 2.86 percent,  respectively, for the 12-month period ended December 31, 2004
from 2.29 and 2.47,  respectively,  for the 12-month  period ended  December 31,
2003.
<PAGE>

Net interest  income and margin for the 12-month  period ended December 31, 2004
were  favorably  impacted  by the  recovery  of cash  basis  interest  income of
approximately  $408,000  on a $4.5  million  loan  that had been  classified  as
nonaccrual at December 31, 2003 and was paid in full during the first quarter of
2004. Net interest  income and margin for the 12-month period ended December 31,
2003  were  negatively   impacted  by  the  charge-off  of  interest  income  of
approximately $287,000 on the same loan,  Additionally,  net interest income and
margin for the 12-month  periods ended  December 31, 2004 and 2003 were slightly
impacted by derivative  contract-related  transactions  during the periods which
decreased  net  interest  income by $55,000 and $80,000,  respectively.  Without
these interest income variances and derivative transactions, net interest margin
for the 2004 and 2003  periods  would have been 2.80  percent and 2.54  percent,
respectively.

The remaining fair value of our interest rate cap contracts on December 31, 2004
was  $1,000.  Therefore,  net  interest  income  in future  periods  can only be
negatively  affected  to that  amount if the fair  value of the  contracts  were
required to be written to $0. If the fair value of the derivative contracts were
to be increased in future  periods due to  increases in  three-month  LIBOR (the
rate upon  which our  current  cap  contracts  are  based),  this  would  have a
favorable  effect on net interest  income in those  future  periods as favorable
adjustments  to the fair value of the  contracts  would be  reflected as reduced
interest expense.

The following  condensed  information  summarizes the major factors combining to
create the  changes to net  interest  income,  spread and margin  during 2004 as
compared to 2003. Lettered explanations following the summary describe causes of
the changes in these major factors.
<TABLE>
<CAPTION>

                  Net Interest Income Analysis - 2004 vs. 2003 (1)


                                                   For the Years
                                                 Ended December 31,          Change
                                                ---------------------  ------------------
                                                   2004       2003
                                                ---------  ----------
                                                 (amounts in millions)
<S>                                              <C>       <C>         <C>          <C>
Total interest income increased................. $  30.1   $   28.6    $   1.5      5.2%
  Due to:
    Increase in average earning assets.......... $ 560.6   $  540.7    $  19.9      3.7%
  Driven by:
    Increase in average loans held
      for sale (a).............................. $  15.8         --    $  15.8        --
    Increase in average investments (b)......... $ 271.4   $  236.0    $  35.4     15.0%
  Offset by:
    Decrease in average loans held for
      investment (c)............................ $ 276.7   $  308.1    $(31.4)   (10.2)%
  The overall increase in average earning
    assets was coupled with:
      Increase in yield on interest-earnings
        assets..................................   5.38%      5.30%      0.08%      1.5%
  Driven by:
    Increase in yield on loans held for
      investment (d)............................   6.56%      6.26%      0.30%      4.8%
    Increase in yield on investments (e)........   4.15%      3.96%      0.19%      4.8%


Total interest expense decreased................ $  14.1   $   15.3    $ (1.2)    (7.8)%

  Due to:
    Decrease in cost of interest-bearing
      liabilities...............................   2.66%      3.01%    (0.35)%   (11.6)%
  Driven by:
    Decrease in cost of interest-bearing
      deposits (f)..............................   1.82%      2.16%    (0.34)%   (15.7)%
    Decrease in cost of borrowings (g)..........   4.44%      4.76%    (0.32)%    (6.7)%
  These decreases were offset by:
    Increase in average interest-bearing
      liabilities............................... $ 530.2   $  508.1    $  22.2      4.4%
    Driven by:
    Increase in average borrowings (h).......... $ 170.5   $  164.5    $   6.0      3.6%
    Increase in average interest-bearing
      deposits (i).............................. $ 359.8   $  343.6    $  16.2      4.7%
<PAGE>
---------------
<FN>

(1)  From continuing operations for all periods presented.

(a)  Average loans held for sale increased due to mortgage loan and student loan
     financing programs initiated during 2004.

(b)  Although period end investments  available for sale decreased $26.7 million
     between  December 31, 2003 and December 31, 2004,  average  investments for
     the 12-month period ended December 31, 2004 increased $35.4 million.  Total
     investments  at  December  31,  2003  were  $262.6   million.   Outstanding
     investments were increased to $288.4 million at March 31, 2004 to replace a
     reduction in loans held for investment that occurred due to general planned
     loan payoffs of approximately $15.0 million, general pay downs on revolving
     lines of credit of  approximately  $8.4  million  and the  payoff of a $4.5
     million  loan  that  was  on  nonaccrual   status  at  December  31,  2003.
     Investments  available  for sale ended June 30, 2004 at $263.4  million and
     September 30, 2004 at $236.3  million.  Over $30.0  million of  investments
     available  for sale were sold during  September  2004 and the proceeds were
     used to fund other earning assets,  particularly mortgage loans and student
     loans held for sale.

(c)  Average loans held for investment  during 2004 declined despite an increase
     in period end loans between  December 31, 2003 and December 31, 2004. Loans
     held for  investment  declined in early 2004 to a low of $254.0  million at
     March 31, 2004 but  finished out the year with  increases  ending at $294.7
     million at December 31, 2004. Average loans held for investment were as low
     as $261.2  million in April 2004 compared  with $303.6  million in December
     31, 2004.

(d)  Our  increased  loan yield  reflects  the  Federal  Reserve  interest  rate
     increases  during  2004.  The  daily  average  prime  rate in 2004 was 4.35
     percent as compared to 4.12 percent for 2003.  The higher prime rate caused
     floating  rate loans to reprice at higher  rates and new loans,  which,  as
     discussed  above,  came on  primarily  in the  second  half of 2004,  to be
     originated at higher interest rate levels.

(e)  The  increased  yield on  investments  reflects  the higher  interest  rate
     environment  during 2004 combined with the lower levels of  prepayments  on
     mortgage-backed securities and collateralized mortgage obligations relative
     to 2003. During 2004, lower premium  amortization ($2.9 million versus $4.1
     million in 2003) helped generate higher yields in the investment portfolio.

(f)  The decrease in cost of  interest-bearing  deposits reflects our efforts to
     contain  deposit  costs  during  a rising  rate  environment  in 2004.  The
     decrease also reflects a full year of benefit of rate  decreases at the end
     of 2003.  Additionally,  during  2003,  new  certificates  of  deposit  and
     repricing  certificates  of deposit priced at lower rates that then reduced
     the cost of deposits going forward into 2004.

(g)  The decrease in cost of borrowings  was primarily a result of a decrease in
     the average cost of FHLB borrowings. $15 million of FHLB advances priced at
     a weighted average rate of 4.77 matured during 2004.

(h)  The increase in average borrowings is primarily  attributable to higher use
     of Federal funds  purchased and the $1.5 million  increase in our long-term
     borrowings that occurred during 2004.

(i)  The increase in average interest-bearing deposits is primarily attributable
     to the increase in average interest  checking and money market accounts due
     to growth in our Wealthbuilder  family of deposit products.  The growth was
     generated  primarily in the Arizona market with some growth attributable to
     our new Golden Valley, Minnesota branch office.
</FN>
</TABLE>

Year ended  December 31, 2003  compared to year ended  December  31,  2002.  Net
interest income increased  $296,000,  or 2.3 percent,  and totaled $13.4 million
for 2003. Net interest  spread and net interest margin adjusted to 2.29 and 2.47
percent, respectively, for the 12-month period ended December 31, 2003 from 2.29
and 2.51, respectively, for the 12-month period ended December 31, 2002.

Net interest  income and margin for the 12-month  period ended December 31, 2003
were impacted by the charge-off of interest income of approximately  $287,000 on
the loan discussed  earlier.  Net interest income for the 12-month periods ended
December 31, 2003 and 2002 also reflected  mark-to-market losses on the value of
derivative  contracts,  which  decreased  net  interest  income by  $80,000  and
$779,000,  respectively.  Without  the  interest  income  charged  off  and  the
mark-to-market  adjustments on these  derivative  contracts for the two periods,
net  interest  margin  would  have been  2.54  percent  for the 12 months  ended
December 31, 2003 and 2.66 percent for the 12 months ended December 31, 2002.
<PAGE>

The following  condensed  information  summarizes the major factors combining to
create the  changes to net  interest  income,  spread and margin  during 2003 as
compared to 2002. Lettered explanations following the summary describe causes of
the changes in these major factors.
<TABLE>
<CAPTION>
                  Net Interest Income Analysis - 2003 vs. 2002 (1)

                                                   For the Years
                                                  Ended December 31,         Change
                                                 --------------------  ----------------
                                                    2003       2002
                                                 ---------  ---------
                                                 (amounts in millions)
<S>                                              <C>        <C>        <C>       <C>
Total interest income decreased................. $    28.7  $   31.8   $ (3.1)   (10)%
  Due to:
    Decrease in yield on interest-earnings
      assets....................................     5.30%     6.11%   (0.81)%   (13)%
  Driven by:
    Decrease in yield on loans (a)..............     6.26%     6.76%   (0.50)%    (7)%
    Decrease in yield on investments (b)........     3.96%     5.13%   (1.17)%   (23)%
  The decreases in yield on interest-earning
   assets were
    Offset by:
    Increase in average earning assets.......... $   540.7  $  520.4   $  20.3      4%

  Driven by:
    Increase in average loans (c)............... $   308.1  $  307.2   $   0.9      0%

    Increase in average investments (d)......... $   236.0  $  214.0   $  22.0     10%

Total interest expense decreased................ $    15.3  $   18.7   $ (3.4)   (18)%
  Due to:
    Decrease in cost of interest-bearing
      liabilities...............................     3.01%     3.82%   (0.81)%   (21)%
  Driven by:
    Decrease in cost of interest-bearing
      deposits (e)..............................     2.16%     2.87%   (0.71)%   (25)%
    Decrease in cost of borrowings (f)..........     4.76%     6.36%   (1.60)%   (25)%
  These decreases were coupled with:
    Increase in average interest-bearing
      liabilities............................... $   508.1  $  490.9   $  17.2      4%
    Driven by:
    Increase in average borrowings (g).......... $   164.5  $  133.6   $  30.9     23%

    Offset by:
    Decrease in average interest-bearing
      deposits (h).............................. $   343.6  $  357.2   $(13.6)    (4)%
---------------
<FN>
(1)  From continuing operations for all periods presented.

(a)  Our  decreased  loan  yield  is  reflective  of  the  lower  interest  rate
     environment  during 2003. The lower rate  environment was caused by several
     Federal  Reserve  reductions in the Federal funds target rate causing prime
     rate to decrease  significantly  during 2001 and  continuing  into 2002 and
     2003.  The daily average prime rate in 2003 was 4.12 percent as compared to
     4.68 percent for 2002.  The lower prime rate caused  floating rate loans to
     reprice at lower  levels and new loans to be  originated  at interest  rate
     levels lower than those originated in the prior period.
(b)  The  decreased  yield on  investments  was  also  reflective  of the  lower
     interest rate environment during 2003.
(c)  Average  loans  remained  relatively  stable  during  2003  in  spite  of a
     significant  decline  in  period  end loans at  December  31,  2003  versus
     December 31, 2002.
(d)  Average  investments  increased in 2003 to maintain an  acceptable  average
     earning  asset  portfolio  and related  interest  income.  The  increase in
     average  investments in 2003 caused the mix in the earning asset  portfolio
     to change resulting in downward pressure on net interest margin.
(e)  The decrease in cost of  interest-bearing  deposits was  reflective  of the
     lower interest rate environment during 2003. Floating rate deposit accounts
     repriced at lower interest rate levels and  certificates of deposit renewed
     or were  originated  at lower  interest rate levels than those in the prior
     period.
(f)  2003 borrowing costs decreased due to the lower interest rate  environment.
     The lower  interest  rates were  reflected in  decreased  cost on our $15.0
     million floating rate  subordinated  debentures,  our $8.5 million floating
     rate loan, floating rate Federal funds purchased and repurchase  agreements
     with customers.
(g)  Average  borrowings  increased  in 2003 due to higher  average  balances of
     Federal funds purchased, customer repurchase agreements and FHLB advances.
(h)  Average deposits in 2003 decreased largely due to a $27.2 million reduction
     in brokered  and  national  market  certificates  of deposit  during the 12
     months ended December 31, 2003.
</FN>
</TABLE>
<PAGE>

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

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

Provision for Credit Losses. We determine a provision for credit losses which we
consider  sufficient  to maintain  our  allowance  for credit  losses at a level
considered  adequate to provide for an  estimate of probable  losses  related to
specifically  identified  loans as well as probable losses in the remaining loan
and lease  portfolio  that have been incurred as of each balance sheet date. The
provision for credit losses for the year ended December 31, 2004 was $175,000 as
compared to $1.5  million in 2003 and $1.2  million in 2002.  Net loan and lease
charge-offs  were $1.9  million,  or 0.58 percent of average loans and leases in
2004 compared with $1.8 million,  or 0.56 percent in 2003 and $521,000,  or 0.17
percent  in 2002.  The  decrease  in the  provision  for  credit  losses in 2004
reflected the  resolution of a significant  amount of  nonperforming  loans that
were  reserved for at December 31, 2003 and were reduced to $549,000 at December
31,  2004 from $8.0  million  at  December  31,  2003.  Of the $1.9  million  of
charge-offs in 2004, $1.2 million related to one commercial  loan.  $975,000 had
been reserved for on that loan at December 31, 2003.

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

The allowance for loan losses totaled $3.3 million at December 31, 2004 compared
with $4.8 and $5.0 million at December 31, 2003 and 2002, respectively. See Note
1 to the Consolidated  Financial  Statements  included under Item 8, "-Financial
Condition-Loan  Portfolio-Allowance for Credit Losses" and "-Critical Accounting
Policies" for further  discussion of the  components of the allowance for credit
losses, our systematic methodology for determining the adequacy of the allowance
and  additional  data  pertaining to  charge-offs,  recoveries and other related
information.

Noninterest   Income.   Noninterest   income,   primarily  driven  by  insurance
commissions,  is becoming a more  significant  source of  revenues  for us as we
continue to  emphasize  our goal of focusing on local  relationship  banking and
providing a broad range of financial  products  and services  that will meet the
needs of our customers,  both commercial and consumer.  Our  noninterest  income
increased  approximately $2.6 million,  or 12.7 percent,  in 2004 largely due to
increased insurance  commissions,  including commissions related to acquisitions
made during 2003 and 2004. Fees on loans and brokerage  income increased in 2004
while service charges, trust and financial services income, net gain on sales of
securities   and  rental   income   declined.   Noninterest   income   increased
approximately $4.5 million,  or 27.7 percent, in 2003 largely due to a full year
of insurance commission income generated by Milne Scali. Service charges,  trust
and financial  services income and rental income also  increased,  while fees on
loans, brokerage income and net gain on sale of securities declined.
<PAGE>
The following table presents, for the periods indicated, the major categories of
our noninterest  income as well as the amount and percent of change between each
of the  periods  presented.  Related  information  and  significant  changes are
discussed in lettered explanations following the table:
<TABLE>
<CAPTION>
                             Noninterest Income (1)
                                                                  Increase (Decrease)
                                                          ------------------------------------
                             For the Years Ended
                                December 31,                 2004 - 2003         2003 - 2002
                          ----------------------------    -----------------   ----------------
                            2004      2003      2002          $        %          $        %
                          --------  --------  --------    --------  -------   --------  ------
                                 (in thousands)
<S>                       <C>       <C>       <C>         <C>         <C>     <C>          <C>
Insurance commissions.....$ 17,490  $ 14,568  $  8,981    $ 2,922     20%     $5,587       62% (a)
Fees on loans.............   2,175     2,022     2,169        153      8%       (147)     (7)% (b)
Service charges...........     827       909       755        (82)   (9)%        154       20% (c)
Brokerage income..........     538       420     1,094        118     28%       (674)    (62)% (d)
Trust and financial
  services................     486     1,009       751       (523)  (52)%        258       34% (e)
Net gain on sales of
  securities .............     269       968     1,870       (699)  (72)%       (902)    (48)% (f)
Rental income.............     109       212        89       (103)  (49)%        123      138%
Other.....................   1,556       704       587        852    121%        117       20% (g)
                          --------  --------  --------    --------            --------
Total noninterest income..$ 23,450   $20,812  $ 16,296    $ 2,638     13%     $4,516       28%
                          ========  ========  ========    ========            ========
--------------------
<FN>
(1)  From continuing operations for all periods presented.

     (a)  In 2004, insurance  commissions  increased due to increased commission
          and profit sharing income at Milne Scali in Phoenix. The increase also
          reflected  production  from recent  acquisitions.  In 2003,  insurance
          commissions increased due to a full year of production of Milne Scali,
          acquired in April 2002.  Profit  Sharing  income  (received  primarily
          during the first  quarter of each year)  included in the amounts above
          totaled  approximately  $1.4  million,  $990,000  and $124,000 for the
          years ended December 31, 2004, 2003 and 2002, respectively.

     (b)  The 2004 increase in fees on loans reflects fees associated with loans
          originated  and  sold,  fees  associated  with the  mortgage  loan and
          student  loan  financing   programs  and  some  fees  associated  with
          commercial  credit line  availability.  The  decrease  in  noninterest
          income  loan  fees  in  2003  primarily  reflects  a  decline  in loan
          generation  due to reduced loan demand,  which was  reflective  of the
          economic  environment  during  2003.  Loan volume  generation  and the
          related  loan fees  associated  with  such  loans  can be  subject  to
          significant  fluctuations making it difficult to anticipate the amount
          of loans that will be  originated or placed and related loan fees that
          will be recognized in future periods.

     (c)  Service  charges  increased in 2003 as the Bank  continued to increase
          its  Wealthbuilder  interest  checking and money market account volume
          along with an  increase in  non-interest  bearing  deposits  which are
          primarily  business  deposit  relationships  that  tend to  utilize  a
          greater level of fee-based deposit services.

     (d)  In  2004,  brokerage  income  increased  primarily  due  to  increased
          production in the Minnesota market. In 2003, brokerage income declined
          largely due to the Bank having fewer brokers on staff in Minnesota.

     (e)  The  2004  decrease  in  trust  and  financial   services   income  is
          attributable  to a  $488,000  fee  recognized  in 2003  by the  Bank's
          financial  services  division  for  management  of  the  sale  of  two
          companies  on behalf of a customer.  The 2003  increase  reflects  the
          $488,000  fee.  This 2003 fee income was offset by  decreases in other
          fee income in the trust and financial  services division including the
          loss of fee income  associated  with the BNC U.S.  Opportunities  Fund
          LLC, which was terminated during 2003.

     (f)  Net gain on sales of  securities  varies  depending  on the  nature of
          investment  securities sales transacted during the respective periods.
          We cannot  guarantee  our  ability to generate  realized  gains in the
          future  given  the  level  of  interest  rates.  In  the  future,  the
          investment portfolio risk/reward  management process may require us to
          recognize net realized losses in order to optimize the forward-looking
          profile of the portfolio.

     (g)  Other  income.  The 2004  increase is  primarily  attributable  to the
          receipt of $527,000 by Milne Scali.  The payment  related to the final
          resolution of a reinsurance  program previously  associated with Milne
          Scali.  Additionally,  BOLI  (bank-owned  life  insurance)  income was
          approximately   $464,000  during  2004  compared  with   approximately
          $183,000 during 2003. The increase in other income in 2003 as compared
          to 2002 is also  attributable  to BOLI income as the BOLI  program was
          initiated during the second half of 2003.
</FN>
</TABLE>
<PAGE>
Noninterest Expense.  Noninterest expense increased  approximately $7.5 million,
or 27.4 percent,  in 2004 primarily as a result of our expanding presence in the
Arizona and Minnesota markets.  Noninterest expense increased approximately $2.0
million,  or 7.7 percent,  in 2003 primarily as a result of the April 2002 Milne
Scali acquisition and our expanding presence in the Arizona market.

The following table presents, for the periods indicated, the major categories of
our noninterest expense as well as the amount and percent of change between each
of the  periods  presented.  Related  information  and  significant  changes are
discussed in lettered explanations below the table:
<TABLE>
<CAPTION>
                             Noninterest Expense (1)
                                                                    Increase (Decrease)
                                                          --------------------------------------
                             For the Years Ended
                                 December 31,                2004 - 2003         2003 -   2002
                          ----------------------------    -------------------  -----------------
                             2004     2003      2002       $          %         $        %
                          --------  --------  --------    ---------  --------  --------  -------
                                 (in thousands)
<S>                       <C>       <C>        <C>        <C>          <C>      <C>         <C>
Salaries and employee
  benefits................$ 21,662  $ 16,478   $14,723    $  5,184     31%      $ 1,755     12% (a)
Occupancy.................   2,700     2,306     2,235         394     17%           71      3% (b)
Depreciation and
  amortization............   1,640     1,458     1,320         182     12%          138     10% (c)
Professional services.....   1,471     1,146     1,495         325     28%        (349)   (23)% (d)
Office supplies,
  telephone and postage...   1,414     1,214     1,106         200     16%          108     10% (e)
Amortization of
  intangible assets.......   1,274     1,063       881         211     20%          182     21% (f)
Marketing and promotion...   1,098       803       749         295     37%           54      7% (g)
FDIC and other
  assessments.............     205       201       214           4      2%         (13)    (6)%
Other.....................   3,304     2,621     2,606         683     26%           15      1% (h)
                          --------  --------   -------    ---------            --------
Total noninterest
  expense.................$ 34,768  $ 27,290  $ 25,329    $  7,478     27%      $ 1,961      8%
                          ========  ========   =======    =========            ========
Efficiency ratio..........  88.04%    79.82%    86.22%       8.22%              (6.40)%         (i)

Total operating expenses
  as a percent of average
  assets..................   5.47%     4.54%     4.45%       0.93%                0.09%         (j)

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

     (a)  Salaries  and  employee  benefits  expenses  increased  in 2004 due to
          growth  and   expansion  in  our  banking  and   insurance   segments,
          particularly in our Minnesota and Arizona markets. 2004 also reflected
          a full year of expense associated with management talent added in late
          2003 and new  management  team members  added  during 2004.  2004 also
          included a $688,000  payment  related to the termination of employment
          of  a  former  officer  of  our  insurance  subsidiary.   The  payment
          represented  the  acceleration  of the remaining  salary due under his
          multi-year   employment   contract.   The  2003  increase  is  largely
          attributable to the addition of banking personnel, particularly in the
          Arizona  market.  Average full time  equivalents  for each year in the
          three-year  period  ended  December  31,  2004 were 318,  276 and 253,
          respectively.
<PAGE>

     (b)  Occupancy  expenses  increased  in  2004  due to the  addition  of the
          Esplanade   location  in  Phoenix,   the  Golden  Valley  location  in
          Minnesota,  and the Tucson, Salt Lake City, Prescott Valley and Denver
          insurance locations.

     (c)  Depreciation  and  amortization   expenses  related  to  fixed  assets
          increased  in  2004  due  to the  expansion  discussed  in (b)  above,
          primarily  in our  Arizona and  Minnesota  markets.  Depreciation  and
          amortization  expenses  increased  in  2003  due  to the  Milne  Scali
          acquisition  along with costs associated with additional  expansion in
          the Arizona market.

     (d)  2004 professional  services  expenses  increased due to an increase in
          brokerage  retainage and clearing fees (resulting from the increase in
          brokerage production) as well as increases in legal, software support,
          appraisal and recording and other  consulting  fees. The 2003 decrease
          is attributable  to decreased  expenses in a number of areas including
          brokerage  clearing and retainage expense (resulting from the decrease
          in associated brokerage revenue),  appraisal and recording fees, audit
          fees,  other  consulting  fees, legal and collection fees and software
          support fees.

     (e)  2004 office supplies,  telephone and postage expenses increased due to
          the  expansion  described  in (b) above,  primarily in our Arizona and
          Minnesota markets.  Increases in this line item in 2003 are associated
          with the Milne Scali  acquisition and additional  expenses  associated
          with expansion in the Arizona market.

     (f)  2004  amortization of intangible assets expenses  increased  primarily
          due to amortization of the insurance  customer list intangibles  added
          when we acquired  certain  assets and assumed  certain  liabilities of
          several  small  insurance  agencies.  2003  reflects  a full  year  of
          amortization of the Milne Scali customer list intangibles.

     (g)  Marketing and promotion  expenses  increased in 2004  primarily due to
          market expansion and the associated advertising and marketing.

     (h)  The 2004 increase in other noninterest  expense is due to increases in
          several  different  items  included in this  category  such as travel,
          other employee benefits,  insurance, business meals and entertainment,
          dues and publications and correspondent bank charges.

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

     (j)  Total operating expenses as a percent of average assets have increased
          as  our  profile  has  changed  from  that  of a  traditional  banking
          organization  to an  organization  with a  broader  base of  financial
          product and service  offerings  the revenues and expenses of which are
          generally not asset-based.
</FN>
</TABLE>

Income  taxes.  We  recorded  income tax  expense of $1.1 and $1.6  million  and
$822,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Our
effective tax rates were 25.15, 29.14 and 28.87 percent for the 12-month periods
ended December 31, 2004,  2003 and 2002,  respectively.  The effective tax rates
were lower than the statutory  rates  principally  due to  tax-exempt  income on
municipal  securities and, for part of 2003 and all of 2004,  tax-exempt  income
associated with $10.0 million of bank-owned life insurance.

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

Financial Condition

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

Total assets  increased  approximately  $52.2 million,  or 8.4 percent,  between
December 31, 2003 and December 31, 2004 and approximately  $19.2 million, or 3.2
percent,  between  December 31, 2002 and December 31, 2003.  Our total assets at
December 31, 2004 were approximately $673.7 million.
<PAGE>
The  following  table  presents  our assets by category as of December 31, 2004,
2003 and 2002,  as well as the amount and  percent of change  between the dates.
Significant changes are discussed in lettered notes following the table (amounts
are in thousands):
<TABLE>
<CAPTION>
                                     Assets
                                                                Increase (Decrease)
                                                       ----------------------------------------
                          As of December 31,              2004 - 2003          2003 - 2002
                     ------------------------------    -------------------   ------------------
                        2004       2003      2002          $         %          $         %
                     ---------  ---------  --------    ---------  --------   ---------  -------
<S>                  <C>        <C>        <C>         <C>           <C>    <C>          <C>
Cash and due from
 banks...............$  11,867  $  12,520  $ 16,978    $   (653)      (5)%   $ (4,458)    (26)% (a)
Interest-bearing
 deposits with banks        14         --       159          14         --       (159)   (100)%
Investment
 securities
 available for sale..  235,916    262,568   208,072     (26,652)     (10)%     54,496       26% (b)
Federal Reserve
 Bank and Federal
 Home Loan Bank
 stock...............    7,541      7,596     7,071         (55)      (1)%        525        7%
Loans held for sale..   60,197         --        --      60,197         --         --        -- (c)
Loans and leases
 held for
 investment, net.....  290,479    278,792   330,788      11,687         4%    (51,996)    (16)% (d)
Premises and
 equipment, net......   21,799     18,570    11,100       3,229        17%      7,470       67% (e)
Interest receivable..    2,686      2,462     2,856         224         9%       (394)    (14)%
Other assets.........   13,357     15,507     4,119      (2,150)     (14)%     11,388      276% (f)
Goodwill.............   21,779     15,089    12,210       6,690        44%      2,879       24% (g)
Other intangible
 assets, net.........    8,075      8,373     8,875        (298)      (4)%       (502)     (6)%
                     ---------  ---------  --------    --------              ---------
    Total assets.....$ 673,710  $ 621,477  $602,228    $ 52,233         8%   $ 19,249        3%
                     =========  =========  ========    ========              =========
-----------------
<FN>

(a)  The 2003 decrease in cash and due from banks is primarily  attributable  to
     an account  reclassification  program that was implemented  during 2003 and
     results in the Bank holding less cash at the Federal Reserve.

(b)  During 2004, we purchased $89.9 million of investment  securities  while we
     sold $74.4 million and there were $38.0  million of  investment  securities
     that  matured and were paid off. We used the proceeds  from the  investment
     security  sales and  maturities  to fund  some of the  loans  held for sale
     discussed in (c) below as well as real estate  construction  and commercial
     and  industrial  loans  discussed  in (d) below.  During  2003,  investment
     securities  available for sale increased as loan volume  decreased (see (d)
     below) and we maintained a somewhat static earning asset portfolio.

(c)  Loans held for sale at December 31, 2004 represent loans  originated  under
     mortgage loan and student loan financing programs initiated during 2004.

(d)  Loans held for investment  increased  during the second half of 2004 due to
     increases in real estate  construction and commercial and industrial loans.
     Loan volume in 2003 was negatively  impacted by planned loan reductions and
     the completion of some financed  commercial real estate projects.  The loan
     reductions  were not  offset by loan  growth  due to a lack of loan  demand
     driven by economic  conditions during the year. It is difficult to predict,
     with any degree of certainty, loan volume in future periods.

(e)  The 2004  increase in premises and equipment is primarily  attributable  to
     our  renovation of a banking  facility in Golden  Valley,  Minnesota,  some
     additional  upgrading  of our location at 322 East Main Avenue in Bismarck,
     the  purchase of land and a building in Tucson and the purchase of land for
     a  future  bank  site  in  Shakopee,   Minnesota.   The  2003  increase  is
     attributable  to the  purchase  of the Milne  Scali  building  in  Phoenix,
     Arizona  in  March  2003  for its  appraised  value  of $3.9  million,  the
     construction of a facility in Scottsdale,  Arizona,  leasehold improvements
     related  to the  relocation  of our  office  at 2725 East  Camelback  Road,
     Phoenix to 2425 East  Camelback  Road,  the  purchase of property in Golden
     Valley,  Minnesota and some improvements to our office building at 322 East
     Main Avenue, Bismarck, North Dakota.

(f)  The 2003 increase in other assets is primarily attributable to the purchase
     of $10.0 million of bank-owned  life insurance  during the third quarter of
     2003.

(g)  Goodwill  increased during 2004 due to the payment of the remaining earnout
     payments related to the Milne Scali  acquisition and goodwill  generated by
     three insurance agency  acquisitions  and a mortgage  company  acquisition.
     Goodwill increased in 2003 due to a $2.3 million earnout payment related to
     the purchase of Milne Scali and the purchase of IASW in December 2003.
</FN>
</TABLE>
<PAGE>

Our total liabilities  increased  approximately  $48.6 million,  or 8.4 percent,
between December 31, 2003 and December 31, 2004 and increased $16.8 million,  or
3.0 percent,  between December 31, 2002 and December 31, 2003. Total liabilities
at December 31, 2004 were approximately $629.9 million. Stockholders' equity was
approximately  $43.8,  $40.2 and $37.7  million at December 31,  2004,  2003 and
2002, respectively.

The  following  table  presents  our  liabilities  and  stockholders'  equity by
category  as of  December  31,  2004,  2003 and 2002,  as well as the amount and
percent of change  between  the dates.  Significant  changes  are  discussed  in
lettered notes following the table (amounts are in thousands):
<TABLE>
<CAPTION>
           Liabilities, Subordinated Debentures and Stockholders' Equity
                                                                  Increase (Decrease)
                                                         --------------------------------------
                             As of December 31,             2004 - 2003         2003 - 2002
                        -----------------------------    ------------------  ------------------
                          2004       2003      2002          $         %         $         %
                        --------  ---------  --------    --------  --------  --------- --------
Deposits:
<S>                     <C>        <C>       <C>         <C>           <C>    <C>           <C>
Noninterest-bearing.....$ 63,386   $ 44,725  $ 44,362    $ 18,661      42%    $   363       1% (a)
Interest-bearing -
 Savings, interest
   checking and
   money market......... 210,887    215,525   187,531      (4,638)    (2)%     27,994      15% (b)
 Time deposits
   $100,000 and over....  83,952     46,569    64,905      37,383      80%    (18,336)   (28)% (c)
 Other time deposits....  97,118     89,123   101,447       7,995       9%    (12,324)   (12)% (d)
Short-term borrowings...  33,697     31,383    28,120       2,314       7%      3,263      12% (e)
FHLB advances...........  97,200    112,200    97,200     (15,000)   (13)%     15,000      15% (f)
Long-term borrowings....  10,079      8,640     8,561       1,439      17%         79       1% (g)
Guaranteed preferred
 beneficial interests
 in Company's
 subordinated
 debentures.............  22,509     22,397    22,326         112       1%         71       0%
Other liabilities.......  11,036     10,729    10,053         307       3%        676       7%
                        --------  ---------  --------    --------            ---------
    Total liabilities... 629,864    581,291   564,505      48,573       8%     16,786       3%
Stockholders' equity....  43,846     40,186    37,723       3,660       9%      2,463       7% (h)
                        --------  ---------  --------    --------            ---------
    Total...............$673,710  $ 621,477  $602,228    $ 52,233       8%   $ 19,249       3%
                        ========  =========  ========    ========            =========
----------------
<FN>
(a)  Noninterest-bearing  deposits  increased in 2004 primarily due to growth in
     our Arizona and Minnesota  markets.  Noninterest-bearing  deposits can also
     fluctuate  significantly  on a daily basis due to  transactions  associated
     primarily with commercial customers.

(b)  The 2003 increase in savings,  interest  checking and money market deposits
     was  attributable to the popularity of our  Wealthbuilder  deposit products
     and reflects deposit growth primarily in the Arizona market.

(c)  Brokered and national market  certificates of deposit were $55.6 million at
     December  31,  2004  compared  with $30.2  million at  December  31,  2003.
     Additionally, deposits in the CDARSsm deposit program totaled $16.8 million
     at December 31, 2004  compared  with $1.4 million at December 31, 2003.  At
     December 31, 2002,  brokered and national  market  certificates  of deposit
     totaled $58.7 million.

(d)  The 2004 increase in other time deposits  represents  core deposit  growth,
     primarily  in our  Arizona  and  Minnesota  markets.  The 2003  decline  is
     partially  attributable  to the $27.2  million  decrease  in  brokered  and
     national  market  certificates  of  deposit.  Additionally,  time  deposits
     declined partly because a number of certificates of deposit, held by credit
     unions and other financial  institutions  (with balances averaging $99,000)
     matured and the funds were not reinvested.

(e)  The increase in  short-term  borrowings  in both 2004 and 2003 is primarily
     due to increased Federal funds purchased at December 31, 2004 and 2003.

(f)  $15.0 million of FHLB advances  matured  during 2004 and were replaced with
     other funding sources.  $10.0 million of FHLB advances held at December 31,
     2002  matured in January  2003 and,  during the third  quarter of 2003,  we
     converted  $20.0  million of  short-term  FHLB advances to $30.0 million of
     longer term FHLB advances maturing in 2005 and 2006.

(g)  The 2004  increase in long-term  borrowings  represents  an increase in the
     term loan at  BNCCORP  from $8.5  million  at  December  31,  2003 to $10.0
     million at December 31, 2004.
<PAGE>

(h)  The 2004 increase in stockholders' equity reflects $3.4 million of earnings
     and $1.5 million of stock issued in  acquisitions,  as restricted stock and
     in stock  option  exercises  offset by a $912,000  decrease  in  unrealized
     holding  gains on securities  available  for sale,  net of income taxes and
     reclassification  adjustment and $93,000 of preferred  stock dividends paid
     during  2004.  The  increase in 2003  primarily  reflects  $3.8  million of
     earnings offset by a $1.7 million  decrease in unrealized  holding gains on
     securities  available  for sale,  net of income taxes and  reclassification
     adjustment.
</FN>
</TABLE>

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

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

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

                                                        December 31,
                      -------------------------------------------------------------------------------
                                2004                        2003                      2002
                      ------------------------   --------------------------  ------------------------

                                    Estimated                   Estimated                  Estimated
                       Amortized   fair market    Amortized    fair market    Amortized   fair market
                         cost         value          cost         value         Cost         value
                      -----------  -----------   -----------   ------------  -----------  -----------
                                                      (in thousands)
<S>                   <C>          <C>           <C>           <C>           <C>          <C>
U.S. government agency
  mortgage-backed
  securities......... $    9,715   $    9,877    $  14,374     $   14,755    $  47,072    $  47,576
U.S. government
  agency securities..        981        1,036          961          1,083        4,608        5,203
Collateralized
  mortgage
  obligations........    189,783      187,704      210,760        209,676      122,795      124,480
State and municipal
  bonds..............     33,390       35,301       32,909         35,056       27,276       28,815
Corporate bonds......      1,941        1,998        1,939          1,998        1,938        1,998
                      -----------  -----------   ---------     ------------  -----------  -----------
Total investments.... $  235,810   $  235,916    $ 260,943     $  262,568    $ 203,689    $ 208,072
                      ===========  ===========   =========     ============  ===========  ===========
------------------
(1) From continuing operations for all periods presented.
</TABLE>
<PAGE>

The following  table presents  maturities for all securities  available for sale
(other than equity  securities)  and yields for all securities in our investment
portfolio at December 31, 2004:
<TABLE>
<CAPTION>
                        Investment Portfolio - Maturity and Yields

                                                                Maturing
                      ---------------------------------------------------------------------------------------------------

                                              After 1 but         After 5 but
                         Within 1 year      within 5 years      within 10 years      After 10 years          Total
                      ------------------  ------------------  ------------------  -------------------  ------------------
                       Amount   Yield(1)   Amount   Yield(1)   Amount   Yield(1)   Amount   Yield (1)   Amount   Yield(1)
                      --------  --------  --------  --------  --------  --------  --------  ---------  --------  --------
<S>          <C>      <C>       <C>       <C>       <C>       <C>          <C>    <C>           <C>       <C>       <C>
U.S. government
  agency
  mortgage-backed
  securities (2)(3)...$     --        --  $     --        --  $    393     5.54%  $  9,322      5.87%     9,715     5.86%
U.S. government
  agency
  securities (2)......     981     9.71%        --        --        --        --        --        --        981     9.71%
Collateralized
  mortgage
  obligations (2)(3)..      --        --        --        --    41,322     3.66%   148,461      3.99%   189,783     3.92%
State and municipal
  bonds (2)...........      --        --     1,048     8.03%     1,983     6.98%    30,359      7.04%    33,390     7.07%
Corporate bonds (2)...      --        --        --        --        --        --     1,941      4.65%     1,941     4.65%
                      --------            --------            --------            --------             --------
Total book value
  of investment
  securities..........$    981     9.71%  $  1,048     8.03%  $ 43,698     3.82%  $190,082      4.57%   235,810     4.47%
                      ========            ========            ========            ========
Unrealized holding
  gain on securities
  available for sale..                                                                                      106
                                                                                                       --------
Total investment
  in securities
  available for                                                                                        $235,916     4.47%
  sale (4)............                                                                                 ========

--------------------
<FN>

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

(2)  Based on amortized cost/book value.

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

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

As of December 31, 2004, we had $235.9 million of available-for-sale  securities
in the investment portfolio as compared to $262.6 and $208.1 million at December
31, 2003 and 2002, respectively,  based on fair value of the securities on those
dates. During 2004, the amount of available-for-sale  securities decreased $26.7
million in order to provide  liquidity to fund earning  asset growth in the form
of loans,  and,  in  particular,  loans held for sale.  In light of our  overall
asset/liability position, much of the decrease in available-for-sale  securities
was in the U.S. government agency mortgage-backed securities (down $4.9 million)
and CMOs  (down  $22.0  million)  because  of  their  forward  looking  economic
risk/reward  profiles relative to other types of securities within the portfolio
and that of other earning asset opportunities. The volume in state and municipal
bonds,  U.S.  government  agency  securities and corporate  bonds was relatively
unchanged for the year.
<PAGE>

During the first quarter of 2004,  the  available-for-sale  portfolio  increased
$25.8 million from $262.6  million as of December 31, 2003 to $288.4  million in
order to maintain the level of earning assets while planned loan  reductions and
the completion of some financed commercial real estate projects reduced the loan
portfolio by $29.6  million  during the same period.  Over the  remaining  three
quarters of 2004, the available-for-sale portfolio decreased by $52.5 million to
end the year at $235.9 million as proceeds from sales and maturities, net of new
purchases  were directed  toward an increase in loan volume for the latter three
quarters of 2004. Finally,  the overall level of market interest rates increased
during 2004 and the yield curve experienced a flattening  relative to the end of
2003. In carrying out the ongoing portfolio management objective to purchase and
own   securities  and   combinations   of  securities   with  good   risk/reward
characteristics,  and in  constant  light  of  managing  the  available-for-sale
portfolio's  risk/reward profile in the context of our overall balance sheet, we
engaged in securities  transactions that generated net realized securities gains
of $269,000  during 2004. We cannot  guarantee our ability to generate  realized
gains in the future  such as those  recognized  during  recent  years  given the
current  level of interest  rates.  In the future,  the  risk-reward  management
process may require us to recognize net realized losses in order to optimize the
forward-looking economic profile of the portfolio and balance sheet.

During 2003, the amount of available-for-sale securities increased $54.5 million
in  order  to  maintain  earning  asset  portfolio  levels  while  planned  loan
reductions and the completion of some financed  commercial  real estate projects
reduced  the  loan  portfolio  by  $52.2  million.   Much  of  the  increase  in
available-for-sale securities was directed toward CMOs because of their economic
risk/reward  profiles (due to the  structure of the CMO cash flows)  relative to
mortgage-backed  or other  types of  securities  and the  ability to pledge such
securities as collateral  for borrowings at the FHLB. In the process of carrying
out the portfolio  management  objective to purchase securities and combinations
of securities with good economic risk/reward characteristics,  we decreased U.S.
government  agency   mortgage-backed   securities  and  U.S.  government  agency
securities by $32.8 and $4.1 million, respectively, and increased CMOs and state
and  municipal  bonds  by  $85.2  and  $6.2  million,  respectively.  Given  our
forecasted  level of future  earnings,  we  increased  our holdings of state and
municipal  bonds by $6.2  million in order to increase  our level of  tax-exempt
income.

The first half of 2003 saw the level of interest rates, including interest rates
for  mortgages,  decline to record or near  record  lows.  The pace of  mortgage
refinancing  reached  record  levels in the second  quarter of 2003.  During the
third  quarter of 2003,  interest  rates rose from the record  lows of the first
half of the year. This decreased mortgage prepayments from their earlier levels.
This made 2003 a volatile year for interest rates and mortgage prepayments.  The
ongoing portfolio  management  process  described above and individual  security
risk/reward   analysis  led  to  the  sale  of   individual   securities   whose
forward-looking  risk/reward  profiles  given  the  changed  interest  rate  and
prepayment   environments  were  inferior  to  other  securities  available  for
purchase.  This  analysis  and ongoing  management  of the  portfolio's  forward
looking risk/reward profile resulted in transactions that generated net realized
securities gains of $968,000 during 2003.

During 2002, we increased U.S.  government  agency  mortgage-backed  securities,
U.S.  government  agency  securities,  and  state  and  municipal  bonds by $5.6
million,  708,000  and  $11.3  million,  respectively  and  decreased  CMOs  and
corporate  debt  securities  by $12.8 and $8.6 million,  respectively.  The $8.6
million  reduction in corporate debt securities during 2002 allowed us to manage
our risk-based  capital  position as such  securities are  risk-weighted  at 100
percent for  risk-based  capital  purposes.  Given our earnings in the third and
fourth quarters of 2002 and our then  forecasted  level of future  earnings,  we
increased our holdings of state and municipal bonds by $11.3 million in order to
increase our level of future  tax-exempt  income.  In addition to the role state
and municipal bonds play in managing our tax position, state and municipal bonds
offer an attractive  risk/reward  profile when  considered in  combination  with
other securities in the portfolio (CMOs and mortgage-backed  securities) and our
overall balance sheet position.

In addition,  during 2002,  mortgage  rates  declined to their lowest  levels in
decades.  This  decrease  in  mortgage  rates  increased  the level of  mortgage
refinancing  and  prepayments  for  U.S.   government   agency   mortgage-backed
securities and CMOs.  The ongoing  portfolio  management  process and individual
security  risk/reward  analysis  described  above led to the sale of  individual
securities whose  forward-looking  risk/reward profiles given the lower interest
rate and increased  prepayment  environment  were  inferior to other  securities
available for purchase.  This analysis and ongoing management of the portfolio's
forward looking  risk/reward profile resulted in transactions that generated net
realized securities gains of $1.9 million during 2002.

At December 31, 2004,  we held no securities  of any single  issuer,  other than
U.S.  government  agency  securities and agency  mortgage-backed  securities and
CMOs, that exceeded 10 percent of stockholders' equity. A significant portion of
our investment securities portfolio  (approximately 87.6 percent at December 31,
2004) was pledged as collateral for public  deposits and  borrowings,  including
borrowings with the FHLB.
<PAGE>

Federal  Reserve  Bank and Federal Home Loan Bank Stock.  Our equity  securities
consisted of $1.3,  $1.2 and $1.2 million of Federal  Reserve Bank ("FRB") stock
at December  31,  2004,  2003 and 2002,  respectively,  and $6.3,  $6.4 and $5.8
million of FHLB stock at December 31,  2004,  2003 and 2002,  respectively.  Our
holdings in FRB stock increased due to the amount of capital stock issued by the
Bank. From 2002 to 2004, our investment in FHLB stock  fluctuated with our usage
of FHLB advances.

Loan  Portfolio.  The  banking  segment's  primary  source of income is interest
earned on loans held for  investment.  Total loans held for  investment,  net of
unearned income and unamortized fees and costs,  increased $10.3 million, or 3.6
percent, to $293.8 million at December 31, 2004 as compared to $283.6 million at
December 31, 2003. In 2003, net loans decreased $52.2 million,  or 15.6 percent,
as compared to December 31, 2002.

The following  table  presents the  composition  of our loan portfolio as of the
dates indicated:
<TABLE>
<CAPTION>

                           Loan Portfolio Composition (1)
                                                    December 31,
                     -------------------------------------------------------------------------------------------------
                           2004               2003                 2002               2001             2000
                     -----------------  ------------------  ------------------  ------------------  ------------------
                      Amount      %      Amount      %       Amount      %       Amount       %      Amount      %
                     ---------  ------  ---------  -------  ---------  -------  ---------  -------  ---------  -------
                                               (dollars in thousands)
<S>                  <C>          <C>   <C>          <C>    <C>          <C>    <C>          <C>    <C>          <C>
Commercial and
  industrial ........$ 75,460     26.0  $ 73,001     26.2   $ 94,075     28.4   $103,883     35.4   $109,335     43.9
Real estate
  mortgage........... 129,321     44.5   129,443     46.4    147,825     44.7    123,727     42.1     85,082     34.1
Real estate
  construction.......  68,967     23.7    60,056     21.5     62,926     19.0     34,225     11.7     21,879      8.8
Agricultural.........  13,919      4.8    12,529      4.5     18,023      5.5     19,069      6.5     15,016      6.0
Consumer/other.......   5,480      1.9     6,277      2.3      8,227      2.5      9,953      3.4     11,552      4.6
Lease financing......   1,540      0.5     2,757      1.0      5,584      1.7      7,578      2.6     10,154      4.1
                     ---------  ------  ---------  -------  ---------  -------  ---------  -------  ---------  -------
Total principal
  amount of loans.... 294,687    101.4   284,063    101.9    336,660    101.8    298,435    101.7    253,018    101.5
Unearned income
  and net
  unamortized
  deferred fees
  and costs..........   (873)    (0.3)     (508)    (0.2)      (866)    (0.3)      (511)    (0.2)      (265)    (0.1)
                     --------   ------  ---------  -------  ---------  -------  ---------  -------  ---------  -------
Loans, net of
  unearned income
  and unamortized
  fees and costs..... 293,814    101.1   283,555    101.7    335,794    101.5    297,924    101.5    252,753    101.4
Less allowance for
  credit  losses..... (3,335)    (1.1)   (4,763)    (1.7)    (5,006)    (1.5)    (4,325)    (1.5)    (3,588)    (1.4)
                     ---------  ------  ---------  -------  ---------  -------  ---------  -------  ---------  -------
Net loans............$290,479   100.00  $278,792   100.00   $330,788   100.00   $293,599   100.00   $249,165   100.00
                     =========  ======  =========  =======  =========  =======  =========  =======  =========  =======

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

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

                    Change in Loan Portfolio Composition (1)
                                            Increase (Decrease)
                               ----------------------------------------------
                                    2004 - 2003             2003 - 2002
                               ----------------------   ---------------------
                                   $           %            $          %
                               -----------  ---------   ----------  ---------
                                           (dollars in thousands)
<S>                            <C>                <C>   <C>             <C>
Commercial and industrial..... $    2,459         3%    $ (21,074)      (22)% (a)
Real estate mortgage..........       (122)        0%      (18,382)      (12)% (b)
Real estate construction......      8,911        15%       (2,870)       (5)% (c)
Agricultural..................      1,390        11%       (5,494)      (30)% (d)
Consumer/other................       (797)     (13)%       (1,950)      (24)%
Lease financing...............     (1,217)     (44)%       (2,827)      (51)%
                               -----------              ----------
Total principal amount of
  loans.......................     10,624         4%      (52,597)      (16)%
Unearned income/unamortized
  fees and costs..............       (365)     (72)%          358         41%
                               -----------              ----------
Loans, net of unearned
  income/unamortized fees
  and costs...................     10,259         4%      (52,239)      (16)%
Allowance for credit losses...      1,428        30%          243          5%
                               -----------              ----------
Net Loans..................... $   11,687         4%    $ (51,996)      (16)%
                               ===========              ==========
<FN>

(1)  From continuing operations for all periods presented.

     (a)  Commercial and industrial  loans decreased in 2003 due to planned loan
          pay-downs,  loan pay- offs and the lack of loan demand due to economic
          conditions.

     (b)  The decrease in real estate  mortgage  loans during 2003  reflects the
          completion of some financed commercial real estate projects.

     (c)  The  increase in 2004 is primarily  attributable  to  commercial  real
          estate construction loan growth in our Arizona and Minnesota markets.

     (d)  The 2003  decrease  in  agricultural  loans is  primarily  due to loan
          pay-offs in the North Dakota market.
</FN>
</TABLE>

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

Credit Policy, Underwriting, Approval and Review Procedures. We follow a uniform
credit policy that sets forth underwriting and loan administration criteria. The
Board of Directors (the "Board") establishes our loan policy,  including lending
guidelines   for  the   various   types  of  credit  we  offer  based  upon  the
recommendations  of  senior  lending  management.  We have an  Executive  Credit
Committee  that approves  loans over a certain size. Our loan policy is reviewed
and reaffirmed by the Board at least annually.

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

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

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

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

   Loan Participations Sold (1)

           December 31,
-----------------------------------
          (in thousands)
<S>                    <C>
   2004...........     $ 131,317
   2003...........       146,988
   2002...........       173,895
   2001...........       208,975
   2000...........       187,773
-----------
(1) From continuing operations for all periods presented.
</TABLE>

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

Concentrations of Credit. Our credit policies emphasize  diversification of risk
among industries,  geographic areas and borrowers.  For purposes of the analysis
of  concentrations of credit as of December 31, 2004 the total outstanding loans
as well as all outstanding loan  commitments  were included.  As of December 31,
2004, we identified two  concentrations  of loans  exceeding 10 percent of total
loans and loan commitments outstanding. These concentrations were in real estate
and  construction,  which  represented 23.4 and 14.5 percent,  respectively,  of
total loans and loan commitments outstanding.

The real estate loans and  commitments  were  extended to 121  customers who are
diversified  across our market  areas and who can  generally be  categorized  as
indicated below:
<TABLE>
<CAPTION>

                                                 Percent of
                                                    total
                                                 outstanding
                                   Number of      loans and
                                   customers    loan commitments
                                 -------------  ----------------
<S>                                        <C>          <C>
Non-residential and apartment
  building operators,
  developers and lessors of
  real property................            86           20.7%
Real estate holding companies..            35            2.7%
                                 -------------  ----------------
     Total.....................           121           23.4%
                                 =============  ================
</TABLE>
<PAGE>


Loans and commitments in the construction category were extended to 60 customers
who are located primarily in Minnesota, Iowa, North Dakota and South Dakota and
who can generally be categorized as indicated below:

<TABLE>
<CAPTION>

                                                    Percent of
                                                       total
                                                    outstanding
                                     Number of       loans and
                                     customers     loan commitments
                                    -------------  ----------------
<S>                                           <C>         <C>
General building contractors.......           36          13.4%
Special trade contractors..........           17           0.4%
Heavy construction, excluding
  building.........................            7           0.7%
                                    -------------  ---------------
     Total.........................           60          14.5%
                                    =============  ===============
</TABLE>

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.

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

Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of our portfolio as of December 31, 2004. Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications:
<TABLE>
<CAPTION>

                                        Maturities of Loans (1)

                                         Over 1 year
                                       through 5 years      Over 5 years
                                    -------------------  ------------------
                         One year     Fixed     Floating   Fixed     Floating
                         or less      rate       rate      rate       rate      Total
                         --------   --------  ---------  ---------  --------  ---------
                                               (in thousands)
<S>                       <C>       <C>       <C>        <C>        <C>       <C>
Commercial and
  industrial............  $51,038   $  8,534  $  12,729  $     660  $  2,499  $  75,460
Real estate mortgage....   34,678     16,142     47,589     15,127    15,785    129,321
Real estate
  construction..........   35,292      1,259     26,481      3,759     2,176     68,967
Agricultural............    6,487      1,902      2,807        415     2,308     13,919
Consumer/other..........    2,202      2,610        467        201        --      5,480
Lease financing.........      418      1,122         --         --        --      1,540
                         --------   --------  ---------  ---------  --------  ---------
Total principal amount
of loans................ $130,115   $ 31,569  $  90,073  $  20,162  $ 22,768  $ 294,687
                         ========   ========  =========  =========  ========  =========

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

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

Interest  Rate Caps and Floors.  From time to time we may use  off-balance-sheet
instruments,  principally  interest rate caps and floors, to adjust the interest
rate sensitivity of  on-balance-sheet  items,  including loans. See -"Liquidity,
Market and Credit  Risk," Item 7A,  "Quantitative  and  Qualitative  Disclosures
about Market Risk," and Notes 1 and 17 to the Consolidated  Financial Statements
included  under  Item  8  for  further  discussion  about  accounting   policies
applicable  to  derivative  financial   instruments  and  currently  outstanding
instruments.
<PAGE>

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

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

                                                    December 31,
                                     -------------------------------------------
                                      2004     2003     2002      2001     2000
                                     -------  -------  -------  -------  -------
                                                  (dollars in thousands)
<S>                                  <C>      <C>      <C>      <C>      <C>
Nonperforming loans:
   Loans 90 days or more delinquent
     and still accruing interest.... $    25  $    38  $ 5,081  $   983  $   221
   Nonaccrual loans (2) (3).........     524    7,913    2,549    3,391      343
   Restructured loans (2) (3).......      --       --       --        5       16
                                     -------  -------  -------  -------  -------
      Total nonperforming loans.....     549    7,951    7,630    4,379      580
   Other real estate owned and
     repossessed assets.............      --       --        8       70       84
                                     -------  -------  -------  -------  -------
      Total nonperforming assets.... $   549  $ 7,951  $ 7,638  $ 4,449  $   664
                                     =======  =======  =======  =======  =======
Allowance for credit losses......... $ 3,335  $ 4,763  $ 5,006  $ 4,325  $ 3,588
                                     =======  =======  =======  =======  =======
Ratio of total nonperforming loans
  to total loans....................   0.19%    2.80%    2.27%    1.47%     .23%
Ratio of total nonperforming assets
  to total assets...................   0.08%    1.28%    1.27%     .80%     .12%
Ratio of allowance for credit
  losses to nonperforming loans.....    607%      60%      66%      99%     619%

--------------------
<FN>

(1)  From continuing operations for all periods presented.

(2)  If the  Company's  nonaccrual  and  restructured  loans had been current in
     accordance with their original  terms, we would have recognized  additional
     interest income of $29,000, $65,000,  $236,000, $84,000 and $29,000 for the
     years ended December 31, 2004, 2003, 2002, 2001 and 2000, respectively.

(3)  The interest income on nonaccrual and restructured  loans actually included
     in our net income was $43,000,  $56,000,  $1,000, $3,000 and $6,000 for the
     years ended December 31, 2004, 2003, 2002, 2001 and 2000 respectively.
</FN>
</TABLE>

Loans 90 days or more delinquent and still accruing  interest include loans over
90 days past due which we believe,  based on our specific analysis of the loans,
do not  present  doubt  about  the  collection  of  interest  and  principal  in
accordance  with the loan contract.  Loans in this category must be well secured
and in the process of collection.  Our lending and management  personnel monitor
these loans closely.

Nonaccrual  loans  include  loans on which  the  accrual  of  interest  has been
discontinued.  Accrual  of  interest  is  discontinued  when we  believe,  after
considering  economic and business conditions and collection  efforts,  that the
borrower's  financial  condition  is such that the  collection  of  interest  is
doubtful.  A delinquent  loan is generally  placed on nonaccrual  status when it
becomes  90 days or more past due  unless  the loan is well  secured  and in the
process of collection.  When a loan is placed on nonaccrual status,  accrued but
uncollected  interest  income  applicable  to the  current  reporting  period is
reversed against interest income of the current period.  Accrued but uncollected
interest income applicable to previous  reporting periods is charged against the
allowance  for credit  losses.  No  additional  interest  is accrued on the loan
balance until the collection of both principal and interest  becomes  reasonably
certain.  When a problem loan is finally  resolved,  there may  ultimately be an
actual write down or charge-off  of the principal  balance of the loan which may
necessitate additional charges to earnings.
<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
original  principal will occur. We had no restructured loans in our portfolio at
December 31, 2004.

Other real estate owned and repossessed  assets represents  properties and other
assets acquired through,  or in lieu of, loan  foreclosure.  Such properties and
assets are included in other assets in the consolidated balance sheets. They are
initially  recorded at fair value at the date of acquisition  establishing a new
cost basis.  Write-downs to fair value at the time of acquisition are charged to
the  allowance  for credit  losses.  After  foreclosure,  we perform  valuations
periodically  and the real estate or assets are carried at the lower of carrying
amount or fair  value  less cost to sell.  Write-downs,  revenues  and  expenses
incurred    subsequent   to   foreclosure   are   charged   to   operations   as
recognized/incurred.   We  had  no  outstanding   other  real  estate  owned  or
repossessed assets at December 31, 2004.

Our ratios of total  nonperforming loans to total loans, and total nonperforming
assets to total  assets,  decreased  between  December 31, 2003 and December 31,
2004.  The ratio of the  allowance  for  credit  losses to  nonperforming  loans
increased  between  December  31,  2003 and  December  31,  2004.  This ratio at
December  31, 2004 was 607  percent as  compared  to 60 percent at December  31,
2003.  These  improvements in nonperforming  loan/asset  ratios is primarily the
result of a sharp decrease in nonperforming loans, which declined to $549,000 at
December 31, 2004, from $7.95 million at December 31, 2003. This decrease is due
primarily to the full payment of a $4.5  million  loan and the  resolution  of a
$2.2  million  loan that  resulted  in a  charge-off  of $1.2  million (of which
$975,000 was reserved for at December 31, 2003).

Potential  Problem Loans. In accordance with accounting  standards,  we identify
loans  considered  impaired and the valuation  allowance  attributable  to these
loans.  Impaired  loans  generally  include loans on which we believe,  based on
current  information  and  events,  it is  probable  that we will not be able to
collect all amounts due in accordance  with the terms of the loan  agreement and
which are analyzed for a specific reserve  allowance.  We generally consider all
loans   risk-graded   substandard   and  doubtful  as  well  as  nonaccrual  and
restructured  loans as impaired.  Potential  problem loans at December 31, 2004,
not including the past due,  nonaccrual and  restructured  loans reported above,
totaled  $3.0  million as  compared  to $3.1  million at December  31,  2003.  A
significant  portion of these potential problem loans are not in default but may
have characteristics such as recent adverse operating cash flows or general risk
characteristics  that the loan officer feels might  jeopardize the future timely
collection of principal and interest payments.  The ultimate resolution of these
credits is subject to changes in economic  conditions and other  factors.  These
loans are closely monitored to ensure that our position as creditor is protected
to the fullest extent possible.

Allowance  for Credit  Losses.  Credit  risk is the risk of loss from a customer
default.  We have in place a process to identify and manage our credit risk. The
process  includes  initial  credit review and approval,  periodic  monitoring to
measure compliance with credit agreements and internal credit policies, internal
credit  review,  monitoring  changes in the risk  ratings  of loans and  leases,
identification of problem loans and leases and special procedures for collection
of problem  loans and leases.  The risk of loss is  difficult to quantify and is
subject to  fluctuations  in values and general  economic  conditions  and other
factors. As discussed previously,  the determination of the allowance for credit
losses  is a  critical  accounting  policy,  which  involves  estimates  and our
judgment on a number of factors such as net  charge-offs,  delinquencies  in the
loan and lease  portfolio and general and economic  conditions.  We consider the
allowance for credit losses of $3.3 million adequate to cover losses inherent in
the loan and lease portfolio as of December 31, 2004.  However, no assurance can
be given that we will not,  in any  particular  period,  sustain  loan and lease
losses that are sizable in relation to the amount  reserved,  or that subsequent
evaluations  of  the  loan  and  lease  portfolio,  in  light  of  factors  then
prevailing, including economic conditions and our ongoing credit review process,
will not require  significant  increases in the allowance for credit  losses.  A
protracted economic slowdown and/or a decline in commercial,  industrial or real
estate  segments may have an adverse impact on the adequacy of the allowance for
credit  losses by  increasing  credit risk and the risk of potential  loss.  See
Notes 1 and 7 to the Consolidated Financial Statements included under Item 8 and
"-Critical  Accounting Policies" for further information  concerning  accounting
policies associated with the allowance for credit losses.

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

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

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

At  yearend  2004,  our  total  allowance  was $3.3  million  which  equates  to
approximately 2.3 and 2.6 times the average gross charge-offs for the last three
and five years, respectively,  and 2.6 and 3.2 times the average net charge-offs
for the same  three-and  five-year  periods,  respectively.  Because  historical
charge-offs are not necessarily  indicative of future charge-off levels, we also
give  consideration  to other risk indicators  when  determining the appropriate
allowance level.  Those risk factors have been summarized  above. Our charge-off
policy is generally consistent with regulatory standards.

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

Concentrations of credit risk are discussed under  "-Concentrations  of Credit."
Concentrations  exist in real  estate and  construction  loans and  commitments.
Additionally,  a geographic  concentration of credit risk also arises because we
have  historically  operated  primarily in the upper  Midwest with 67 percent of
loans  outstanding  as of December 31, 2004 having been extended to customers in
Minnesota, North Dakota and South Dakota. As of December 31, 2004, 30 percent of
our loans had been extended to customers in Arizona. Other groups of credit risk
may not constitute a significant concentration,  but are analyzed based on other
evident risk factors for the purpose of determining an adequate allowance level.

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

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

The  following  table  summarizes,  for the periods  indicated,  activity in the
allowance for credit losses, including amounts of loans charged-off,  amounts of
recoveries,  additions to the allowance charged to operating expense,  the ratio
of net  charge-offs to average total loans,  the ratio of the allowance to total
loans at the end of each period and the ratio of the allowance to  nonperforming
loans:
<TABLE>
<CAPTION>

                    Analysis of Allowance for Credit Losses (1)
                                           For the Years ended December 31,
                                ------------------------------------------------
                                  2004      2003      2002      2001      2000
                                --------  --------  --------  --------  --------
                                            (dollars in thousands)
<S>                             <C>       <C>       <C>       <C>       <C>
Balance of allowance for
  credit losses,
  beginning of period...........$  4,763  $  5,006  $  4,325  $  3,588  $  2,872
                                --------  --------  --------  --------  --------
Charge-offs:
   Commercial and industrial....   1,578     1,508       408       542       574
   Real estate mortgage.........      --       189         9        99        58
   Agricultural.................      97        10        --        --        16
   Consumer/other...............     208        23        75       213        39
   Lease financing..............      --        90       165       411        68
                                --------  --------  --------  --------  --------
      Total charge-offs.........   1,883     1,820       657     1,265       755
                                --------  --------  --------  --------  --------
Recoveries:
   Commercial and industrial....     141        73        86       140       100
   Real estate mortgage.........      33         7         8        30        96
   Agricultural.................      --        --         4         1        33
   Consumer/other...............      97        11        11       132        25
   Lease financing..............       9        11        27        --        15
                                --------  --------  --------  --------  --------
      Total recoveries..........     280       102       136       303       269
                                --------  --------  --------  --------  --------
Net charge-offs................. (1,603)   (1,718)     (521)     (962)     (486)
Provision for credit losses
  charged to operations.........     175     1,475     1,202     1,699     1,202
                                --------  --------  --------  --------  --------
Balance of allowance for
  credit losses, end of
  period........................$  3,335  $  4,763  $  5,006  $  4,325  $  3,588
                                ========  ========  ========  ========  ========
Ratio of net charge-offs
  to average loans.............. (0.58)%   (0.56)%   (0.17)%   (0.33)%   (0.20)%
                                ========  ========  ========  ========  ========
Average gross loans
  outstanding during
  the period....................$276,652  $308,115  $307,227  $293,716  $244,526
                                ========  ========  ========  ========  ========
Ratio of allowance for
  credit losses to
  total loans...................   1.14%     1.68%     1.49%     1.45%     1.42%
                                ========  ========  ========  ========  ========
Ratio of allowance for
  credit losses to
  nonperforming loans...........    607%       60%       66%       99%      619%
                                ========  ========  ========  ========  ========

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

Of the $1.9  million  of  charge-offs  for the year  ended  December  31,  2004,
approximately  $1.2 million  relates to one  commercial  contractor.  A $975,000
reserve was established for this credit at December 31, 2003.

Our ratio of  allowance  for credit  losses to total  loans was 1.14  percent at
December  31, 2004  compared  with 1.68 percent one year  earlier.  The ratio at
December 31, 2004  reflects $1.9 million of  charge-offs  over the course of the
12-month  period  ended  December  31,  2004,  as  well as the  reduced  reserve
requirement related to the sharp decrease in nonperforming loans during the same
period.
<PAGE>

The table below presents, for the periods indicated, an allocation of the
allowance for credit losses among the various loan categories and sets forth the
percentage of loans in each category to gross loans. The allocation of the
allowance for credit losses as shown in the table should neither be interpreted
as an indication of future charge-offs, nor as an indication that charge-offs in
future periods will necessarily occur in these amounts or in the indicated
proportions.
<TABLE>
<CAPTION>
                      Allocation of the Allowance for Loan Losses (1)

                                                                    December 31,
                 -------------------------------------------------------------------------------------------------------------------
                           2004                     2003                  2002                   2001                   2000
                 ----------------------  ---------------------  ---------------------  ---------------------  ----------------------
                            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
                  Amount   percentage      Amount   percentage   Amount   percentage    Amount   percentage    Amount   percentage
                    of      of total         of      of total      of      of total       of      of total       of      of total
                 allowance gross loans   allowance gross loans  allowance gross loans  allowance gross loans  allowance gross loans
                 --------- ------------  --------- -----------  --------- -----------  --------- -----------  --------- -----------
                                       (dollars in thousands)
<S>              <C>            <C>       <C>           <C>     <C>            <C>     <C>            <C>     <C>            <C>
Commercial and
 industrial......$   1,583      25%       $  2,093      26%     $   2,344      28%     $   2,586      34%     $   2,066      42%
Real estate
 mortgage........    1,116      44%          1,976      46%         1,836      44%         1,038      42%           702      34%
Real estate
 construction....      379      23%            395      21%           398      19%           137      11%           112      10%
Agricultural.....      186       5%            211       4%           231       5%           267       6%           342       6%
Consumer/other...       62       2%             68       2%            85       2%           118       5%           128       5%
Lease
 financing.......        9       1%             20       1%           112       2%           179       2%           145       3%
Unallocated......       --       0%             --       0%            --       0%            --       0%            93       0%
                 --------- ------------  --------- -----------  --------- -----------  --------- -----------  --------- -----------
Total............$   3,335     100%         $4,763     100%     $   5,006     100%     $   4,325     100%     $   3,588     100%
                 ========= ============  ========= ===========  ========= ===========  ========= ===========  ========= ===========
---------------
(1)  From continuing operations for all periods presented.
</TABLE>

Deposits. Our core deposits consist of noninterest- and interest-bearing  demand
deposits,  savings  deposits,  money market deposit  accounts,  certificates  of
deposit under  $100,000,  certain  certificates of deposit of $100,000 and over,
public funds and certificates of deposit in the CDARSsm program.  Total deposits
were $455.3 million at December 31, 2004 compared with $395.9 and $398.2 million
at December 31, 2003 and 2002,  respectively.  We use these deposits, along with
other borrowed funds, to support our asset base.

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

                                           For the Years Ended December 31,
                        ---------------------------------------------------------------------------------------
                                    2004                       2003                          2002
                        ---------------------------   ---------------------------   ---------------------------
                                   Percent    Wgtd.              Percent    Wgtd.              Percent    Wgtd.
                         Average     of       avg.     Average     of       avg.     Average     of       avg.
                         balance   deposits   rate     balance   deposits   rate     balance   deposits   rate
                        ---------  --------  ------   ---------  --------  ------   ---------  --------  ------
                                                (dollars in thousands)
<S>                     <C>          <C>      <C>     <C>          <C>      <C>     <C>          <C>      <C>
Interest checking and
  MMDAs.................$ 198,992    48.22%   1.07%   $ 186,796    48.69%   1.17%   $ 174,108    44.51%   1.64%
Savings deposits........    6,695     1.62%   0.70%       6,052     1.58%   0.84%       4,511     1.15%   0.86%
Time deposits (CDs):
CDs under $100,000......   95,509    23.15%   2.55%      94,820    24.72%   3.18%     104,964    26.83%   3.88%
CDs $100,000 and over...   58,625    14.21%   3.27%      55,928    14.58%   3.91%      73,639    18.83%   4.46%
                        ---------  --------           ---------  --------           ---------  --------
Total time deposits.....  154,134    37.36%   2.83%     150,748    39.30%   3.45%     178,603    45.66%   4.12%
                        ---------  --------           ---------  --------           ---------  --------
Total interest-bearing
  deposits..............  359,821    87.20%   1.82%     343,596    89.57%   2.16%     357,222    91.32%   2.87%
Noninterest-bearing
  demand deposits.......   52,822    12.80%      --      40,022    10.43%      --      33,951     8.68%      --
                        ---------  --------           ---------  --------           ---------  --------
Total deposits........  $412,643    100.00%   1.58%    $383,618   100.00%   1.94%   $ 391,173   100.00%   2.62%
                        =========  ========           =========  ========           =========  ========

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

At times earning asset growth can outpace core deposit  growth  resulting in the
use of brokered  deposits  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 nonbank  competitors and the multitude
of financial and investment  products available to customers as well as the need
to utilize such funds in the process of our overall balance sheet management. At
times,  access to brokered and out of market deposits is available at maturities
and rates  more  favorable  than those  available  in our local  markets.  As of
December  31,  2004,  we  held a  total  of  $3.8  million  of  national  market
certificates of deposit and $55.0 million of deposits  acquired through brokers.
Under current FDIC regulations,  only "well capitalized"  financial institutions
may fund themselves with brokered  deposits without prior  regulatory  approval.
Our Bank was considered  "well  capitalized"  at December 31, 2004. See "Capital
Resources and Expenditures" and Note 18 to the Consolidated Financial Statements
included under Item 8 for a summary of the capital status of the Bank.

Time  deposits in  denominations  of $100,000 and more totaled  $83.9 million at
December  31, 2004 as compared to $46.6 and $64.9  million at December  31, 2003
and 2002, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 2004:
<TABLE>
<CAPTION>

                       Time Deposits of $100,000 and Over
                                 (in thousands)
Maturing in:
<C>                                   <C>
3 months or less....................  $ 18,817
Over 3 months through 6 months......    28,523
Over 6 months through 12 months.....    10,493
Over 12 months......................    26,119
                                     ----------
   Total............................  $ 83,952
                                     ==========
</TABLE>

Borrowed  Funds.  We use  short-term  borrowings,  FHLB  advances and  long-term
borrowings  to support our asset base.  Short-term  borrowings  include  Federal
funds  purchased  and  U.S.  Treasury  tax and loan  note  option  accounts  and
securities sold under agreements to repurchase. At December 31, 2004, short-term
borrowings were $33.7 million compared to $31.4 million at December 31, 2003 and
$28.1 million at December 31, 2002.

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

                            Short-Term Borrowings (1)

                                                     2004      2003      2002
                                                    -------   --------  --------
                                                      (dollars in thousands)
<S>                                                 <C>       <C>       <C>
Short-term borrowings outstanding at period end.... $33,697   $31,383   $28,120
Weighted average interest rate at period end.......   2.40%     1.41%     1.48%
Maximum month-end balance during the period........ $50,566   $37,670   $28,120
Average borrowings outstanding for the period...... $29,663   $21,942   $ 7,799
Weighted average interest rate for the period......   1.75%     1.74%     1.81%

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


Note  11  to  the  Consolidated  Financial  Statements  included  under  Item  8
summarizes  the  general  terms  of our  short-term  borrowings  outstanding  at
December 31, 2004 and 2003, including interest rates,  maturity dates,  weighted
average yields and other applicable terms.

FHLB advances  totaled  $97.2,  $112.2,  and $97.2 million at December 31, 2004,
2003 and 2002,  respectively while long-term  borrowings totaled $10.1, $8.6 and
$8.6 million, respectively, for the same periods.

During 2004,  $15.0 million of our FHLB advances  matured and were replaced with
other funding  sources.  During 2003, $15.0 million of our FHLB advances matured
and we originated  $30.0 million of new FHLB advances  primarily for the purpose
of funding the purchase of CMOs. During 2002, $20.0 million of our FHLB advances
matured and were not replaced due to the  availability of other funding sources.
Also during 2002, we incurred $8.5 million of long-term debt in conjunction with
the acquisition of Milne Scali. An additional $1.5 million of long-term debt was
added in 2004.
<PAGE>

Notes 12 and 13 to the Consolidated  Financial  Statements included under Item 8
summarize the general  terms of our FHLB  advances and  long-term  borrowings at
December 31, 2004 and 2003, including interest rates,  maturity dates,  weighted
average yields and other applicable terms.

Interest  Rate Caps and Floors.  From time to time we may use  off-balance-sheet
instruments,  principally  interest rate caps and floors, to adjust the interest
rate sensitivity of on-balance-sheet items, including borrowings. During May and
June 2001, we  purchased,  for $1.2  million,  interest rate cap contracts  with
notional  amounts  totaling  $40.0  million to  mitigate  interest  rate risk in
rising-rate  scenarios.  The referenced  interest rate is three-month LIBOR with
$20.0 million of 4.50 percent  contracts having three-year  original  maturities
and  $20.0  million  of  5.50  percent   contracts  having  five-year   original
maturities.  The $20.0  million  of 4.50  percent  contracts  having  three-year
original  maturities  matured  during the second  quarter of 2004. The remaining
contracts  will  mature  during  the  second  quarter  of 2006.  The  contracts,
classified as other assets,  are reflected in our December 31, 2004 consolidated
balance  sheet at their  combined  fair value of $1,000.  The  contracts are not
being accounted for as hedges under SFAS 133. As a result, the impact of marking
the contracts to fair value has been,  and will continue to be,  included in net
interest  income.  During the years ended December 31, 2004 and 2003, the impact
of  marking  the  contracts  to market  (reflected  in the  consolidated  income
statements  as an increase in interest  expense on  borrowings)  was $55,000 and
$80,000, respectively. The fair value of $1,000 as of December 31, 2004 reflects
the full extent of the  potential  loss on the  contracts  should  further write
downs to fair value be required. See -"Liquidity,  Market and Credit Risk," Item
7A,  "Quantitative  and Qualitative  Disclosures about Market Risk," and Notes 1
and  17 to the  Consolidated  Financial  Statements  included  under  Item 8 for
further discussion about accounting policies applicable to derivative  financial
instruments.

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

In July 2001, we established an additional special purpose trust for the purpose
of  issuing  $15.0  million  of  floating  rate  subordinated  debentures.   The
subordinated  debentures qualify as Tier 1 capital up to certain limits with the
balance  qualifying as Tier 2 capital up to certain  limits.  See Note 14 to the
Consolidated   Financial  Statements  included  under  Item  8  for  a  complete
description of the floating rate subordinated debentures.

Capital  Resources  and  Expenditures.   We  actively  monitor  compliance  with
regulatory  capital  requirements,  including  risk-based  and leverage  capital
measures. Under the risk-based capital method of capital measurement,  the ratio
computed is dependent on the amount and  composition  of assets  recorded on the
balance sheet,  and the amount and  composition of  off-balance-sheet  items, in
addition  to  the  level  of  capital.  Note  18 to the  Consolidated  Financial
Statements  included  under  Item 8 includes  a summary  of the  risk-based  and
leverage  capital  ratios of BNCCORP  and the Bank as of  December  31, 2004 and
2003,  including  the  capital  ratios  and  capital  amounts  necessary  to  be
considered  "well   capitalized"   under  prompt  corrective  action  regulatory
provisions and adequately  capitalized for capital adequacy purposes. As of each
of those dates, BNCCORP and the Bank exceeded capital adequacy  requirements and
the Bank was  considered  "well  capitalized"  under  prompt  corrective  action
provisions.


The capital ratios of the Company and the Bank were as follows as of those
dates:
<TABLE>
<CAPTION>
                                  Tier 1        Total
                                  Risk-         Risk-        Tier 1
    As of December 31, 2004       Based         Based       Leverage
                                  Ratio         Ratio        Ratio
                                -----------   -----------  -----------
<S>                                 <C>           <C>          <C>
BNCCORP, consolidated.........      6.35%         8.85%        4.51%
BNC National Bank.............      9.61%        10.36%        6.83%

    As of December 31, 2003

BNCCORP, consolidated.........      7.14%        10.63%        4.90%
BNC National Bank.............     10.74%        11.92%        7.37%
</TABLE>
<PAGE>

The changes in capital  ratios  between  December 31, 2003 and December 31, 2004
are  primarily  due to an  increase  in total  risk-weighted  assets from $403.7
million at  December  31, 2003 to $449.2  million at  December  31, 2004 for the
consolidated ratios and, for the bank ratios, an increase in total risk-weighted
assets from $403.3  million at December  31, 2003 to $448.6  million at December
31, 2004.  The capital ratios were also impacted by the payment of the remaining
earnout amounts related to the Milne Scali acquisition (which increased goodwill
by $6.0 million) and the acquisition of three insurance  agencies and a mortgage
company (which increased  goodwill and other intangible  assets by approximately
$1.6 million).

During  2004,  we completed  the  renovation  of the property in Golden  Valley,
Minnesota (purchased in 2003). We also purchased property in Tucson, Arizona for
use by  insurance  personnel.  We also  made  some  improvements  to our  office
building at 322 East Main Avenue,  Bismarck, North Dakota and purchased property
in  Shakopee,  Minnesota  for a future  bank site,  which is expected to open in
2006. Finally, we installed a videoconference  system that ties together certain
locations.  Capital  expenditures  for 2005 will include the construction of the
Shakopee  facility,  some remodeling of the exterior of our building at 322 East
Main Avenue in Bismarck,  the  interior of the Milne Scali  building in Phoenix,
and could include the purchase or lease of additional  facilities in our various
market areas should such  facilities or  properties be deemed to add  additional
franchise value.

Off-Balance-Sheet Arrangements. In the normal course of business, we are a party
to various financial instruments with  off-balance-sheet  risk. Such instruments
help us to meet the needs of our  customers,  manage our interest  rate risk and
effectuate business combination transactions. These instruments and commitments,
which we enter into for purposes  other than trading,  carry varying  degrees of
credit, interest rate or liquidity risk in excess of the amount reflected in the
consolidated  balance  sheets.  We have  also  entered  into  certain  guarantee
arrangements that are not reflected in the consolidated  balance sheets. Each of
these instruments is discussed in the following sections.

Commitments  to Extend  Credit.  Commitments  to extend credit are agreements to
lend to a  customer  provided  there is no  violation  of any  condition  in the
contract.  Commitments  to extend credit are legally  binding and generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. The contractual  amount represents our exposure to credit loss in the event
of default by the  borrower;  however,  at December 31,  2004,  based on current
information,  no losses were  anticipated as a result of these  commitments.  We
manage this  credit  risk by using the same  credit  policies we apply to loans.
Collateral is generally  required to secure the loans covered by the commitments
based on  management's  credit  assessment of the borrower.  The  collateral may
include marketable securities, real estate and other types of business assets of
the borrower such as accounts receivable, inventory, equipment, deposit accounts
and  general  intangibles.  Since we expect  some of the  commitments  to expire
without being drawn, total commitment  amounts do not necessarily  represent our
future liquidity requirements related to such commitments.

Commitments to extend credit are important to us in that they provide sources of
liquidity  to our  customers.  Our  liquidity is impacted to the extent that the
customer  draws upon the  commitments.  Our  revenues are impacted to the extent
advances of funds are made and  interest is earned on such  advances of funds or
we charge a fee for extending or maintaining  the commitment.  Such  commitments
don't typically result in material expenses for us, but rather, result in normal
operating  expenses  involved  with  processing,  approval and other  activities
associated with the extension and administration of such credit facilities.  Our
cash flow is  impacted  to the  extent  the  commitments  are drawn  upon by our
customers.  There  are  no  retained  interests,   securities  issued  or  other
indebtedness  incurred  by us in  connection  with these  commitments  to extend
credit,  and,  other than the obligation to honor the commitment if drawn by the
customer,  there are no other obligations or liabilities,  including  contingent
obligations or liabilities,  arising from such commitments. At the present time,
other than the passage of time or the  nonperformance  of customers  under these
commitments,  there is no known event, demand, commitment,  trend or uncertainty
that will result in or is  reasonably  likely to result in  termination  of such
commitments to a material extent.  The contractual  amount of our commitments to
extend credit totaled $152.2 million at December 31, 2004.

Commercial Letters of Credit.  Commercial letters of credit are issued on behalf
of  customers  to  ensure  payment  or  collection  in  connection   with  trade
transactions.  In the event of a  customer's  nonperformance,  our  credit  loss
exposure  is the  same  as in  any  extension  of  credit,  up to  the  letter's
contractual amount; however, at December 31, 2004, based on current information,
no losses  were  anticipated  as a result of these  commitments.  We assess  the
borrower's  credit to  determine  the  necessary  collateral,  which may include
marketable  securities,  real estate and other  types of business  assets of the
borrower such as accounts receivable, inventory, equipment, deposit accounts and
general intangibles. Since the conditions requiring us to fund letters of credit
may not occur, our liquidity requirements related to such letters of credit will
likely be less than the total outstanding commitments.
<PAGE>

Commercial  letters of credit are an  important  service  provided  by us to our
commercial customers. Our liquidity is impacted only to the extent we must honor
a commercial letter of credit due to nonperformance of the commercial  customer.
Our revenues  are  impacted to the extent we are  required to perform  under the
letter of credit and earn interest  income on the advanced  funds or we charge a
fee for  issuing or  maintaining  the letter of credit.  Such  letters of credit
typically don't result in material expenses for us, but rather, result in normal
operating  expenses  involved  with  processing,  approval and other  activities
associated with the extension and  administration of such letters of credit. Our
cash flow is impacted to the extent the  nonperformance of the customer requires
us to  advance  under the  letter of credit.  There are no  retained  interests,
securities issued or other indebtedness  incurred by us in connection with these
letters of credit, and, other than the obligation to honor the letter of credit,
there are no other obligations or liabilities,  including contingent obligations
or liabilities,  arising from such letters of credit. At the present time, other
than the passage of time or  nonperformance  of customers under their letters of
credit, there is no known event, demand,  commitment,  trend or uncertainty that
will result or is reasonably  likely to result in termination of such letters of
credit to a material extent. The contractual amount of our commercial letters of
credit totaled $249,000 at December 31, 2004.

Performance and Financial Standby Letters of Credit. Performance standby letters
of credit are  irrevocable  obligations  to the  beneficiary on our part to make
payment on account of any default by the account party in the  performance  of a
nonfinancial or commercial  obligation.  Under these arrangements,  we could, in
the event of the account party's nonperformance, be required to pay a maximum of
the amount of issued letters of credit.  Under the agreements,  we have recourse
against  the account  party up to and  including  the amount of the  performance
standby letter of credit. We evaluate each account party's creditworthiness on a
case-by-case basis and the amount of collateral  obtained varies and is based on
our credit  evaluation  of the account  party.  As of December 31, 2004,  we had
outstanding $6.8 million of performance standby letters of credit.

Financial  standby  letters  of  credit  are  irrevocable   obligations  to  the
beneficiary  on our part to repay  money  borrowed  by or advanced to or for the
account of the account  party or to make payment on account of any  indebtedness
undertaken  by the account  party,  in the event that the account party fails to
fulfill its obligation to the beneficiary.  Under these arrangements,  we could,
in the event of the account party's nonperformance, be required to pay a maximum
of the  amount of issued  letters  of  credit.  Under  the  agreements,  we have
recourse  against  the  account  party up to and  including  the  amount  of the
financial   standby  letter  of  credit.   We  evaluate  each  account   party's
creditworthiness  on a case-by-case basis and the amount of collateral  obtained
varies  and is  based on our  credit  evaluation  of the  account  party.  As of
December 31, 2004, we had outstanding $44.5 million of financial standby letters
of credit.  $34.0 million of these letters of credit were  participated to other
financial institutions.

Performance  and  financial  standby  letters  of credit  are also an  important
service we provide to our commercial  customers.  Our liquidity is impacted only
to the extent we must honor such a letter of credit due to nonperformance of the
customer.  Our  revenues  are  impacted to the extent we are required to perform
under the letter of credit and interest is earned on outstanding  advances or if
we charge a fee for issuing or administering the letter of credit.  Such letters
of credit typically don't result in material expenses for us, but rather, normal
operating  expenses  involved  with  processing,  approval and other  activities
associated with the extension and  administration of such letters of credit. Our
cash flow is impacted to the extent the  nonperformance of the customer requires
us to  advance  under the  letter of credit.  There are no  retained  interests,
securities issued or other indebtedness  incurred by us in connection with these
letters of credit and,  other than the obligation to honor the letter of credit,
there are no other obligations or liabilities,  including contingent obligations
or liabilities,  arising from such letters of credit. At the present time, other
than the passage of time or  nonperformance  of customers under their letters of
credit, there is no known event, demand,  commitment,  trend or uncertainty that
will result in or is reasonably likely to result in terminations of such letters
of credit to a material extent.

Interest  Rate Swaps,  Caps and Floors.  Interest  rate swaps are  contracts  to
exchange  fixed  and  floating  rate  interest  payment  obligations  based on a
notional  principal  amount.  From time to time we may enter into swaps to hedge
our balance sheet against fluctuations in interest rates. Interest rate caps and
floors are used to protect  our  balance  sheet from  unfavorable  movements  in
interest rates while allowing benefit from favorable movements.  The credit risk
related to interest rate contracts is that  counterparties may be unable to meet
the contractual  terms of the agreements.  This risk is estimated by calculating
the  present  value  of the  cost to  replace  outstanding  contracts  in a gain
position at current market rates, reported on a net basis by counterparties.  We
manage  the  credit  risk  of our  interest  rate  contracts  through  bilateral
collateral  agreements,  credit  approvals,  limits and  monitoring  procedures.
Additionally,  we reduce the assumed  counterparty  credit risk  through  master
netting  agreements  that permit us to settle  interest rate  contracts with the
same counterparty on a net basis. At December 31, 2004, we held $20.0 million of
interest  rate caps.  These caps are  reflected in the December 31, 2004 balance
sheet at their combined fair value of $1,000.
<PAGE>

Interest rate swaps,  caps and floors can be an effective way to hedge  interest
rate  risk.  Due to the fact that they are  purchased  at fair  value,  which is
generally  significantly  less than the notional amount of the  instrument,  our
liquidity  is not  generally  materially  affected  by the  origination  of such
instruments. The amount of revenues or expenses associated with such instruments
is dependent upon the accounting methodology selected for the instruments (i.e.,
whether such  instruments are officially  designated as hedges under  applicable
accounting  standards).  Our current interest rate caps are not accounted for as
hedges. Therefore, increases in their fair value are presented as a reduction to
interest  expense  while  decreases  in their  fair  value are  presented  as an
increase in interest expense.  Cash flow is not affected under these instruments
other than at the time of purchase  and,  during their life,  if interest  rates
move in such a fashion that payments  under the interest rate caps are received.
There  are no  retained  interests,  securities  issued  or  other  indebtedness
incurred by us in connection  with these  interest rate caps,  and, there are no
other   obligations  or  liabilities,   including   contingent   obligations  or
liabilities,  arising from such interest rate caps.  The interest rate caps will
terminate upon their scheduled  maturity dates,  which are in May and June 2006.
Until such time as those contracts mature,  there are no known events,  demands,
commitments, trends or uncertainties that will result in or is reasonably likely
to result in  termination  of the  contracts.  We do have the option to sell the
contracts at their fair value at any time.

Contingent Consideration in Business Combinations.  Pursuant to the terms of the
agreement  related to the IASW asset  acquisition in December  2003,  additional
consideration of up to $320,000 may be payable to IASW, subject to the operation
of the acquired assets  achieving  certain  financial  performance  targets.  In
accordance  with  current  accounting  standards,  there is no current  carrying
amount associated with this contractual obligation.  Additionally,  there are no
recourse  provisions  associated  with this  guarantee  that would  enable us to
recover from third parties any of the amounts paid under the guarantee and there
are no assets held  either as  collateral  or by third  parties  that,  upon the
occurrence of any triggering  event or condition  under the guarantee,  we could
obtain and  liquidate  to recover all or a portion of the amounts paid under the
guarantee.

Contingent  consideration  in business  combinations,  under current  accounting
standards and provided  certain criteria are met, is not required to be recorded
at the time of the  transaction.  Such  contingent  consideration,  which may be
based on the financial  performance of the acquired entity or other factors, can
be an effective tool in maintaining or encouraging certain levels of performance
by the acquired entity.  Such consideration may be critical to accomplishing the
business combination. Our cash flow and liquidity are impacted to the extent the
contractual financial performance is attained and we are, therefore, required to
make the contingency payments. There are no known events, demands,  commitments,
trends  or  uncertainties,  other  than the  passage  of time and the  financial
performance  of the  acquiree,  that will result in or is  reasonably  likely to
result in termination of the contingent consideration agreement.

Guaranteed Preferred Beneficial Interests in Company's Subordinated  Debentures.
BNCCORP,  concurrent  with the issuance of preferred  securities in July 2000 by
BNC  Capital  Trust I and in July  2001 by BNC  Statutory  Trust  II,  fully and
unconditionally guaranteed all obligations of the special purpose trusts related
to  the  trust  preferred  securities.  Note  14 to the  Consolidated  Financial
Statements  included  under item 8 includes a full  description of the nature of
the  established  trusts and the securities  issued by the trusts.  There are no
recourse  provisions  associated with these guarantees that would enable BNCCORP
to recover from third parties any of the amounts paid under the  guarantees  and
there are no assets held either as collateral or by third parties that, upon the
occurrence of any triggering  event or condition under the  guarantees,  BNCCORP
could obtain and liquidate to recover all or a portion of the amounts paid under
the guarantees.

The trust  preferred  securities  are important to us in that they provide for a
cost-effective  means of  obtaining  Tier 1  capital  for  regulatory  purposes.
Additionally,  BNCCORP is allowed to deduct,  for income tax  purposes,  amounts
paid in respect of the securities  and ultimately  distributed to the holders of
the preferred  securities.  Our consolidated  interest expense reflects interest
paid on the preferred securities and cash flows are impacted accordingly.  There
are no retained  interests  (other  than the common  stock of the trusts held by
BNCCORP),  securities  issued  (other  than as  described  above) or  additional
indebtedness incurred by us in connection with these securities,  and, there are
no other  obligations  or  liabilities,  including  contingent  obligations  and
liabilities,  arising from the  securities.  Due to recently  issued  accounting
standards,  the Federal Reserve is presently  considering the regulatory capital
status of such instruments.  A change in the regulatory  capital status of these
existing instruments could materially impact us in that our consolidated capital
ratios would  decline if the  securities  could not be treated as Tier 1 capital
(to certain limits) or Tier 2 capital (to certain limits).  Should such a change
in regulatory capital status be required to be implemented, BNCCORP likely would
need to immediately  explore  opportunities  for issuing other  instruments that
qualify as regulatory  capital.  It is difficult to predict,  with any degree of
certainty,  the Federal  Reserve's  final decision as it pertains to the capital
treatment of such instruments.

Indemnifications.  In conjunction  with various business  combinations,  we have
entered  into  certain  indemnifications  with  the  contracting  parties.  Such
indemnifications,   although  considered  guarantees  under  current  accounting
standards,  are not deemed to be material to our financial  condition or results
of operations.
<PAGE>

Contractual Obligations, Contingent Liabilities and Commitments.

As  disclosed in the Notes to the  Consolidated  Financial  Statements  included
under Item 8, we have certain contractual  obligations,  contingent  liabilities
and  commitments.  Certain  of these  commitments  have  been  discussed  in the
sections  above.  At December 31, 2004,  the aggregate  contractual  obligations
(excluding  bank  deposits),  contingent  liabilities  and  commitments  were as
follows (in thousands):
<TABLE>
<CAPTION>

                                           Payments due by period
                            ---------------------------------------------------
                              Less
Contractual Obligations:     than 1    1 to 3     3 to 5    After 5
                              year      years      years     years      Total
                            --------  ---------  --------  ---------  ---------
<S>                         <C>       <C>        <C>       <C>        <C>
Total borrowings........... $ 49,364  $  21,412  $ 11,333  $  81,376  $ 163,485

Annual rental commitments
 under non-cancelable
 operating leases..........    1,057      1,635       705        276      3,673
                            --------  ---------  --------  ---------  ---------
Total...................... $ 50,421  $  23,047  $ 12,038  $  81,652  $ 167,158
                            ========  =========  ========  =========  =========

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

Commitments to lend........ $117,333  $  28,235  $  6,524  $      87  $ 152,179

Standby and commercial
 letters of credit.........    6,101     11,434        --         --     17,535
                            --------  ---------  --------  ---------  ---------
Total...................... $123,434  $  39,669  $  6,524  $      87  $ 169,714
                            ========  =========  ========  =========  =========
</TABLE>

Liquidity, Market and Credit Risk

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

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

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

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

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

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

The  Consolidated  Statements  of  Cash  Flows  in  the  Consolidated  Financial
Statements  included  under  Item 8 of Part II  present  data on cash  and  cash
equivalents  provided  by  and  used  in  operating,   investing  and  financing
activities.  In addition to liquidity  from core deposit  growth,  together with
repayments  and  maturities  of  loans  and  investments,  we  utilize  brokered
deposits,  sell securities  under  agreements to repurchase and borrow overnight
Federal  funds.  The  Bank  is a  member  of  the  FHLB,  which  affords  it the
opportunity  to borrow  funds in terms  ranging  from  overnight to 10 years and
beyond.  Advances  from the  FHLB are  generally  collateralized  by the  Bank's
mortgage loans and various investment securities.  See "-Investment  Securities"
and Note 12 to the Consolidated  Financial  Statements  included under Item 8 of
Part II. We have also  obtained  funding  through the  issuance of  Subordinated
Notes, subordinated debentures and long-term borrowings.  See "-Borrowed Funds,"
"Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures"
and Notes 13 and 14 to the Consolidated Financial Statements included under Item
8 of Part II for further information on these instruments.

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

                                               For the Years Ended December 31,
                                             -----------------------------------
                                                  2004        2003       2002
                                             ----------  ----------  -----------
                                                       (in thousands)
<S>                                          <C>         <C>          <C>
Proceeds from FHLB advances..................$ 382,000   $ 175,300    $      --
Proceeds from sales of investment
  securities.................................   74,363      76,652      100,651
Net increase (decrease) in deposits..........   59,401      (2,303)      21,293
Proceeds from maturities of investment
  securities.................................   38,049      56,598       50,984
Net increase in short-term borrowings........    2,314       3,263       27,360
Proceeds from issuance of preferred stock....    1,500          --        1,500
Net increase in long-term borrowings.........    1,439         279        8,548

Repayments of FHLB advances.................. (397,000)   (160,300)     (20,000)
Purchases of investment securities...........  (89,904)   (193,653)    (146,985)
Net (increase) decrease in loans.............  (10,670)     50,419      (35,144)
Cash paid for Milne Scali earnouts...........   (6,012)     (2,315)          --
Additions to premises and equipment..........   (5,035)     (9,012)      (2,974)
Repurchase of preferred stock................   (1,750)         --           --
Cash paid for acquisition of
  insurance agencies.........................     (462)       (260)     (13,964)
Disposition of discontinued
  Fargo branch...............................       --          --       (4,365)
</TABLE>


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

We measure our liquidity position on a monthly basis. Key factors that determine
our  liquidity  are the  reliability  or  stability  of our  deposit  base,  the
pledged/non-pledged  status of our  investments  and potential loan demand.  Our
liquidity  management  system divides the balance sheet into liquid assets,  and
short-term  liabilities  that are assumed to be  vulnerable  to  non-replacement
under  abnormally  stringent  conditions.  The  excess  of  liquid  assets  over
short-term  liabilities is measured over a 30-day planning horizon.  Assumptions
for  short-term  liabilities  vulnerable  to  non-replacement  under  abnormally
stringent  conditions are based on a historical  analysis of the  month-to-month
percentage  changes in  deposits.  The excess of liquid  assets over  short-term
liabilities and other key factors such as expected loan demand as well as access
to other  sources of liquidity  such as lines with the FHLB,  Federal  funds and
those other  supplemental  sources  listed above are tied  together to provide a
measure of our  liquidity.  We have a targeted  range and manage our  operations
such that these targets can be achieved.  We believe that our prudent management
policies  and  guidelines  will  ensure  adequate  levels of  liquidity  to fund
anticipated needs of on- and off-balance-sheet items. In addition, a contingency
funding  policy  statement  identifies  actions  to be taken in  response  to an
adverse  liquidity event.  During 2004, our management team conducted an on-site
funding crisis simulation designed to model several days of a funding crisis.
<PAGE>

As of December 31, 2004, we had established three revolving lines of credit with
banks,  totaling $17.5 million.  At December 31, 2004, the Bank had not drawn on
these lines leaving  $17.5  million  available  under these  revolving  lines of
credit. The lines, if drawn upon, mature daily with interest rates that float at
the Federal funds rate. The Bank has also been approved for repurchase agreement
lines of up to $100.0 million with a major financial institution.  The lines, if
utilized,  would be  collateralized  by investment  securities.  At December 31,
2004, we also had the ability to draw  additional FHLB advances of $54.6 million
based upon the mortgage loans and securities that were then pledged,  subject to
a requirement to purchase additional FHLB stock.

Forward-Looking Statements

Statements  included  in  Item  7,  "Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations"  which are not  historical  in
nature  are  intended  to be,  and are  hereby  identified  as  "forward-looking
statements"  for  purposes  of the safe  harbor  provided  by Section 27A of the
Securities  Act and Section 21E of the  Exchange  Act. We caution  readers  that
these forward-looking statements,  including without limitation,  those relating
to our future business prospects,  revenues, working capital, liquidity, capital
needs,  interest  costs,  income and expenses,  are subject to certain risks and
uncertainties  that could cause actual results to differ  materially  from those
indicated in the  forward-looking  statements due to several important  factors.
These factors  include,  but are not limited to: risks of loans and investments,
including dependence on local and regional economic conditions;  competition for
our  customers  from other  providers of financial  services;  possible  adverse
effects of changes in interest  rates  including  the effects of such changes on
derivative contracts and associated  accounting  consequences;  risks associated
with our acquisition and growth strategies;  and other risks which are difficult
to predict and many of which are beyond our control. For a discussion of some of
the  additional  risk factors that might cause such  differences,  see Item 1 of
Part I, "-Factors That May Affect Future Results of Operations."

Effects of Inflation

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

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

Recently Issued and Adopted Accounting Pronouncements

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

Critical Accounting Policies

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

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

     Specific Reserves.  The amount of specific reserves is determined through a
     loan-by-loan  analysis of problem loans over a minimum size that  considers
     expected future cash flows,  the value of collateral and other factors that
     may impact the  borrower's  ability to make payments when due.  Included in
     this  group  are  those  nonaccrual  or  renegotiated  loans  that meet the
     criteria as being "impaired" under the definition in Statement of Financial
     Accounting  Standards No. 114, "Accounting by Creditors for Impairment of a
     Loan," ("SFAS 114"). A loan is impaired when, based on current  information
     and events,  it is probable  that a creditor  will be unable to collect all
     amounts  due  according  to the  contractual  terms of the loan  agreement.
     Problem  loans  also  include  those  credits  that  have  been  internally
     classified as credits  requiring  management's  attention due to underlying
     problems in the borrower's business or collateral concerns. Under SFAS 114,
     any allowance on impaired loans is generally based on one of three methods.
     The accounting  standard requires that impaired loans be measured at either
     the present value of expected cash flows at the loan's  effective  interest
     rate,  the  loan's  observable  market  price  or  the  fair  value  of the
     collateral of the loan.  Specific reserves totaled $904,000 at December 31,
     2004.

     Reserves for Homogeneous Loan Pools. We make a significant  number of loans
     and leases  that,  due to their  underlying  similar  characteristics,  are
     assessed for loss as "homogeneous" pools. Included in the homogeneous pools
     are consumer loans and commercial loans under a certain size that have been
     excluded from the specific  reserve  allocation  previously  discussed.  We
     segment  the  pools by type of loan or lease  and,  using  historical  loss
     information,   estimate  a  loss  reserve  for  each  pool.   Reserves  for
     homogeneous loan pools totaled $2.313 million at December 31, 2004.

     Qualitative  Reserve. Our senior lending management also allocates reserves
     for special  situations  that are unique to the measurement  period.  These
     include,  among other things,  prevailing and anticipated  economic trends,
     such as economic  conditions in certain  geographic or industry segments of
     the  portfolio   and  economic   trends  in  the   retail-lending   sector,
     management's  assessment  of credit risk  inherent  in the loan  portfolio,
     delinquency trends, historical loss experience and peer-group loss history.
     Our qualitative reserve totaled $118,000 at December 31, 2004.

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

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

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

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

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

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

While our methodology utilizes historical and other objective  information,  the
establishment of the allowance for credit losses and the classification of loans
is, to some extent,  based on our judgment and  experience.  We believe that the
allowance for credit losses is adequate, as of December 31, 2004, to cover known
and inherent risks in the loan and lease portfolio.  However,  future changes in
circumstances,  economic  conditions or other factors could cause us to increase
or decrease the allowance for credit losses as necessary.

Allowance  for Credit  Losses - Impact on  Earnings.  As  indicated  above,  the
determined  level  of the  allowance  for  credit  losses  involves  assumptions
underlying our estimates that reflect  highly  uncertain  matters in the current
period.  Additionally,  a  different  estimate  that could have been used in the
current period could have had a material impact on reported financial  condition
or  results of  operations.  We are not aware,  at this time,  of known  trends,
commitments, events or other uncertainties reasonably likely to occur that would
materially affect our methodology or the assumptions  used,  although changes in
the qualitative and quantitative factors noted above could occur at any time and
such changes  could be of a material  nature.  We have used our  assumptions  to
arrive at the level of the allowance for credit losses that we consider adequate
to provide for an estimate of probable losses related to specifically identified
loans as well as probable  losses in the remaining loan and lease portfolio that
have been incurred as of December 31, 2004.  The  qualitative  and  quantitative
factors noted above can  reasonably be expected to impact the estimates  applied
and cause such estimates to change from period to period.

Our allowance for credit losses of approximately $3.3 million  necessitated that
a provision for credit losses of $175,000 be charged to operations  for the year
ended  December 31, 2004.  Should our analysis  have  resulted in the need for a
higher or lower  allowance for credit  losses,  an additional or reduced  amount
would have been charged to operations during the period. For example, should our
analysis  have  indicated  the need for an allowance  for credit  losses of $3.5
million,  an  additional  $200,000  would have been charged to the provision for
loan losses resulting in net income of approximately $3.3 million as compared to
the $3.4 million recorded for the year ended December 31, 2004. Had our analysis
indicated  the need for an  allowance  for credit  losses of $3.1  million,  the
provision for credit losses would have been reduced by the full  $175,000,  plus
an additional $25,000 would have been reversed out of the reserve,  resulting in
net  income of  approximately  $3.6  million  as  compared  to the $3.4  million
recorded for the period.

In the  past  three  years  there  have  been  changes  in the  qualitative  and
quantitative  factors noted above.  From period to period,  economic  situations
change,  credits may deteriorate or improve and the other factors we consider in
arriving  at our  estimates  may  change.  However,  our basic  methodology  for
determining an appropriate  allowance for credit losses has remained  relatively
stable. This methodology has resulted in allowance levels of $3.3, $4.8 and $5.0
million at each of December  31,  2004,  2003 and 2002,  respectively.  As noted
above,  the amount of the provision  for credit losses  charged to operations is
directly related to our estimates of the appropriate  level of the allowance for
credit losses.  Charge-offs  and recoveries  during the applicable  periods also
impact the level of the allowance for credit losses resulting in a provision for
credit  losses that could be higher or lower in order to bring the allowance for
credit losses in line with our estimates.

Income  Taxes.  Income  taxes are  accounted  for using the asset and  liability
method  according  to SFAS 109.  Under  this  method,  deferred  tax  assets and
liabilities  and  the  amounts  of  tax  currently  payable  or  refundable  are
recognized.

Deferred tax assets and liabilities are recognized for the estimated  future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Such  differences  can relate to  differences  in accounting  for credit
losses,  depreciation  timing  differences,   unrealized  gains  and  losses  on
investment securities, deferred compensation, amortization timing differences of
intangible  assets and  leases,  which are treated as  operating  leases for tax
purposes and loans for financial statement purposes.

Deferred  tax  assets and  liabilities  are  measured  using  enacted  tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the  enactment  date. We subscribe to several tax reporting
services  to allow us to  constantly  monitor  federal  and  state  legislation,
regulation and judicial activity to keep abreast of any changes which may affect
these assets or liabilities.
<PAGE>

The  realization  of these  deferred  tax assets and  liabilities  could  differ
significantly from the amounts recorded.  Our analysis includes consideration of
many factors  including  our continued  growth and  expansion  into new lines of
business  and taxing  jurisdictions  such that the  Company  could be subject to
different taxing methodologies. The amount of the assets or liabilities realized
is  dependent  on the tax  rates in effect in the  taxing  jurisdictions  we are
subject to at the time the temporary  differences  are recovered.  The tax rates
vary from state to state and we  continue to achieve  nexus in new states  which
may have higher or lower rates in effect.

We have  considered the need for a valuation  allowance and have  determined the
Company has a deferred tax asset  resulting from certain state tax net operating
loss  carry-forwards  which it believes will not be realized.  These losses were
incurred  in years a  unitary  return  was not filed  and the  Company  does not
believe it will have  sufficient  apportioned  income to this state to receive a
benefit  from them  before  they  expire.  In all other  respects,  the  Company
believes  there is credible  evidence  to expect  sufficient  taxable  income to
absorb future deductible temporary differences.  As part of this assessment,  we
have  considered  the  timing  of  the  expected  recoveries  of  the  temporary
differences.

Current tax liabilities or amounts  refundable are recognized based on currently
enacted tax legislation,  federal and state regulations, rulings and procedures,
applicable  federal and state judicial rulings and our  interpretation  thereof.
The Company files its federal tax return on a  consolidated  basis and has taken
the position it is a unitary business and files all state returns as such.

We employ a systematic  methodology of determining our tax related balances that
includes  an ongoing  review  process  and  quarterly  adjustments.  Our process
includes  comparison and reconciliation of recorded amounts to those reported to
the taxing authorities.

Impairment   Testing  Related  to  Goodwill  and  Other  Intangible  Assets.  In
accordance  with SFAS No. 142, the Company tests  goodwill and other  intangible
assets for impairment annually or when impairment indicators are present.  These
tests are  required to be conducted at the  reporting  unit level.  Goodwill and
other  intangible  assets are impaired when the carrying amount of the reporting
unit exceeds the implied fair value of the reporting unit.

The North Dakota  banking group was used as the reporting  unit for goodwill and
other  intangible  assets  related to the  acquisition  of various  branches and
deposits in North Dakota. The mortgage branch was used as the reporting unit for
the goodwill related to the acquisition of the mortgage consulting and brokerage
firm. The trust and professional services departments were used as the reporting
unit for the  intangible  assets  related to acquisition of customer lists and a
management contract. Milne Scali was used as the reporting unit for goodwill and
other intangible assets related to all insurance acquisitions.

The Company uses current,  comparable transactions to estimate the fair value of
the  respective  reporting  units when  available.  The  Company  calculates  an
estimated fair value based on multiples of revenues, earnings, and book value of
the comparable transactions.  However, when such comparable transactions are not
available  or may have  become  outdated,  the  Company  uses  other  methods to
estimate the fair value of the reporting units.  These other methods may include
the discounted cash flow approach,  the same  methodology  used to establish the
initial purchase price or the average of several methods.

Assessing impairment of the Company's goodwill and other intangible assets is an
inexact  science  and can be  approached  using a variety of  methods.  Specific
factors and rates used to assess value are based on management's  best estimates
of variables  affecting  the  valuation  analyses.  The  estimates  are assessed
periodically and any identified impairment would result in a change to earnings.
Such charges could materially  affect the Company's results of operations due to
the  significant  amount of goodwill  and other  intangible  assets that must be
assessed periodically or when impairment indicators are present.

The  effect of any  impairment  is  recorded  in  earnings  in the  period it is
determined.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate risk arises from changes in interest rates. Interest rate risk can
result from: (1) Repricing risk - timing  differences in the  maturity/repricing
of assets, liabilities,  and off-balance-sheet contracts; (2) Options risk - the
effect of embedded options, such as loan prepayments, interest rate caps/floors,
and deposit withdrawals; (3) Basis risk - risk resulting from unexpected changes
in the spread between two or more different rates of similar  maturity,  and the
resulting  impact on the  behavior of lending and funding  rates;  and (4) Yield
curve risk - risk resulting from unexpected changes in the spread between two or
more rates of different  maturities  from the same type of  instrument.  We have
risk management policies to monitor and limit exposure to interest rate risk. To
date we have not conducted  trading  activities as a means of managing  interest
rate risk.  Our  asset/liability  management  process is  utilized to manage our
interest  rate risk.  The  measurement  of interest  rate risk  associated  with
financial  instruments is meaningful only when all related and offsetting on-and
off-balance-sheet  transactions are aggregated,  and the resulting net positions
are identified.

Our  interest  rate risk  exposure is actively  managed  with the  objective  of
managing the level and potential  volatility of net interest  income in addition
to the long-term growth of equity, bearing in mind that we will always be in the
business of taking on rate risk and that rate risk  immunization is not entirely
possible.  Also,  it is  recognized  that as exposure  to interest  rate risk is
reduced,  so too may the overall  level of net  interest  income and equity.  In
general,  the  assets  and  liabilities   generated  through  ordinary  business
activities  do  not  naturally  create  offsetting  positions  with  respect  to
repricing or maturity  characteristics.  Access to the derivatives market can be
an important  element in  maintaining  our interest  rate risk  position  within
policy  guidelines.  Using  derivative  instruments,  principally  interest rate
floors and caps, the interest rate sensitivity of specific transactions, as well
as pools of assets or liabilities,  is adjusted to maintain the desired interest
rate  risk  profile.  See  "-Loan   Portfolio-Interest  Rate  Caps  and  Floors"
"-Borrowings-Interest  Rate  Caps  and  Floors"  and  Notes  1  and  17  to  the
Consolidated  Financial  Statements  included  under Item 8 for a summary of our
accounting policies pertaining to such instruments.

Our primary tool for measuring  and managing  interest rate risk is net interest
income simulation. This exercise includes our assumptions regarding the level of
interest rates and their impact on our current balance sheet. Interest rate caps
and floors are  included to the extent that they are  exercised  in the 12-month
simulation  period.   Additionally,   changes  in  prepayment  behavior  of  the
residential  mortgage,  CMOs, and mortgage-backed  securities portfolios in each
rate environment are captured using industry  estimates of prepayment speeds for
various  coupon  segments of the  portfolio.  For  purposes of this  simulation,
projected  month-end  balances of the various  balance  sheet  accounts are held
constant at their December 31, 2004 levels.  Cash flows from a given account are
reinvested  back  into the same  account  so as to keep  the  month-end  balance
constant at its December 31, 2004 level.  The static balance sheet assumption is
made so as to project the interest rate risk to net interest  income embedded in
the existing  balance sheet.  With knowledge of the balance sheet's existing net
interest income profile,  more informed  strategies and tactics may be developed
as it relates to the structure/mix of growth.

We monitor the results of net interest income simulation on a quarterly basis at
regularly scheduled ALCO meetings. Each quarter net interest income is generally
simulated for the upcoming  12-month  horizon in seven interest  scenarios.  The
scenarios generally modeled are parallel interest ramps of +/- 100bp, 200bp, and
300bp along with a rates unchanged  scenario.  The parallel movement of interest
rates  means all  projected  market  interest  rates move up or down by the same
amount.  A ramp in  interest  rates  means that the  projected  change in market
interest  rates  occurs  over the  12-month  horizon  on a pro-rata  basis.  For
example, in the +100bp scenario, the projected prime rate will increase from its
starting  point at December  31, 2004 of 5.25  percent to 6.25 percent 12 months
later.  The prime  rate in this  example  will  increase  1/12th of the  overall
increase of 100 basis  points each month.  Given the  historically  low absolute
level of market  interest  rates as of December 31,  2004,  the  declining  rate
scenario  analysis  was  limited  to -100bp and  -200bp  for the  summary  table
presented  below and a +400bp  scenario was added.  As the yield curve flattened
over the course of 2004 with  short-term  rates  increasing  more than long-term
rates,  the parallel  movement of interest  rates takes the level of the 10-year
U.S. Treasury note yield in the -200bp scenario to 2.26 percent.  This is nearly
100bp below the June 13, 2003 low for the 10-year  U.S.  Treasury  note yield of
3.11 percent.  Therefore,  the level of mortgage  prepayment activity built into
the model is significantly greater than the record levels experienced during the
2003 lows in mortgage rates.

The net interest income  simulation  result for the 12-month horizon that covers
the  calendar  year of 2005 is shown  below.  The impact of each  interest  rate
scenario on  projected  net interest  income is  displayed  before and after the
impact of the $20.0 million cumulative notional original five-year interest rate
cap positions on three-month  LIBOR with a 5.50 percent  strike.  These interest
rate caps had a remaining maturity of approximately 18 months as of December 31,
2004.  The impact of the cap  positions is calculated  by  determining  the fair
value of the contracts at the end of the 12-month horizon using an interest rate
option  valuation model. The change in fair value plus any expected cash flow in
the various rate  scenarios is summed to determine the total net  benefit/(cost)
of the  portfolio  of  interest  rate cap  contracts.  See Notes 1 and 17 to the
Consolidated  Financial  Statements included under Item 8 of Part II for further
discussion related to our interest rate caps and accounting  policies related to
these derivative instruments.
<PAGE>
<TABLE>
<CAPTION>

                         Net Interest Income Simulation
                             (amounts in thousands)

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


<S>                          <C>        <C>      <C>        <C>       <C>       <C>       <C>
Projected 12-month net
  interest income........... $ 14,087   $ 15,122 $ 16,825   $ 17,340  $ 17,847  $ 18,076  $ 18,228

Dollar change from rates
  unchanged scenario.........$(2,738)   $(1,703)       --   $    515  $  1,022  $  1,251  $  1,403
Percentage change from rates
  unchanged scenario.........(16.27)%   (10.12)%       --      3.06%     6.07%     7.44%     8.34%

Net benefit/(cost) of
  cumulative $40.0 million
  interest rate caps (1).....$    (1)  $    (1)  $    (1)   $    (1)        --  $     25  $    109

Total net interest income
  impact with caps...........$ 14,086  $ 15,121  $ 16,824   $ 17,339  $ 17,847  $ 18,101  $ 18,337
Dollar change from unchanged
  w/caps.....................$(2,738)  $(1,703)        --   $    515  $  1,022  $  1,277  $  1,513
Percentage change from
  unchanged w/caps...........(16.27)%  (10.12)%        --      3.06%     6.07%     7.59%     8.99%
Policy guidelines (decline
limited to)..................  10.00%     5.00%        --      5.00%    10.00%    15.00%    20.00%
<FN>
(1)  In May and June 2001,  we purchased  four  interest  rate cap  contracts on
     three-month  LIBOR with  strikes at 5.50 percent each in the amount of $5.0
     million  notional with original  terms of five years for total  notional of
     $20.0  million.  These  contracts  will expire in May and June of 2006. See
     Notes 1 and 17 to the Consolidated Financial Statements included under Item
     8 for further  information  on  accounting  policies  related to derivative
     financial investments.
</FN>
</TABLE>

Our rate  sensitivity  position  over the  projected  12-month  horizon is asset
sensitive. This is evidenced by the projected increase in net interest income in
the rising interest rate scenarios.

Because one of the  objectives  of  asset/liability  management is to manage net
interest income over a one-year planning  horizon,  policy guidelines are stated
in terms of maximum  potential  reduction in net interest income  resulting from
changes in interest  rates over the 12-month  period.  It is no less  important,
however,  to give  attention  to the  absolute  dollar  level of  projected  net
interest income over the 12-month period.

Our general policy is to limit the percentage decrease in projected net interest
income to 5, 10, 15 and 20 percent from the rates unchanged scenario for the +/-
100bp, 200bp, 300bp and 400bp interest rate ramp scenarios, respectively. When a
given  scenario  falls  outside  of these  limits,  such as is the case with the
-100bp  and  -200bp  scenarios   above,  the  ALCO  reviews  the   circumstances
surrounding  the exception  and,  considering  the level of net interest  income
generated in the scenario and other related  factors,  may approve the exception
to the general  policy or recommend  actions  aimed at bringing  the  respective
scenario within the general limits noted above. A targeted level of net interest
income is  established  and  approved  by the Board  and  ALCO.  This  target is
reevaluated and reset as appropriate at each quarterly ALCO meeting.
<PAGE>

Static gap  analysis  is another  tool that may be used for  interest  rate risk
measurement.  The net  differences  between  the amount of assets,  liabilities,
equity and off-balance-sheet  instruments repricing within a cumulative calendar
period is  typically  referred  to as the "rate  sensitivity  position"  or "gap
position." The following  table sets forth our rate  sensitivity  position as of
December  31,  2004.  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, 2004
                                     -------------------------------------------------
                                       0-3       4-12       1-5       Over
                                      months    months     years    5 years     Total
                                     --------- ---------  --------  ---------  --------
                                                  (dollars in thousands)
Interest-earning assets:
<S>                                  <C>        <C>       <C>        <C>       <C>
    Interest-bearing deposits with
      banks..........................$     14   $    --   $     --   $     --  $     14
    Investment securities (1)........   8,349    18,175    118,119     91,273   235,916
    FRB and FHLB stock...............   7,541        --         --         --     7,541
    Loans held for sale, fixed rate..     512        --         --         --       512
    Loans held for sale, floating
      rate...........................  32,454    27,231         --         --    59,685
    Loans held for investment,
      fixed rate (2).................  10,576    15,117     29,987     11,080    66,760
    Loans held for investment,
      floating rate (2).............. 223,124       564      4,239         --   227,927
                                     --------- ---------  --------  ---------  --------
      Total interest-earning assets..$282,570  $ 61,087   $152,345   $102,353  $598,355
                                     ========= =========  ========  =========  ========

Interest-bearing liabilities:
    Interest checking and money
      market accounts................$210,887  $     --   $    --    $    --   $210,887
    Savings..........................   7,248        --        --         --      7,248
    Time deposits under $100,000.....  21,873    49,200     25,307        738    97,118
    Time deposits $100,000 and over..  18,817    39,016      6,329     19,790    83,952
    Short-term borrowings............  33,697        --         --         --    33,697
    FHLB advances....................      --    15,000     30,000     52,200    97,200
    Long-term borrowings.............     667        --      2,745      6,667    10,079
    Subordinated debentures..........      --        --         --     22,509    22,509
                                     --------- ---------  --------  ---------  --------
      Total interest-bearing
        liabilities..................$293,189  $103,216   $ 64,381   $101,904  $562,690
                                     ========= =========  ========  =========  ========
Interest rate gap....................$(10,619) $(42,129)  $ 87,964  $     449  $ 35,665
                                     ========= =========  ========  =========  ========
Cumulative interest rate gap at
  December 31, 2004..................$(10,619) $(52,748)  $ 35,216  $  35,665
                                     ========= =========  ========  =========
Cumulative interest rate gap to
  total assets....................... (1.58)%   (7.83)%      5.23%      5.29%

--------------------
<FN>

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

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

The table assumes that all savings and interest-bearing  demand deposits reprice
in the earliest period presented,  however,  we believe a significant portion of
these accounts constitute a core component and are generally not rate sensitive.
Our  position is supported by the fact that  aggressive  reductions  in interest
rates paid on these deposits  historically have not caused notable reductions in
balances.  For example,  while the Federal funds target rate increased 125 basis
points  during the second half of 2004,  the rates paid on these  deposits  were
only increased slightly, without any noticeable reductions in balances.
<PAGE>

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

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

Since there are  limitations  inherent in any  methodology  used to estimate the
exposure to changes in market interest rates, these analyses are not intended to
be a forecast of the actual effect of changes in market  interest  rates such as
those indicated above on the Company.  Further,  these analyses are based on our
assets and liabilities as of December 31, 2004 (without forward  adjustments for
planned growth and anticipated  business  activities) and do not contemplate any
actions we might undertake in response to changes in market interest rates.



Item 8. Financial Statements and Supplementary Data

<TABLE>
<CAPTION>

                     INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Financial Statements:                                          Page

<S>                                                                           <C>
Independent Auditors' Report................................................. 62

Consolidated Balance Sheets as of December 31, 2004 and 2003................. 63

Consolidated Statements of Income for the years ended December 31, 2004,
2003 and 2002................................................................ 64

Consolidated Statements of Comprehensive Income for the years ended
December 31, 2004, 2003, and 2002............................................ 66

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003, and 2002............................................ 67

Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003, and 2002......................................................... 68

Notes to Consolidated Financial Statements................................... 69
</TABLE>

<PAGE>


            Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders
BNCCORP, Inc.:


We have audited the accompanying  consolidated  balance sheets of BNCCORP,  Inc.
and subsidiaries as of December 31, 2004 and 2003, and the related  consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the years in the three-year  period ended  December 31, 2004.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). 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,  2004  and  2003,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2004, in conformity  with  accounting  principles  generally
accepted in the United States of America.

[signed] KPMG LLP








Minneapolis, Minnesota
February 14, 2005

<PAGE>

<TABLE>
<CAPTION>


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

                                     ASSETS
                                                                                              2004              2003
                                                                                        -----------------  ---------------
<S>                                                                                        <C>              <C>
CASH AND DUE FROM BANKS.............................................................       $   11,867       $  12,520
INTEREST-BEARING DEPOSITS WITH BANKS.................................................              14              --
                                                                                        -----------------  ---------------
     Cash and cash equivalents.......................................................          11,881          12,520
INVESTMENT SECURITIES AVAILABLE FOR SALE.............................................         235,916         262,568
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK................................           7,541           7,596
LOANS HELD FOR SALE..................................................................          60,197              --
LOANS AND LEASES, net................................................................         293,814         283,555
ALLOWANCE FOR CREDIT LOSSES..........................................................         (3,335)          (4,763)
                                                                                        -----------------  ---------------
     Net loans and leases............................................................         290,479         278,792
PREMISES AND EQUIPMENT, net..........................................................          21,799          18,570
INTEREST RECEIVABLE..................................................................           2,686           2,462
OTHER ASSETS.........................................................................          13,357          15,507
GOODWILL.............................................................................          21,779          15,089
OTHER INTANGIBLE ASSETS, net.........................................................           8,075           8,373
                                                                                        -----------------  ---------------
                                                                                           $  673,710       $ 621,477
                                                                                        =================  ===============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
     Noninterest-bearing.............................................................      $   63,386       $  44,725

     Interest-bearing -
         Savings, interest checking and money market.................................         210,887         215,525
         Time deposits $100,000 and over.............................................          83,952          46,569
         Other time deposits.........................................................          97,118          89,123
                                                                                        -----------------  ---------------
     Total deposits..................................................................         455,343         395,942
SHORT-TERM BORROWINGS................................................................          33,697          31,383
FEDERAL HOME LOAN BANK ADVANCES......................................................          97,200         112,200
LONG-TERM BORROWINGS.................................................................          10,079           8,640
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
  SUBORDINATED DEBENTURES............................................................          22,509          22,397
OTHER LIABILITIES....................................................................          11,036          10,729
                                                                                        -----------------  ---------------
              Total liabilities......................................................         629,864         581,291
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $.01 par value - 2,000,000 shares authorized;
            125 and 150 shares issued and outstanding................................              --              --
     Capital surplus - preferred stock...............................................           1,250           1,500
     Common stock, $.01 par value - 10,000,000 shares authorized; 2,884,876 and
         2,749,196 shares issued and outstanding (excluding 43,901 and
         42,880 shares held in treasury).............................................              29              28
     Capital surplus - common stock..................................................          18,601          17,074
     Retained earnings...............................................................          24,430          21,119
     Treasury stock (43,901 and 42,880 shares).......................................           (530)            (513)
       Accumulated other comprehensive income, net of income taxes...................              66             978
                                                                                        -----------------  ---------------
              Total stockholders' equity.............................................          43,846          40,186
                                                                                        -----------------  ---------------
                                                                                           $  673,710       $ 621,477
                                                                                        =================  ===============
</TABLE>
          See accompanying notes to consolidated financial statements.

<PAGE>


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

                                                                              2004           2003          2002
                                                                           ------------   ------------  ------------
INTEREST INCOME:
<S>                                                                          <C>           <C>            <C>
   Interest and fees on loans.............................................   $ 18,865      $  19,297      $ 20,778
   Interest and dividends on investments -
     Taxable..............................................................      9,455          7,545         9,774
     Tax-exempt...........................................................      1,604          1,535           977
     Dividends............................................................        209            259           223
   Other..................................................................          8             10            66
                                                                           ------------  -------------  ------------
              Total interest income.......................................     30,141         28,646        31,818
                                                                           ------------  -------------  ------------
INTEREST EXPENSE:
   Deposits...............................................................      6,532          7,438        10,242
   Short-term borrowings..................................................        519            382           141
   Federal Home Loan Bank advances........................................      4,898          5,333         6,214
   Long-term borrowings...................................................        393            387           310
   Subordinated debentures................................................      1,758          1,728         1,829
                                                                           ------------  -------------  ------------
              Total interest expense......................................     14,100         15,268        18,736
                                                                           ------------  -------------  ------------
              Net interest income.........................................     16,041         13,378        13,082
PROVISION FOR CREDIT LOSSES...............................................        175          1,475         1,202
                                                                           ------------  -------------  ------------
NET INTEREST INCOME AFTER PROVISION FOR
  CREDIT LOSSES...........................................................     15,866         11,903        11,880
                                                                           ------------  -------------  ------------
NONINTEREST INCOME:
   Insurance commissions..................................................     17,490         14,568         8,981
   Fees on loans..........................................................      2,175          2,022         2,169
   Service charges........................................................        827            909           755
   Brokerage income.......................................................        538            420         1,094
   Trust and financial services...........................................        486          1,009           751
   Net gain on sales of securities........................................        269            968         1,870
   Rental income..........................................................        109            212            89
   Other..................................................................      1,556            704           587
                                                                           ------------  -------------  ------------
              Total noninterest income....................................     23,450         20,812        16,296
                                                                           ------------  -------------  ------------
NONINTEREST EXPENSE:
   Salaries and employee benefits.........................................     21,662         16,478        14,723
   Occupancy..............................................................      2,700          2,306         2,235
   Depreciation and amortization..........................................      1,640          1,458         1,320
   Professional services..................................................      1,471          1,146         1,495
   Office supplies, telephone and postage.................................      1,414          1,214         1,106
   Amortization of intangible assets......................................      1,274          1,063           881
   Marketing and promotion................................................      1,098            803           749
   FDIC and other assessments.............................................        205            201           214
   Other..................................................................      3,304          2,621         2,606
                                                                           ------------  -------------  ------------
              Total noninterest expense...................................     34,768         27,290        25,329
                                                                           ------------  -------------  ------------
Income from continuing operations before income taxes.....................      4,548          5,425         2,847
Income tax provision......................................................      1,144          1,581           822
                                                                           ------------  -------------  ------------
Income from continuing operations.........................................      3,404          3,844         2,025
                                                                           ------------  -------------  ------------
</TABLE>
          See accompanying notes to consolidated financial statements.

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

                                                                               2004            2003         2002
                                                                           ------------    -----------  ------------
Discontinued Operations:
<S>                                                                           <C>            <C>          <C>
 Gain from operations of discontinued Fargo branch (including net loss on
    sale of $49 for 2002), net of income taxes of $6......................         --             --            14
                                                                           ------------    -----------  ------------
NET INCOME................................................................    $ 3,404        $ 3,844      $  2,039
                                                                           ============    ===========  ============

Dividends on preferred stock..............................................    $   (93)       $  (120)     $    (79)
                                                                           ------------    -----------  ------------
Income available to common stockholders...................................    $ 3,311        $ 3,724      $  1,960
                                                                           ============    ===========  ============

BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations........................................     $  1.18        $  1.38      $   0.74

Gain from discontinued Fargo branch, net of income taxes..................         --             --          0.01
                                                                           ------------    -----------  ------------
Basic earnings per common share...........................................    $  1.18        $  1.38      $   0.75
                                                                           ============    ===========  ============

DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations.........................................    $  1.14        $  1.35      $   0.74

Gain from discontinued Fargo branch, net of income taxes..................         --             --          0.01
                                                                           ------------    -----------  ------------
Diluted earnings per common share.........................................    $  1.14        $ 1.35       $   0.75
                                                                           ============    ===========  ============
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

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


                                                                2004              2003             2002
                                                            --------------    -------------    -------------

<S>                                                            <C>              <C>              <C>
NET INCOME..................................................   $  3,404         $   3,844        $   2,039
OTHER COMPREHENSIVE INCOME (LOSS) -
     Unrealized gains (losses) on securities:
        Unrealized holding gains (losses) arising during
        the period, net of income taxes of $(539), $(668),
        and $1,197..........................................       (711)           (1,122)           2,381


        Reclassification adjustment for gains included in
        net income, net of income taxes.....................       (201)             (600)          (1,330)
                                                            --------------    -------------    -------------

OTHER COMPREHENSIVE INCOME (LOSS)...........................       (912)           (1,722)           1,051
                                                            --------------    -------------    -------------

COMPREHENSIVE INCOME........................................   $  2,492         $   2,122        $   3,090
                                                            ==============    =============    =============

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                         BNCCORP, INC. AND SUBSIDIARIES
                 Consolidated Statement of Stockholders' Equity
                            For the Periods Indicated
                        (In thousands, except share data)


                                                  Capital                       Capital                      Accumulated
                               Preferred Stock    Surplus     Common Stock      Surplus                         Other
                             ------------------  Preferred -------------------  Common   Retained  Treasury  Comprehensive
                              Shares    Amount     Stock     Shares    Amount    Stock   Earnings   Stock      Income       Total
                             -------- --------- ---------- ---------- -------- --------- --------- -------- ------------- ----------

<S>               <C> <C>              <C>      <C>        <C>        <C>      <C>       <C>       <C>       <C>          <C>
BALANCE, December 31, 2001...      --  $    --  $     --   2,442,050  $    24  $ 14,084  $ 15,435  $  (513)  $   1,649    $ 30,679
   Net income................      --       --        --          --       --        --     2,039       --          --       2,039
   Other comprehensive
     income -
    Change in unrealized
     holding gains on
     securities available
     for sale, net of income
     taxes and
     reclassification
     adjustment..............      --       --        --          --       --        --        --       --       1,051       1,051
  Issuance of preferred stock     150       --     1,500          --       --        --        --       --          --       1,500
  Preferred stock dividends..      --       --        --          --       --        --      (79)       --          --         (79)
  Issuance of common stock...      --       --        --     297,759        3     2,497        --       --          --       2,500
  Other .....................      --       --        --       4,000       --        33        --       --          --          33
                             -------- --------- ---------- ---------- -------- --------- --------- -------- ------------- ----------

BALANCE, December 31, 2002...     150       --     1,500   2,743,809       27    16,614    17,395     (513)      2,700      37,723
  Net income.................      --       --        --          --       --        --     3,844       --          --       3,844
  Other comprehensive loss -
   Change in unrealized
    holding gains on
    securities available
    for sale, net of income
    taxes and
    reclassification
    adjustment...............      --       --        --          --       --        --        --       --      (1,722)     (1,722)
 Preferred stock dividends...      --       --        --          --       --        --      (120)      --          --        (120)
 Issuance of common stock....      --       --        --      12,701       --       227        --       --          --         227
 Other ......................      --       --        --      35,566        1       233        --       --          --         234
                             -------- --------- ---------- ---------- -------- --------- --------- -------- ------------- ----------


BALANCE, December 31, 2003...     150       --     1,500   2,792,076       28    17,074    21,119     (513)        978      40,186
  Net income.................                                                               3,404                            3,404
  Other comprehensive loss -
   Change in unrealized
    holding gains on
    securities available
    for sale, net of income
    taxes and
    reclassification
    adjustment...............                                                                                     (912)       (912)
 Repurchase of preferred
   stock.....................    (150)      --    (1,500)                                                                   (1,500)
 Issuance of preferred stock.     150       --     1,500                                                                     1,500
 Repurchase of preferred
   stock.....................     (25)      --      (250)                                                                     (250)
 Preferred stock dividends...                                                                 (93)                             (93)
 Issuance of common stock....                                 67,657        1     1,089                                      1,090
 Other ......................                                 69,044       --       438                (17)                    421
                             -------- --------- ---------- ---------- -------- --------- --------- -------- ------------- ----------

BALANCE, December 31, 2004...     125  $    --  $  1,250   2,928,777  $    29   $18,601  $ 24,430  $  (530)  $      66    $ 43,846
                             ======== ========= ========== ========== ======== ========= ========= ======== ============= ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                         BNCCORP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                         For the Years Ended December 31
                                 (In thousands)
                                                                                  2004              2003              2002
                                                                              ------------     -------------     --------------
OPERATING ACTIVITIES:
<S>                                                                              <C>              <C>               <C>
   Net income.......................................................             $  3,404         $  3,844          $   2,039
    Adjustments to reconcile net income to net cash provided by (used
     in) operating activities -
       Provision for credit losses..................................                  175            1,475              1,202
       Depreciation and amortization................................                1,640            1,458              1,489
       Amortization of intangible assets............................                1,274            1,063                881
       Net premium amortization on investment securities............                2,894            4,116              2,966
       Proceeds from loans recovered................................                  280              102                136
       Write down of other real estate owned and repossessed assets.                   44               40                142
       Change in interest receivable and other assets, net..........                2,148          (10,946)             2,308
       Loss on sale of bank premises and equipment..................                   25               17                  5
       Net realized gains on sales of investment securities.........                 (269)            (968)            (1,870)
       Deferred income taxes........................................                  537              874               (269)
       Change in dividend distribution payable......................                   26              (15)                (4)
       Change in other liabilities, net.............................                  147               71             (2,965)
       Originations of loans held for sale..........................             (210,070)              --                 --
       Proceeds from sale of loans held for sale....................              148,400               --                 --
       Originations of loans to be sold.............................              (65,194)         (81,706)           (92,004)
       Proceeds from sale of loans..................................               65,194           81,706             92,004
                                                                              ------------     -------------     --------------
             Net cash provided by (used in) operating activities....              (49,345)           1,131              6,060
                                                                              ------------     -------------     --------------
INVESTING ACTIVITIES:
   Purchases of investment securities...............................              (89,904)        (193,653)          (146,985)
   Proceeds from sales of investment securities.....................               74,363           76,652            100,651
   Proceeds from maturities of investment securities................               38,049           56,598             50,984
   Purchases of Federal Reserve and Federal Home Loan Bank stock....               (7,862)          (3,007)                --
   Proceeds from sales of Federal Reserve and Federal Home Loan Bank
       stock........................................................                7,917            2,482                 --
   Net (increase) decrease in loans.................................              (10,670)          50,419            (35,144)
   Additions to premises and equipment..............................               (5,035)          (9,012)            (2,974)
   Proceeds from sale of premises and equipment.....................                  149              108                161
   Cash paid for Milne Scali earnouts...............................               (6,012)          (2,315)                --
   Cash paid for acquisition of insurance agencies..................                 (462)            (260)           (13,964)
   Cash paid for acquisition of mortgage company....................                 (150)              --                 --
   Disposition of discontinued Fargo branch.........................                   --               --             (4,365)
   Other............................................................                    4               --                 --
                                                                              ------------     -------------     --------------
             Net cash provided by (used in) investing activities....                  387          (21,988)           (51,636)
                                                                              ------------     -------------     --------------
  FINANCING ACTIVITIES:
   Net increase in demand, savings, interest checking and money
       market accounts..............................................               10,803           28,357             36,723
   Net increase (decrease) in time deposits.........................               48,598          (30,660)           (15,430)
   Net increase (decrease) in short-term borrowings.................                2,314            3,263             27,360
   Repayments of Federal Home Loan Bank advances....................             (397,000)        (160,300)           (20,000)
   Proceeds from Federal Home Loan Bank advances....................              382,000          175,300                 --
   Repayments of long-term borrowings...............................                  (61)             (62)               (62)
   Proceeds from long-term borrowings...............................                1,500              141              8,610
   Proceeds from issuance of preferred stock........................                1,500               --              1,500
   Repurchase of preferred stock....................................               (1,750)              --                 --
   Payment of preferred stock dividends.............................                  (93)            (120)               (79)
   Amortization of discount on subordinated debentures..............                   86               86                 86
   Other, net.......................................................                  422              235                 33
                                                                              ------------     -------------     --------------
             Net cash provided by financing activities..............               48,319           16,240             38,741
                                                                              ------------     -------------     --------------
NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS...............                 (639)          (4,617)            (6,835)
CASH AND CASH EQUIVALENTS, beginning of year........................               12,520           17,137             23,972
                                                                              ------------     -------------     --------------
CASH AND CASH EQUIVALENTS, end of year..............................             $ 11,881         $ 12,520          $  17,137
                                                                              ============     =============     ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid....................................................             $ 13,699         $ 15,693          $  19,481
                                                                              ============     =============     ==============
   Income taxes paid................................................             $    594         $    817          $     912
                                                                              ============     =============     ==============
</TABLE>
          See accompanying notes to consolidated financial statements.

<PAGE>


                         BNCCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 2004 and 2003



1. Description of Business and Summary of Significant Accounting Policies

Description of Business.  BNCCORP, Inc. ("BNCCORP") is a registered bank holding
company incorporated under the laws of Delaware. It is the parent company of BNC
National  Bank  (together  with its  wholly-owned  subsidiaries,  Milne  Scali &
Company,  Inc.  ("Milne  Scali") and BNC Asset  Management,  Inc.,  the "Bank").
BNCCORP,  through  these  wholly  owned  subsidiaries,  which  operate  from  26
locations in Arizona,  Minnesota,  North Dakota,  Colorado and Utah,  provides a
broad range of banking, insurance, brokerage, trust and other financial services
to small- and mid-sized businesses and individuals.

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

Impairment   Testing  Related  to  Goodwill  and  Other  Intangible  Assets.  In
accordance  with SFAS No. 142, the Company tests  goodwill and other  intangible
assets for impairment annually or when impairment indicators are present.  These
tests are  required to be conducted at the  reporting  unit level.  Goodwill and
other  intangible  assets are impaired when the carrying amount of the reporting
unit exceeds the implied fair value of the reporting unit.

The North Dakota  banking group was used as the reporting  unit for goodwill and
other  intangible  assets  related to the  acquisition  of various  branches and
deposits in North Dakota. The mortgage branch was used as the reporting unit for
the goodwill related to the acquisition of the mortgage consulting and brokerage
firm.  The  Financial  Services  Group  was used as the  reporting  unit for the
intangible  assets  related to  acquisition  of customer  lists and a management
contract.  Milne Scali & Company was used as the reporting unit for goodwill and
other intangible assets related to all insurance acquisitions.

The Company uses current,  comparable transactions to estimate the fair value of
the  respective  reporting  units when  available.  The  company  calculates  an
estimated fair value based on multiples of revenues, earnings, and book value of
the comparable transactions.  However, when such comparable transactions are not
available  or may have  become  outdated,  the  Company  uses  other  methods to
estimate the fair value of the reporting units.  These other methods may include
the discounted cash flow approach,  the same  methodology  used to establish the
initial purchase price or the average of several methods.

Assessing impairment of the Company's goodwill and other intangible assets is an
inexact  science  and can be  approached  using a variety of  methods.  Specific
factors and rates used to assess value are based on management's  best estimates
of variables  affecting  the  valuation  analyses.  The  estimates  are assessed
periodically and any identified impairment would result in a change to earnings.
Such charges could materially  affect the Company's results of operations due to
the  significant  amount of goodwill  and other  intangible  assets that must be
assessed periodically or when impairment indicators are present.

The  effect of any  impairment  is  recorded  in  earnings  in the  period it is
determined.  There was no  goodwill  impairment  recorded  during the  reporting
periods included in these consolidated financial statements.

Other Significant Accounting Policies

Business Combinations.  Business combinations that have been accounted for under
the  purchase  method of  accounting  include the results of  operations  of the
acquired  businesses from the date of  acquisition.  Net assets of the companies
acquired  were  recorded  at  their  estimated  fair  value  as of the  date  of
acquisition.  Effective  with the issuance of Statement of Financial  Accounting
Standards  No.  141,   "Business   Combinations"   ("SFAS  141"),  all  business
combinations are required to be accounted for by the purchase method.  Note 2 to
these  consolidated  financial  statements  includes a summary  of all  business
combinations completed during the three-year period ended December 31, 2004.

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

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

Investment Securities.  Investment and mortgage-backed  securities that the Bank
intends to hold for  indefinite  periods of time as part of its  asset/liability
strategy,  or that may be sold in response to changes in interest rates, changes
in prepayment risk, the need to increase  regulatory  capital or similar factors
are classified as available for sale.  Available-for-sale securities are carried
at market value. Net unrealized gains and losses,  net of deferred income taxes,
on investments and mortgage-backed securities available for sale are reported as
a separate component of stockholders'  equity until realized (see "Comprehensive
Income"). All securities,  other than the securities of the Federal Reserve Bank
("FRB") and the Federal Home Loan Bank  ("FHLB"),  were  classified as available
for sale as of  December  31,  2004 and  2003.  Investment  and  mortgage-backed
securities  that the Bank  intends to hold until  maturity  are carried at cost,
adjusted for  amortization  of premiums and accretion of discounts using a level
yield methd over the period to  maturity.  The Bank did not have any  securities
classified as held to maturity as of December 31, 2004 or 2003.

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

Declines in the fair value of individual  available-for-sale or held-to-maturity
securities below their cost, which are deemed other than temporary, could result
in a charge to earnings and the corresponding  establishment of a new cost basis
for the  security.  Such  write-downs,  should they occur,  would be included in
noninterest  income as realized losses.  There were no such  write-downs  during
2004, 2003 or 2002. Note 4 to these consolidated financial statements includes a
summary of  investment  securities in a loss position at December 31, 2004 along
with the length of time that  individual  securities  have been in a  continuous
unrealized loss position and a discussion concerning such securities.

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

Loans Held for Sale.  Loans held for sale are  recorded  at the lower of cost or
market value.  The Bank has initiated a financing  program in which it purchases
short-term participation interests in residential mortgage loans originated by a
mortgage company.  Residential mortgage loans held for sale at December 31, 2004
totaled $35.0 million.  The majority of the  residential  mortgage loans will be
paid in full within 60 days. The maximum term for these loans is 120 days. It is
anticipated that additional  residential  mortgage loans will be purchased under
the  program.  The Bank has  also  initiated  a  financing  program  in which it
purchases  interests in student loans  originated by a student loan  origination
company. Student loans held for sale at December 31, 2004 totaled $25.2 million.
The  student  loans  will be held  until  the end of the  first  quarter  or the
beginning of the second quarter of 2005, at which time they will be paid in full
by proceeds received from the sale of these loans on the secondary market. It is
anticipated that additional student loans will be purchased under the program.

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

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

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

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

Mortgage  Servicing and Transfers of Financial Assets.  The Bank regularly sells
loans to others on a  non-recourse  basis.  Sold loans are not  included  in the
accompanying  consolidated  balance sheets. The Bank generally retains the right
to service  the loans as well as the right to receive a portion of the  interest
income on the loans. At December 31, 2004 and 2003, the Bank was servicing loans
for the benefit of others with aggregate unpaid principal balances of $131.3 and
$147.0 million, respectively.  Many of the loans sold by the Bank are commercial
lines of  credit  for which  balances  and  related  payment  streams  cannot be
reasonably  estimated  in order to  determine  the fair  value of the  servicing
assets or liabilities  and/or future  interest income retained by the Bank. Upon
sale, any unearned net loan fees or costs are recognized in noninterest income.

Premises and  Equipment.  Land is carried at cost.  Premises and  equipment  are
reported at cost less accumulated  depreciation and  amortization.  Depreciation
and  amortization  for  financial  reporting  purposes  is charged to  operating
expense using the  straight-line  method over the estimated  useful lives of the
assets.  Estimated useful lives are up to 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the  improvement.  The
costs of improvements are capitalized. Maintenance and repairs, as well as gains
and  losses  on  dispositions  of  premises  and  equipment,   are  included  in
noninterest income or expense as incurred.

Other Real Estate Owned and  Repossessed  Property.  Real estate  properties and
other assets acquired  through,  or in lieu of, loan foreclosure are included in
other  assets in the  balance  sheets,  and are stated at the lower of  carrying
amount or fair value less  estimated  costs to sell,  at the date of transfer to
other real estate owned or repossessed property.  When an asset is acquired, the
excess of the recorded  investment  in the asset over fair value less  estimated
costs to sell, if any, is charged to the allowance for credit losses. Management
performs valuations periodically.  Fair value is generally determined based upon
appraisals of the assets  involved.  Subsequent  declines in the estimated  fair
value,  net operating  results and gains and losses on  disposition of the asset
are included in other  noninterest  expense.  The Bank had no outstanding  other
real  estate  owned or  repossessed  property  at either  December  31,  2004 or
December 31, 2003.

Goodwill.  Goodwill  represents  the aggregate  excess of the cost of businesses
acquired  over the  fair  value of their  net  assets  at dates of  acquisition.
Goodwill is not amortized, but instead is tested for impairment annually or when
impairment  indicators  are  present.  Note 9 to  these  consolidated  financial
statements includes other disclosures related to goodwill.

Other  Intangible  Assets.  Other  intangible  assets include  premiums paid for
deposits   assumed,   insurance  books  of  business  and  other   miscellaneous
intangibles.  Deposit premiums are being amortized over their estimated lives of
10 years using the straight-line method. Such accounting treatment is consistent
with  Statement of  Financial  Accounting  Standards  No. 147,  "Acquisition  of
Certain  Financial  Institutions,  an Amendment to FASB Statements No. 72 ("SFAS
72") and 144 and FASB Interpretation No. 9 ("FIN 9")" ("SFAS 147"), which became
effective on October 1, 2003.  Insurance books of business intangibles are being
amortized over their  estimated  lives of 12.5 or 10 years for commercial  lines
and 9.8 or 10 years for personal lines. Under Statement of Financial  Accounting
Standards No. 142,  "Goodwill and Other  Intangible  Assets"  ("SFAS 142"),  the
Company's other  intangible  assets with  identifiable  lives are amortized over
those lives and are monitored to assess  recoverability  and  determine  whether
events  and  circumstances   require  adjustment  to  the  recorded  amounts  or
amortization  periods.  Intangible  assets with  indefinite  lives are no longer
amortized but are tested for impairment  annually or when impairment  indicators
are  present.  Note  9  to  these  consolidated  financial  statements  includes
additional information related to the Company's other intangible assets.

Impairment  of  Long-Lived   Assets.  The  Company  reviews  long-lived  assets,
including property and equipment,  certain identifiable intangibles and goodwill
for  impairment  periodically  or  whenever  events or changes in  circumstances
indicate that the carrying amount of any such asset may not be  recoverable.  If
impairment  is  identified,  the  assets  are  written  down to their fair value
through a charge to noninterest expense. No such impairment losses were recorded
during 2004, 2003 or 2002.

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

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

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

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

     Federal Reserve Bank and Federal Home Loan Bank Stock.  The carrying amount
     of FRB and FHLB stock is their cost, which approximates fair value.

     Loans held for sale. The fair value of the Company's loans held for sale is
     stated as the lower of cost or market value of the loans.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stock-Based Compensation.  At December 31, 2004, the Company had two stock-based
employee  compensation plans, which are described more fully in Note 28 to these
consolidated  financial  statements.  The Company  applies the  recognition  and
measurement   principles  of  Accounting   Principles   Board  Opinion  No.  25,
"Accounting   for  Stock   Issued  to   Employees"   ("APB   25")  and   related
interpretations   in  accounting  for  those  plans.  No  stock-based   employee
compensation  expense is reflected in net income for stock options granted under
the plans as all options  granted under those plans had an exercise  price equal
to the  market  value of the  underlying  common  stock  on the  date of  grant.
Compensation  expense is reflected in net income for the periods presented below
for  restricted  stock  issued  under the stock  plans and its net effect on net
income is reflected in the table below.
<PAGE>

The following table  illustrates the effect on net income and EPS if the Company
had applied the fair value  recognition  provisions  of  Statement  of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123") to  stock-based  employee  compensation  for the years  ended  December 31
(amounts in thousands):

<TABLE>
<CAPTION>

                                                                   2004                2003               2002
                                                              ---------------     ---------------    ----------------
<S>                                                                  <C>                <C>                 <C>
Net income, as reported...............................               $ 3,404            $  3,844           $  2,039
Add: total stock-based employee compensation expense
   included in reported net income, net of related tax
   effects............................................                   114                  96                  6
Deduct: total stock-based employee compensation expense
   determined under fair value method for all awards,
   net of related tax effects.........................                  (154)               (147)               (40)
                                                              ---------------     ---------------    ----------------
Pro forma net income..................................               $ 3,364            $  3,793           $  2,005
                                                              ===============     ===============    ================
Earnings per share:

  Basic - as reported.................................               $  1.18            $   1.38           $   0.75
  Basic - pro forma...................................                  1.13                1.30               0.72
  Diluted - as reported...............................                  1.14                1.35               0.75
  Diluted - pro forma.................................                  1.10                1.27               0.72
</TABLE>

Recently Issued or Adopted Accounting Pronouncements

The following represent accounting  pronouncements  issued and/or adopted during
the three-year period ended December 31, 2004:

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

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

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

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

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

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

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

In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable  Interest  Entities"  ("FIN 46").  FIN 46  addresses  consolidation  by
business   enterprises  of  variable   interest   entities  which  have  certain
characteristics  by requiring  that if a business  enterprise  has a controlling
interest  in a variable  interest  entity (as  defined by FIN 46),  the  assets,
liabilities  and  results  of  activities  of the  variable  interest  entity be
included in the  consolidated  financial  statements  with those of the business
enterprise.  FIN 46 applied  immediately to variable  interest  entities created
after January 31, 2003 and to variable  interest entities in which an enterprise
obtains an interest  after that date.  For variable  interests  acquired  before
February  1, 2003,  FIN 46 applied in the first  fiscal  year or interim  period
beginning after June 15, 2003. During 2003, the FASB delayed the  implementation
date for these  provisions  until the fourth quarter of 2003.  Accordingly,  the
Company adopted FIN 46 during the fourth quarter of 2003. The adoption  resulted
in the  deconsolidation  of two BNCCORP  trusts  that have  issued  subordinated
debentures (commonly referred to as "trust preferred securities") (see Note 14).
Prior periods have been reclassified to reflect the adoption of FIN 46.
<PAGE>

In April 2003, the FASB issued Statement of Financial  Accounting  Standards No.
149,  "Amendment  of  Statement  133  on  Derivative   Instruments  and  Hedging
Activities"  ("SFAS 149"). SFAS 149 amended Statement 133 for decisions made (1)
as  part  of the  Derivatives  Implementation  Group  process  that  effectively
required amendments to Statement 133, (2) in connection with other FASB projects
dealing  with   financial   instruments,   and  (3)  in   connection   with  the
implementation issues raised in relation to the application of the definition of
a derivative,  in particular,  the meaning of "an initial net investment that is
smaller  than  would be  required  for other  types of  contracts  that would be
expected to have a similar  response to changes in market  factors," the meaning
of "underlying," and the characteristics of a derivative that contains financing
components.  SFAS 149 is  generally  effective  for  contracts  entered  into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The Company adopted SFAS 149 on July 1, 2003 and such adoption did not
have a material effect on its financial position or results of operations.

In May 2003,  the FASB issued  Statement of Financial  Accounting  Standards No.
150, "Accounting for Certain Financial  Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes  standards for how an
issuer   classifies   and   measures   certain   financial    instruments   with
characteristics  of both liabilities and equity.  The statement requires that an
issuer  classify a financial  instrument that is within its scope as a liability
(or asset in some  circumstances).  Many of those  instruments  were  previously
classified  as  equity.  SFAS 150 became  effective  for  financial  instruments
entered into or modified  after May 31, 2003,  and otherwise at the beginning of
the first interim period  beginning after June 15, 2003,  except for mandatorily
redeemable financial  instruments for nonpublic  companies.  The Company adopted
SFAS 150 on July 1, 2003.  Adoption of the standard  required  classification of
BNCCORP's  subordinated  debentures as  liabilities  as compared to the previous
classification  between the liability and equity section of the balance  sheets.
Additionally,  the standard  requires that the interest expense  associated with
the subordinated debentures be included in interest expense and, hence, included
in the computation of net interest income and net interest margin. Prior periods
have been reclassified to reflect the adoption of SFAS 150.

On December 24, 2003, the FASB issued  Interpretation  No. 46 (revised  December
2003), "Consolidation of Variable Interest Entities" ("FIN 46R") which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity  through  means other than voting  rights and  accordingly
should  consolidate the entity.  FIN 46R replaced FIN 46. FIN 46R indicates that
when voting  interests  are not  effective in  identifying  whether an entity is
controlled  by another  party,  the economic  risks and rewards  inherent in the
entity's  assets and  liabilities  and the way in which the various parties that
have  involvement  with the entity  share in those  economic  risks and  rewards
should be used to  determine  whether  the  entity  should be  consolidated.  An
enterprise  that is involved with another  entity  generally must assess whether
that  involvement  requires  consolidation  under FIN 46R. That  involvement may
arise in a variety of ways, such as (a) lending to the entity,  (b) investing in
equity (voting or nonvoting) of the entity,  (c) issuing  guarantees  related to
the assets or  liabilities  of the entity,  or both,  (d) retaining a beneficial
interest in (or providing  financial support for) assets  transferred or sold to
the entity, (e) managing the assets of the entity, (f) leasing assets to or from
the entity and (g) entering  into a  derivative  contract  with the entity.  The
objective  of FIN 46R is to provide  consolidation  guidance for  situations  in
which  voting  equity  interests  do  not  adequately  reflect  the  controlling
interests in an entity. Public entities were required to apply FIN 46 or FIN 46R
to all entities that are  considered  special  purpose  entities in practice and
under the FASB  literature that was applied before the issuance of FIN 46 by the
end of the first  reporting  period that ended after  December 31, 2003.  Public
companies  that are not  small  business  issuers  were  required  to adopt  the
accounting requirements of FIN 46R by the end of the first reporting period that
ended after March 15, 2004.  The Company has adopted the various  provisions  of
FIN 46R as indicated  above but presently does not have any additional  variable
interest  entities  that would be required  to be  included in its  consolidated
financial statements.
<PAGE>

On December  12,  2003,  the  Accounting  Standards  Executive  Committee of the
American  Institute of Certified Public Accountants issued Statement of Position
03-3,  "Accounting for Certain Loans or Debt Securities  Acquired in a Transfer"
("SOP 03-3"). SOP 03-3 addresses  accounting for differences between contractual
cash flows and cash flows  expected to be collected  from an investor's  initial
investment in loans or debt securities ("loans") acquired in a transfer if those
differences are attributable,  at least in part, to credit quality.  It includes
such  loans  acquired  in  purchase  business  combinations  and  applies to all
nongovernmental  entities.  SOP 03-3 does not apply to loans  originated  by the
entity. SOP 03-3 limits the yield that may be accreted  ("accretable  yield") to
the  excess of the  investor's  estimate  of  undiscounted  expected  principal,
interest  and other  cash  flows  (cash  flows  expected  at  acquisition  to be
collected) over the investor's initial investment in the loan. SOP 03-3 requires
that the  excess of  contractual  cash  flows  over cash  flows  expected  to be
collected  ("nonaccretable  difference")  not be  recognized as an adjustment of
yield, loss accrual or valuation  allowance.  SOP 03-3 prohibits  investors from
displaying  accretable yield and nonaccretable  difference in the balance sheet.
Subsequent  increases in cash flows expected to be collected generally should be
recognized  prospectively  through  adjustment  of the  loan's  yield  over  its
remaining  life.  Decreases  in cash flows  expected to be  collected  should be
recognized as  impairment.  SOP 03-3  prohibits  "carrying  over" or creation of
valuation  allowances  in the  initial  accounting  of all loans  acquired  in a
transfer  that  are  within  the  scope of SOP  03-3.  This  prohibition  of the
valuation  allowance  carryover applies to the purchase of an individual loan, a
pool of loans,  a group of loans  and  loans  acquired  in a  purchase  business
combination.  SOP 03-3 is effective for loans acquired in fiscal years beginning
after December 15, 2004.  Early  adoption is encouraged.  The Company will adopt
SOP 03-3 on January 1, 2005. At this time,  adoption of SOP 03-3 is not expected
to have a material  impact on the  Company's  financial  position  or results of
operations.

On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105, "Application
of Accounting  Principles to Loan  Commitments"  ("SAB 105"). SAB 105 summarizes
the views of the SEC staff  regarding  the  application  of  generally  accepted
accounting   principles  to  loan   commitments   accounted  for  as  derivative
instruments.  SAB 105 acts to significantly  limit opportunities to recognize an
asset related to a commitment to originate a mortgage loan that will be held for
sale prior to funding the loan. SAB 105 pertains to  recognizing  and disclosing
the loan  commitments  and is effective for  commitments  to originate  mortgage
loans to be held for sale  that are  entered  into  after  March 31,  2004.  The
Company adopted the provisions of SAB 105 beginning  April 1, 2004.  Adoption of
SAB 105 did not have a material  impact on the Company's  financial  position or
results of operations.

At its March 2004 meeting,  the Emerging  Issues Task Force revisited EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain  Investments"  ("EITF  No.  03-1").  Effective  with  reporting  periods
beginning  after June 15, 2004,  companies  carrying  certain  types of debt and
equity  securities at amounts higher than the securities' fair values would have
to use more  detailed  criteria to  evaluate  whether to record a loss and would
have to disclose additional information about unrealized losses. The Company has
reviewed the revised EITF No. 03-1 and had planned to implement these additional
procedures  effective  with the quarter  beginning on July 1, 2004,  however the
FASB has since issued a statement of financial  position deferring the effective
date of the revised  EITF No. 03-1 until  further  implementation  issues may be
resolved.  Adoption  of the new  issuance  could have a  material  impact on the
Company's  financial  position and results of  operations  but the extent of any
impact  will  vary due to the fact that the  model,  as  issued,  calls for many
judgments and  additional  evidence  gathering as such  evidence  exists at each
securities valuation date.

In December 2004, the FASB issued  Statement of Financial  Accounting  Standards
No. 153,  "Exchanges of Nonmonetary  Assets,  an amendment of APB Opinion No. 29
("SFAS 153").  SFAS 153 addresses the  measurement  of exchanges of  nonmonetary
assets.  It eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," and replaces it with an exception for
exchanges  that do not have  commercial  substance.  SFAS 153  specifies  that a
nonmonetary  exchange has  commercial  substance if the future cash flows of the
entity are expected to change  significantly  as a result of the  exchange.  The
provisions  of  SFAS  153  become  effective  for  nonmonetary  asset  exchanges
occurring in fiscal periods beginning after June 15, 2005.  Earlier  application
is  permitted  for  nonmonetary  asset  exchanges  occurring  in fiscal  periods
beginning  after  December  2004.  The  provisions of SFAS 153 are to be applied
prospectively.  The  Company  expects  to adopt  SFAS 153 on  January  1,  2006;
however,  adoption of the standard is not expected to have a material  effect on
the Company's financial position or results of operations.
<PAGE>

In December 2004, the FASB issued  Statement of Financial  Accounting  Standards
No. 123 (revised 2004),  "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires
that the cost resulting from all share-based payment  transactions be recognized
in the financial statements. SFAS 123R establishes fair value as the measurement
objective in accounting for share-based  payment  arrangements  and requires all
entities  to apply a  fair-value-based  measurement  method  in  accounting  for
share-based  payment  transactions with employees except for equity  instruments
held by employee share  ownership  plans.  However,  SFAS 123R provides  certain
exceptions  to the  measurement  method  if it is  not  possible  to  reasonably
estimate the fair value of an award at the grant date.  A nonpublic  entity also
may choose to measure its liabilities under share-based payment  arrangements at
intrinsic  value.  SFAS  123R also  establishes  fair  value as the  measurement
objective for  transactions  in which an entity  requires goods or services from
nonemployees in share-based payment transactions.  SFAS 123R amends Statement of
Financial Accounting Standards No. 95, "Statement of Cash Flows" to require that
excess tax  benefits be reported  as a  financing  cash inflow  rather than as a
reduction of taxes paid.  SFAS 123R  replaces  SFAS 123 and  supersedes  APB 25.
Additional  other  pronouncements  are also  superseded or amended by SFAS 123R.
SFAS  123R  becomes  effective  for  public  entities  that do not file as small
business  issuers as of the beginning of the first  interim or annual  reporting
period that begins  after June 15, 2005.  Therefore,  the Company will adopt the
provisions of SFAS 123R on or before July 1, 2005. Adoption of the standard will
affect results of operations to the extent that expenses  associated  with stock
options are required to be recognized in the financial statements under the fair
value  accounting  method.  The disclosures  included under Note 1 ("Stock-Based
Compensation"),  as well as those  presented  in Note 28 to  these  consolidated
financial  statements,  provide an  estimation  of the  impact on the  Company's
results of operations under the revised accounting standard.

Regulatory Environment.  BNCCORP and its subsidiaries are subject to regulations
of certain state and Federal agencies,  including periodic examinations by those
regulatory agencies. BNCCORP and the Bank are also subject to minimum regulatory
capital  requirements.  At December 31, 2004,  capital levels  exceeded  minimum
capital requirements (see Note 18 to these consolidated financial statements).

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


2. Acquisitions and Divestitures:

The following acquisitions and divestitures transpired during the three-year
period ended December 31, 2004:

Milne Scali  entered into an option  agreement  with an insurance  agency and an
insurance  producer on August 17,  2004 (the  "Option  Agreement"),  in order to
further  increase the scope of the insurance  segment's  operations in Utah. The
Option  Agreement gives Milne Scali an irrevocable  right to purchase all of the
assets of the insurance agency at any time until January 31, 2006. The insurance
producer,  the sole  shareholder of the insurance  agency,  also entered into an
employment  and  non-competition  agreement with Milne Scali on August 17, 2004.
The primary term of his employment will be through January 31, 2006. Milne Scali
will make monthly payments of approximately $3,000 in partial  consideration for
the grant of the option. These payments will be made to the former owners of the
insurance  agency  for debt  totaling  $397,000,  which the  insurance  producer
incurred  when he  acquired  the agency in August of 2001.  Milne  Scali has not
assumed these obligations and the payments will end if the insurance  producer's
employment  is terminated  or if Milne Scali  exercises  the option.  The option
price is the assumption of the remaining debt obligations. The principal balance
of the debt when Milne Scali entered into the Option Agreement was approximately
$288,000 and the balance will be approximately $268,000 in January of 2006 prior
to the expiration of the Option Agreement.

On July 31,  2004,  in order to increase  the scope of the  Company's  insurance
segment operations, Milne Scali acquired the assets of a Denver,  Colorado-based
surety  producer,  for  $150,000 of cash.  Acquisitions  of  insurance  agencies
generally  result in the  recognition  of  intangible  assets due to the service
nature  of  the  business,   the  lack  of  tangible  assets  acquired  and  the
profitability of the acquired agency.  The entire purchase price of $150,000 was
allocated to an intangible asset (customer lists), which the surety producer had
recently  purchased  from his  former  employer.  The  intangible  asset will be
amortized using a method that  approximates  the anticipated  useful life of the
associated customer lists, which will cover a period of 10 years. The intangible
asset, all of which is attributable to the Company's insurance segment,  will be
evaluated for possible  impairment under the provisions of SFAS142.  The results
of operations of the acquired assets are included in the Company's  consolidated
financial statements effective August 1, 2004.
<PAGE>

On June 30, 2004,  in order to further  grow the  Company's  insurance  segment,
Milne  Scali  acquired  certain  assets  and  assumed  certain   liabilities  of
Finkbeiner Insurance,  Inc., a Prescott Valley,  Arizona-based insurance agency,
for 26,607 shares of newly issued BNCCORP common stock (valued at $ 466,000) and
$545,000  of cash.  Of the total  $1.0  million  purchase  price,  $487,000  was
allocated  to the net assets  acquired  (including  intangible  assets)  and the
excess of the purchase  price of  approximately  $523,000 over the fair value of
the net assets was  recorded  as  goodwill.  Additional  consideration  of up to
$180,000  is payable to  Finkbeiner  Insurance,  Inc.  subject to the  insurance
operation  achieving certain  performance  targets.  In accordance with purchase
method  accounting  requirements,  such payments  would increase the cost of the
transaction  in future  periods  and are not  reflected  as  liabilities  in the
Company's  current  consolidated  balance sheet.  The goodwill,  all of which is
attributable to the Company's insurance segment,  will be evaluated for possible
impairment  under the provisions of SFAS 142. Other acquired  intangible  assets
related to  personal  and  commercial  insurance  lines  books of  business  and
totaling  approximately   $459,300,  will  be  amortized  using  a  method  that
approximates the anticipated useful life of the associated customer lists, which
will cover a period of 10 years.  The  results  of  operations  of the  acquired
assets are included in the Company's consolidated financial statements effective
July 1, 2004.

On March 31, 2004,  in order to further grow the  Company's  insurance  segment,
Milne Scali  acquired  certain  assets and assumed  certain  liabilities  of The
Richard Q. Perry Agency,  a Salt Lake City,  Utah-based  insurance  agency,  for
22,470 shares of newly issued BNCCORP common stock (valued at $341,000).  Of the
total $341,000 purchase price, $166,000 was allocated to the net assets acquired
(all  intangible  assets) and the excess of the purchase price of  approximately
$175,000  over the fair value of the net assets was  recorded as  goodwill.  The
goodwill,  all of which is attributable to the Company's insurance segment, will
be evaluated for possible  impairment  under the  provisions of SFAS 142.  Other
acquired  intangible  assets related to personal and commercial  insurance lines
books of business and totaling  approximately $166,000 will be amortized using a
method that approximates the anticipated useful life of the associated  customer
lists,  which will cover a period of 10 years.  The results of operations of the
acquired assets are included in the Company's  consolidated financial statements
effective April 1, 2004.

On March 31, 2004,  BNC  Insurance,  Inc., a subsidiary of the Bank,  was merged
with and into Milne & Company  Insurance,  Inc.  and the name of Milne & Company
Insurance, Inc. was changed to Milne Scali & Company, Inc.

On December 31, 2003, in order to further grow the Company's  insurance segment,
Milne Scali acquired the assets and assumed certain liabilities of The Insurance
Alliance of the Southwest ("IASW"),  a Tucson,  Arizona-based  insurance agency,
for 12,701 shares of newly issued  BNCCORP common stock (valued at $227,000) and
$256,000 in cash. A subsequent  payment of $156,000 in cash and 15,692 shares of
newly issued  BNCCORP common stock (valued at $233,000) was made on December 31,
2004 and a similar  payment  is due on  December  31,  2005.  Of the total  $1.3
million  purchase  price,  $601,000  was  allocated  to the net assets  acquired
(including  intangible  assets) and the excess  purchase price of  approximately
$659,000  over the fair  value  of the net  assets  was  recorded  as  goodwill.
Additional  consideration  of up to $320,000 is payable to IASW,  subject to the
insurance operation  achieving certain  performance  targets. In accordance with
purchase method accounting  requirements,  such payments would increase the cost
of the transaction in future periods and are not reflected as liabilities in the
Company's  current  consolidated  balance sheet.  The goodwill,  all of which is
attributable  to the  Company's  insurance  segment,  is evaluated  for possible
impairment  under the provisions of SFAS 142. Other acquired  intangible  assets
related to  personal  and  commercial  insurance  lines  books of  business  and
totaling  approximately  $562,000 are amortized using a method that approximates
the anticipated useful life of the associated customer lists, which will cover a
period of 10 years.  The  results  of  operations  of the  acquired  assets  are
included in the Company's consolidated financial statements effective January 1,
2004.

On December 1, 2003, in order to further grow its mortgage  banking  operations,
the  Bank  executed  an  Asset   Purchase  and  Sale  Agreement  (the  "Purchase
Agreement") with Lynk Financial LLC of Arizona ("Lynk") and its principal owner.
Under the Purchase  Agreement,  the Bank, on January 5, 2004,  acquired  certain
assets of Lynk for 2,888 shares of newly issued  BNCCORP common stock (valued at
$50,000) and $150,000 in cash. Acquisition of the mortgage operation resulted in
the recognition of goodwill due to the service nature of the business,  the lack
of tangible assets acquired and the profitability of the acquired assets. Of the
total $200,000  purchase price,  $5,000 was allocated to the net assets acquired
and the excess  purchase price of $195,000 over the fair value of the net assets
was recorded as goodwill.  The  goodwill,  all of which is  attributable  to the
Company's  banking  segment,  is  evaluated  for possible  impairment  under the
provisions  of SFAS 142.  The  results  of  operation  of the  mortgage  banking
operation  are  included  in the  Company's  consolidated  financial  statements
effective January 5, 2004.
<PAGE>

On September 30, 2002, the Bank sold its Fargo,  North Dakota branch largely due
to the fact that the branch did not  achieve  critical  mass for the Bank in the
Fargo  marketplace  and the sale allowed the Bank to redirect  assets to markets
where they can be more  productively  and  profitably  employed.  Pursuant  to a
definitive  branch  purchase and assumption  agreement  dated July 26, 2002, the
Bank  sold  the  assets  of the  Fargo  branch,  including  the  bank  building,
furniture,  fixtures and  equipment  totaling  $6.0 million and $19.5 million of
loans. The Bank also sold $31.0 million in deposits. Prior to the application of
the  Bank's  direct  costs  incurred  in the sale of the branch  ($56,000),  the
transaction resulted in a net gain on sale of $7,000. These amounts are included
in the line item "Gain from operations of discontinued  Fargo branch  (including
net loss on sale of $49,000 for 2002),  net of income taxes" in the consolidated
statements  of  income.  The  Fargo  branch's  profit or loss,  for the  periods
presented, is also reflected in this line item.  Additionally,  included in this
line item is $973,000  of net  interest  income for the Fargo  branch for the 12
months ended December 31, 2002. The Fargo branch had previously been reported in
the banking operations segment of the Company's segment disclosures.

On April 16, 2002, in order to further grow its insurance  segment,  the Company
acquired 100 percent of the voting equity  interests of Milne Scali,  a Phoenix,
Arizona-based  insurance agency, for 297,759 shares of newly issued common stock
(valued at $2.5 million) and $15.5  million in cash. To effect the  transaction,
BNCCORP  incurred  $8.5 million in long-term  debt.  Of the total $18.0  million
purchase price, $7.2 million was allocated to the net assets acquired (including
intangible assets) and the excess purchase price of approximately  $10.8 million
over the fair value of net  assets  was  recorded  as  goodwill.  As part of the
transaction,  deferred tax liabilities of $2.3 million were initially  recorded,
which also increased goodwill by the same amount. Subsequent to the acquisition,
the Company and Milne Scali made an Internal  Revenue  Code  Section  338(h)(10)
election  to step up the  basis  in the  acquired  assets.  Upon  the  election,
goodwill  was  reduced by $1.8  million,  deferred  taxes  were  reduced by $2.3
million and a liability for the resulting income taxes in the amount of $590,000
was recorded.  Subsequent to the  acquisition it was determined that $155,000 of
the  $590,000  of  accrued  income  taxes  would  not be due.  Goodwill  and the
liability  for income  taxes  were  reduced by this  amount.  Under the  Section
338(h)(10)  election,  all of the goodwill  related to the  acquisition  will be
deductible for tax purposes.

Earnout  payments  of $2.3 and $2.6  million  were  made  during  2003 and 2004,
respectively.  During 2004, an accelerated  earnout  payment of $3.4 million was
also made. The payment of the accelerated earnout is the final payment due under
the Milne Scali acquisition agreement and was precipitated by the termination of
an executive officer of Milne Scali. The accelerated earnout payment represented
payments  that would have been made  during  2005 and 2006 under the Milne Scali
acquisition  agreement.  The earnout payments increased the goodwill  associated
with  the  acquisition.  The  goodwill,  all of  which  is  attributable  to the
Company's  insurance  segment,  is evaluated for possible  impairment  under the
provisions of SFAS 142. Other acquired intangible assets related to personal and
commercial  insurance  lines books of business and totaling  approximately  $8.0
million are being  amortized  using a method that  approximates  the anticipated
useful life of the  associated  customer  lists,  which cover a period of 9.8 to
12.5  years.  Milne  Scali's  results of  operations  have been  included in the
Company's  consolidated financial statements since the acquisition date of April
16, 2002.

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

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

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

The  following  pro  forma  information  has  been  prepared  assuming  that the
acquisition  of  Milne  Scali  had  been  consummated  at the  beginning  of the
respective  period.  The pro  forma  financial  information  is not  necessarily
indicative  of the  results  of  operations  as they  would  have  been  had the
transaction been consummated on the assumed dates (amounts are in thousands):
<TABLE>
<CAPTION>
                                                12 Months Ended
                                               December 31, 2002
                                           ------------------------
<S>                                                 <C>
Net interest income....................             $  14,761
Noninterest income.....................                19,553
Noninterest expense....................                28,032

Income from continuing operations......                 2,313

Income from discontinued operations....                    14
Net income.............................                 2,327

Basic earnings per common share........             $    0.79
Diluted earnings per common share......             $    0.79
</TABLE>


3. Restrictions on Cash and Due From Banks:

The Bank is required to  maintain  reserve  balances in cash on hand or with the
FRB under the Federal  Reserve Act and Federal  Reserve  Board's  Regulation  D.
Required  reserve  balances were $25,000 and $25,000 as of December 31, 2004 and
2003, respectively.

4. Investment Securities Available For Sale:

Investment  securities have been classified in the  consolidated  balance sheets
according to management's  intent.  The Company had no securities  designated as
trading or  held-to-maturity  in its portfolio at December 31, 2004 or 2003. The
carrying  amount of  available-for-sale  securities and their  approximate  fair
values were as follows as of December 31 (in thousands):
<TABLE>
<CAPTION>

                                                               Gross             Gross           Estimated
                                           Amortized        Unrealized        Unrealized           Fair
                                              Cost             Gains             Losses            Value
                                        ----------------  ---------------   ---------------   ---------------
                     2004
<S>                                         <C>               <C>              <C>               <C>
U.S. government agency mortgage-
  backed securities....................     $   9,715         $    167         $      (5)        $   9,877
U.S. government agency securities......           981               55                --             1,036
Collateralized mortgage obligations....       189,783              190            (2,269)          187,704
State and municipal bonds..............        33,390            2,028              (117)           35,301
Corporate debt securities..............         1,941               57                --             1,998
                                        ----------------  ---------------   ---------------   ---------------
                                            $ 235,810         $  2,497         $  (2,391)        $ 235,916
                                        ================  ===============   ===============   ===============

                     2003
                                                               Gross             Gross           Estimated
                                           Amortized        Unrealized        Unrealized           Fair
                                              Cost             Gains             Losses            Value
                                         ---------------  ----------------  ---------------  ----------------
U.S. government agency mortgage-
  backed securities....................     $  14,374         $    389         $      (8)        $  14,755
U.S. government agency securities......           961              122                --             1,083
Collateralized mortgage obligations....       210,760            1,451            (2,535)          209,676
State and municipal bonds..............        32,909            2,264              (117)           35,056
Corporate debt securities..............         1,939               59                --             1,998
                                         ---------------  ----------------  ---------------  ----------------
                                            $ 260,943         $  4,285         $  (2,660)        $ 262,568
                                         ===============  ================  ===============  ================
</TABLE>
<PAGE>

The  amortized  cost and  estimated  fair  market  value  of  available-for-sale
securities classified according to their contractual  maturities at December 31,
2004, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                               Estimated
                                              Amortized          Fair
                                                 Cost            Value
                                           ---------------  ---------------
<S>                                            <C>              <C>
Due in one year or less...................     $     981        $   1,036
Due after one year through five years.....         1,048            1,166
Due after five years through ten years....        43,699           43,324
Due after ten years.......................       190,082          190,390
                                           ---------------  ---------------
     Total................................     $ 235,810        $ 235,916
                                           ===============  ===============
</TABLE>

Securities  carried at  approximately  $206.6 and $234.0 million at December 31,
2004 and 2003,  respectively,  were pledged as  collateral  for public and trust
deposits  and  borrowings,  including  borrowings  with the FHLB and  repurchase
agreements with customers.

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

                                 2004              2003              2002
                            ----------------  ----------------  ----------------
<S>                           <C>               <C>                <C>
Sales proceeds..............  $    74,363       $    76,652        $  100,651
Gross realized gains........          886             1,573             2,003
Gross realized losses.......          617               605               133
</TABLE>

The following table shows the Company's investments' gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities  have been in a continuous  unrealized  loss position at December 31,
2004 (amounts are in thousands):
<TABLE>
<CAPTION>

                             Less than 12 months             12 months or more                        Total
                           ------------------------     ----------------------------    ----------------------------------
                              Fair      Unrealized           Fair       Unrealized                 Fair       Unrealized
Description of Securities     Value        Loss              Value         Loss            #       Value         Loss
                           ----------- ------------     --------------- ------------    ------- ------------ -------------
<S>                        <C>           <C>                <C>          <C>                <C>  <C>           <C>
U.S. government agency
 mortgage-backed
 securities................$       --    $     --           $     805    $     (5)          3    $     805     $     (5)
Collateralized mortgage
 obligations...............   147,715      (1,489)             27,550        (780)         25      175,265       (2,269)
State and municipal bonds..       969         (30)              1,862         (87)          7        2,831         (117)
                           ----------- ------------     --------------- ------------    ------- ------------ -------------
Total temporarily
 impaired securities.......$  148,684    $ (1,519)          $  30,217    $   (872)         35    $ 178,901     $ (2,391)
                           =========== ============     =============== ============    ======= ============ =============
</TABLE>
<PAGE>

In reaching the conclusion that the impairments disclosed in the table above are
temporary and not  other-than-temporary  in nature,  the Company  considered the
nature of the securities,  the associated guarantees and collateralization,  the
securities  ratings and the level of  impairment of the  securities.  There were
three  U.S.  government  agency  mortgage-backed   securities,  all  issued  and
guaranteed by GNMA. There were 25  collateralized  mortgage  obligations,  24 of
which are  issued  and  guaranteed  by FNMA and FHLMC and one that is issued and
guaranteed by GNMA. The sum of the fair value of the six collateralized mortgage
obligation positions that have been in a continuous unrealized loss position for
12 months or more as of December 31, 2004 was only 2.75 percent below the sum of
their amortized cost.  There were seven state and municipal  bonds, all of which
are insured, AAA rated general obligation bonds. None of the impairments was due
to  deterioration in credit quality that might result in the  non-collection  of
contractual principal and interest. The cause of the impairments is, in general,
attributable to changes in interest rates.

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

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

                                              2004                2003
                                         ----------------    ----------------
<S>                                             <C>                 <C>
Federal Reserve Bank Stock, at cost.....        $  1,268            $  1,236
Federal Home Loan Bank Stock, at cost...           6,273               6,360
                                         ----------------    ----------------
  Total.................................        $  7,541            $  7,596
                                         ================    ================
</TABLE>
There is no contractual  maturity on these investments;  they represent required
regulatory investments.

6. Loans and Leases:

Composition of Loan and Lease Portfolio. The composition of the loan and lease
portfolio was as follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
                                                  2004              2003
                                             ---------------    --------------
<S>                                              <C>               <C>
Commercial and industrial...................     $   75,460        $  73,001
Real estate:
   Mortgage.................................        129,321          129,443
   Construction.............................         68,967           60,056
Agricultural................................         13,919           12,529
Consumer....................................          5,091            6,188
Lease financing.............................          1,540            2,757
Other.......................................            389               89
                                             ---------------    --------------
     Total..................................        294,687          284,063
Less:
   Unearned income and net unamortized
     deferred fees and costs................           (873)            (508)
                                             ---------------    --------------
   Loans and leases, net....................        293,814          283,555
   Allowance for credit losses..............         (3,335)          (4,763)
                                             ---------------    --------------
         Net loans and leases...............     $  290,479        $ 278,792
                                             ===============    ==============
</TABLE>

Geographic  Location and Types of Loans.  Loans were to borrowers located in the
following market areas as of December 31:
<TABLE>
<CAPTION>
                                           2004              2003
                                        ----------        ----------
<S>                                        <C>               <C>
North Dakota.......................        33%               31%
Arizona............................        30                29
Minnesota..........................        30                28
South Dakota.......................         4                 8
Other..............................         3                 4
                                        ----------        ----------
         Totals....................       100%              100%
                                        ==========        ==========
</TABLE>
<PAGE>

Commercial  loan  borrowers  are generally  small- and  mid-sized  corporations,
partnerships and sole  proprietors in a wide variety of businesses.  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 Bank holds real property as  collateral.  Of the $129.3 and $129.4
million of real estate mortgages as of December 31, 2004 and 2003, respectively,
many are loans made to commercial  customers  where the  collateral for the loan
is,  among  other  things,  the real  estate  occupied  by the  business  of the
customer.  Accordingly,  certain loans categorized as real estate mortgage loans
could be  characterized  as  commercial  loans that are secured by real  estate.
Agricultural   loans  include  loans  to  grain  and/or   livestock   producers,
agricultural  real estate  loans,  machinery  and  equipment  and other types of
loans.  Loans to  consumers  are both  secured and  unsecured.  Lease  financing
represents credit to borrowers under direct finance lease obligations.  The Bank
also extends financing to lease companies,  securing the loan with an assignment
of lease  payments and a security  filing  against the  underlying  asset of the
lease.  These loans are classified as lease financing but are not direct finance
lease obligations.  Single- and multi-family residential mortgage loans totaling
$11.9 and $8.3 million at December 31, 2004 and 2003, respectively, were pledged
as collateral  for FHLB  borrowings.  Commercial  loans totaling $39.3 and $43.4
million at December 31, 2004 and 2003, respectively,  were pledged as collateral
for borrowings, including FHLB borrowings.

Concentrations of Credit. The Bank's credit policies  emphasize  diversification
of  risk  among   industries,   geographic   areas  and   borrowers.   The  only
concentrations of loans exceeding 10 percent of total loans at December 31, 2004
were real estate loans, such as loans to non-residential  and apartment building
operators and lessors of real property  ($72.1 million) and  construction  loans
($37.2 million).  Loans within these categories are diversified across different
types of  borrowers,  geographically  dispersed,  and secured by many  different
types of real estate and other collateral.

Impaired Loans.  As of December 31, the Bank's  recorded  investment in impaired
loans and the related valuation allowance was as follows (in thousands):
<TABLE>
<CAPTION>
                                                            2004                                  2003
                                              ---------------------------------     ---------------------------------
                                                Recorded           Valuation          Recorded          Valuation
                                               Investment          Allowance         Investment         Allowance
                                              ---------------    --------------     --------------    ---------------
Impaired loans -
<S>                                                <C>               <C>                <C>                <C>
     Valuation allowance required.........         $   3,508         $   1,043          $  10,996          $   2,245
     No valuation allowance required......                39                --                 --                 --
                                              ---------------    --------------     --------------    ---------------
         Total impaired loans.............         $   3,547         $   1,043          $  10,996          $   2,245
                                              ===============    ==============     ==============    ===============
</TABLE>

Impaired loans generally  include loans on which management  believes,  based on
current information and events, it is probable that the Bank 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  Bank  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 Bank's  allowance
for credit losses.

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

                                                        2004            2003             2002
                                                    ------------    ------------     ------------
<S>                                                     <C>            <C>             <C>
Average recorded investment in impaired loans......     $ 4,991        $ 13,415        $ 13,135
                                                    ============    ============     ============
Interest income recognized on impaired loans.......     $   273        $    758        $    658
                                                    ============    ============     ============
Average recorded investment in impaired loans
     as a percentage of average total loans........        1.8%            4.4%            4.0%
                                                    ============    ============     ============
</TABLE>
<PAGE>

Past Due,  Nonaccrual and Restructured  Loans. As of December 31, 2004 and 2003,
the Bank had $25,000  and  $38,000,  respectively,  of loans past due 90 days or
more and still accruing interest. As of December 31, 2004 and 2003, the Bank had
$524,000 and $7.9 million, respectively, of nonaccrual loans and no restructured
loans  (included as impaired  loans above).  The following  table  indicates the
effect on income if  interest  on such loans  outstanding  at  yearend  had been
recognized at original  contractual  rates during the year ended December 31 (in
thousands):

<TABLE>
<CAPTION>
                                                         2004            2003            2002
                                                     ------------    -----------    -------------
<S>                                                        <C>           <C>        <C>
Interest income that would have been recorded.......       $  72         $  121     $       237
Interest income recorded............................          43             56               1
                                                     ------------    -----------    -------------
Effect on interest income...........................       $  29         $   65     $       236
                                                     ============    ===========    =============
</TABLE>

As of December 31, 2004 the Bank had no commitments to lend additional  funds to
borrowers   with  loans  whose  terms  had  been   modified  in  troubled   debt
restructurings.

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

Leases.  The Bank  extends  credit  to  borrowers  under  direct  finance  lease
obligations.   The  direct  finance  lease   obligations  are  stated  at  their
outstanding principal amount net of unearned income and net unamortized deferred
fees and costs. At December 31, 2004 the total minimum annual lease payments for
direct finance lease  obligations  with remaining terms of greater than one year
were as follows (in thousands):
<TABLE>
<CAPTION>

<C>                                                   <C>
2005.....................................             $   383
2006.....................................                 354
2007.....................................                 166
2008.....................................                  --
2009.....................................                  --
Thereafter...............................                  --
                                              ----------------
Total future minimum lease payments......                 903
Unguaranteed residual values.............                 340
                                              ----------------
Total all payments.......................               1,243
Unearned income..........................               (121)
                                              ----------------
Net outstanding principal amount.........             $ 1,122
                                              ================
</TABLE>

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


7. Allowance for Credit Losses:

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

                                        2004           2003            2002
                                    -------------  --------------  -------------
<S>                                     <C>            <C>            <C>
Balance, beginning of year.........     $  4,763       $  5,006       $  4,325
     Provision for credit losses...          175          1,475          1,202
     Loans charged off.............       (1,883)        (1,820)          (657)
     Loans recovered...............          280            102            136
                                    -------------  --------------  -------------
Balance, end of year...............     $  3,335       $  4,763       $  5,006
                                    =============  ==============  =============
</TABLE>
<PAGE>

8. Premises and Equipment

Premises and equipment consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>

                                                        2004           2003
                                                   -------------   -------------
<S>                                                  <C>              <C>
Land and improvements.............................   $    4,913       $  3,142
Buildings and improvements........................       13,269         11,873
Leasehold improvements............................        1,755          1,796
Furniture, fixtures and equipment.................       10,692          9,638
                                                   -------------   -------------
 Total cost.......................................       30,629         26,449
Less accumulated depreciation and amortization....       (8,830)        (7,879)
                                                   -------------   -------------
 Net premises, leasehold improvements and
  equipment.......................................   $   21,799       $ 18,570
                                                   =============   =============
</TABLE>

Depreciation  and  amortization  expense on premises  and  equipment  charged to
continuing  operations totaled approximately $1.6, $1.5 and $1.3 million for the
years ended December 31, 2004, 2003 and 2002, respectively.

9. Goodwill and Other Intangible Assets

Goodwill,  representing  the excess of the purchase price over the fair value of
net assets acquired,  results from purchase acquisitions made by the Company. On
January  1,  2002,  the  Company  adopted  SFAS 142.  Under  SFAS 142,  goodwill
associated  with  business  combinations  completed  after June 30,  2001 is not
required to be amortized.  Effective  January 1, 2002, the Company  discontinued
all goodwill amortization.

Since  January  1,  2002,  goodwill  has been  assessed  for  impairment  at the
reporting unit and qualifying  subsidiary levels by applying a  fair-value-based
test at least annually or if impairment  indicators are present. The Company has
$257,000 of unamortized goodwill related to four separate transactions completed
prior to July 1, 2001 and $21.5  million of  goodwill  related  to  transactions
completed  during  2002,  2003 and  2004.  Pursuant  to SFAS  142,  the  Company
completed its annual goodwill impairment assessment during the second quarter of
2004 and  concluded  that  goodwill  was not  impaired as of June 30,  2004.  No
subsequent events have occurred that would change the conclusion reached.

Core  deposit  intangibles  are  amortized  based on a useful  life of 10 years.
Insurance books of business intangibles are being amortized over their estimated
lives of 12.5 years for  commercial  lines and 9.8 years for personal  lines for
the books of business  acquired in the Milne Scali  acquisition and 10 years for
the books of  business  acquired  in the IASW,  the Salt Lake City  agency,  the
Prescott  Valley agency and the Denver  surety  business  acquisitions.  Certain
identifiable  intangible  assets that are also  included  in the caption  "other
intangible  assets" in the consolidated  balance sheets are generally  amortized
over a useful life of 10 years.


The gross carrying  amount of intangible  assets and the associated  accumulated
amortization  at  December  31,  2004  is  presented  in  the  table  below  (in
thousands):
<TABLE>
<CAPTION>
                                      Gross                           Net
                                     Carrying      Accumulated      Carrying
                                      Amount       Amortization      Amount
                                   -------------  --------------  -------------
  Intangible assets:
<S>                                  <C>             <C>              <C>
   Core deposit intangibles......... $   3,497       $   3,283        $    214
   Insurance books of business
    intangibles.....................     9,379           1,901           7,478
   Other............................     1,138             755             383
                                    -----------  --------------   -------------
         Total...................... $  14,014       $   5,939        $  8,075
                                    ===========  ==============   =============
</TABLE>
<PAGE>

Amortization  expense for intangible  assets was $1.3, $1.1 million and $881,000
for the years ended December 31, 2004, 2003 and 2002, respectively.

The following table shows the estimated  amortization expense, for the next five
years,  for  amortized  intangible  assets  existing on the  Company's  books at
December 31, 2004 (in thousands).  Projections of amortization expense are based
on existing asset balances as of December 31, 2004. Actual amortization  expense
may differ significantly depending upon changes in market conditions:

<TABLE>
<CAPTION>
                                          Insurance
                                        Commercial and
                              Core      Personal Books
                             Deposit     of Business
                           Intangibles    Intangibles      Other       Total
                          ------------  --------------- ----------- ------------

Year ended December 31,
<S>                        <C>            <C>             <C>          <C>
   2005..................  $  213         $  801          $  160       $ 1,174
   2006..................      --            801             112           913
   2007..................      --            801             112           913
   2008..................      --            801              --           801
   2009..................      --            801              --           801

</TABLE>

The following table shows the change in goodwill, by reporting segment, between
January 1, 2004 and December 31, 2004 (in thousands):

<TABLE>
<CAPTION>
                                                                                       Segment
                                                           -----------------------------------------------------------------
                                                             Banking          Insurance          Other            Total
                                                           -------------    --------------    -------------    -------------
<S>              <C>                                          <C>              <C>               <C>             <C>
Balance, January 1, 2004..............................        $   212          $ 14,700          $   177         $ 15,089
Goodwill attributable to purchase acquisitions........            198               712               --              910
Goodwill attributable to earnout payments.............             --             6,012               --            6,012
Other.................................................             --               (55)            (177)            (232)
                                                           -------------    --------------    -------------    -------------
Balance, December 31, 2004............................        $   410          $ 21,369          $    --         $ 21,779
                                                           =============    ==============    =============    =============

</TABLE>

10. Deposits:

The scheduled maturities of time deposits as of December 31, 2004 are as follows
(in thousands):

<TABLE>
<CAPTION>

<C>                                <C>
2005........................       $ 128,906
2006........................          24,690
2007........................           4,120
2008........................           1,378
2009........................           1,448
Thereafter..................          20,528
                             ----------------
                                   $ 181,070
                             ================
</TABLE>

At  December  31,  2004  and  2003,   the  Bank  had  $3.8  and  $12.9  million,
respectively, of time deposits that had been acquired in the national market and
$51.8 and $18.6 million,  respectively,  of time deposits that had been acquired
through a broker.

At December 31, 2004 collateralized mortgage obligations and state and municipal
bonds with an  amortized  cost of  approximately  $21.2  million were pledged as
collateral  for certain  deposits and $4.8 million of bank  depository  guaranty
bonds from a bankers  surety  company were pledged as  additional  collateral on
Bank deposits.

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

11. Short-Term Borrowings:

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

<TABLE>
<CAPTION>
                                                    2004             2003
                                                -------------    -------------
 <S>                                               <C>               <C>
 Federal funds purchased and
    U. S. Treasury tax and loan
    note option accounts (1)...................    $ 21,314          $17,114
  Repurchase agreements with customers,
    renewable daily, interest payable
    monthly, rates ranging from 2.00%
    to 3.19%, and 1.50%, respectively,
    secured by government agency
    collateralized mortgage obligations (1)....      12,383           14,269
                                                -------------    -------------
                                                   $ 33,697          $31,383
                                                =============    =============
<FN>
(1)  The weighted average interest rate on short-term borrowings  outstanding as
     of December 31, 2004 and 2003 was 2.40% and 1.41%, respectively.
</FN>
</TABLE>

Customer  repurchase  agreements  are used by the  Bank to  acquire  funds  from
customers  where the  customers  are  required  or desire  to have  their  funds
supported by collateral  consisting of  government,  government  agency or other
types of  securities.  The  repurchase  agreement  is a  promise  to sell  these
securities to a customer at a certain price and repurchase them at a future date
at that same price plus interest  accrued at an agreed upon rate.  The Bank uses
customer repurchase agreements in its liquidity plan as well as an accommodation
to  customers.  At December 31, 2004,  $12.4  million of  securities  sold under
repurchase agreements,  with a weighted average interest rate of 2.37%, maturing
in 2005,  were  collateralized  by  government  agency  collateralized  mortgage
obligations  having a carrying value of $25.3  million,  a market value of $25.3
million and unamortized principal balances of $25.4 million.

As of December 31, 2004, the Bank had  established  three  additional  revolving
lines of credit with banks,  totaling $17.5  million.  At December 31, 2004, the
Bank had not drawn on these lines leaving $17.5  million  available  under these
revolving lines of credit.  The lines, if drawn upon, mature daily with interest
rates that float at the Federal funds rate.  The Bank has also been approved for
repurchase  agreement  lines  of up to  $100.0  million  with a major  financial
institution.  The lines,  if utilized,  would be  collateralized  by  investment
securities.

12. Federal Home Loan Bank Advances:

FHLB  advances  consisted  of the  following  at  December  31  (amounts  are in
thousands):
<TABLE>
<CAPTION>
                                    2004                                  2003
                      ---------------------------------     ---------------------------------
                                            Weighted                             Weighted
                                             Average                              Average
  Year of Maturity          Amount             Rate             Amount              Rate
                      ---------------    --------------     --------------    ---------------
<S>  <C>                  <C>                                 <C>                  <C>
     2004............     $       --             --           $  15,000            4.77%
     2005............         15,000           2.30%             15,000            2.30
     2006............         20,000           2.06              20,000            2.06
     2009............         10,000           5.64              10,000            5.64
     2010............         52,200           6.09              52,200            6.09
                      ---------------    --------------     --------------    ---------------
                          $   97,200           4.63%          $ 112,200            4.65%
                      ===============    ==============     ==============    ===============
</TABLE>

Some of the advances  listed above have call  provisions  that allow the FHLB to
request  that the  advance  be paid back or  refinanced  at the rates then being
offered by the FHLB.  As of December  31,  2004,  the Bank had $62.2  million of
callable FHLB advances all callable quarterly during the first quarter of 2005.

At December 31,  2004,  the advances  from the FHLB were  collateralized  by the
Bank's mortgage loans with unamortized principal balances of approximately $51.2
million resulting in a FHLB collateral equivalent of $31.9 million. In addition,
the advances from the FHLB were  collateralized  by securities with  unamortized
principal balances of approximately  $148.1 million. The Bank has the ability to
draw  additional  advances of $54.6  million  based upon the mortgage  loans and
securities  that are currently  pledged,  subject to a  requirement  to purchase
additional FHLB stock.
<PAGE>

13. Long-Term Borrowings:

The following  table sets forth selected  information  for long-term  borrowings
(borrowings  with an original  maturity of greater than one year) as of December
31 (in thousands):
<TABLE>
<CAPTION>
                                                      2004             2003
                                                   ------------     ------------
<S>                                                  <C>               <C>
 Note payable to the Bank of North Dakota,
    principal and interest due each March 31,
    beginning on March 31, 2005 and ending
    March 31, 2019, interest payable at
    30-day LIBOR plus 2.45%, secured by
    the stock of BNC National Bank ...............   $  10,000         $  8,500
  Other ..........................................          79              140
                                                   ------------     ------------
                                                     $  10,079         $  8,640
                                                   ============     ============
</TABLE>
The $10.0 million loan from the Bank of North Dakota includes various  covenants
that are primarily  operational  rather than financial in nature. As of December
31, 2004, the Company was in compliance with these covenants.

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

In July 2001,  BNCCORP  established a special purpose trust, BNC Statutory Trust
II, for the purpose of issuing $15.0  million of floating  rate trust  preferred
securities.  The  floating  rate trust  preferred  securities  were issued at an
initial rate of 7.29 percent and adjust quarterly to a rate equal to three-month
LIBOR  plus 3.58  percent.  The  interest  rate at  December  31,  2004 was 5.74
percent.  Prior to July 31, 2011,  the rate shall not exceed 12.5  percent.  The
proceeds from the issuance,  together with the proceeds of the related  issuance
of $464,000 of common securities of the trust, were invested in $15.5 million of
junior subordinated deferrable interest debentures of BNCCORP. The floating rate
junior  subordinated  deferrable  interest  debentures were issued at an initial
rate of 7.29 percent and adjust  quarterly to a rate equal to three-month  LIBOR
plus 3.58  percent.  The interest  rate at December  31, 2004 was 5.74  percent.
Prior to July 31, 2011, the rate shall not exceed 12.5 percent.  Concurrent with
the  issuance  of the  preferred  securities  by the  trust,  BNCCORP  fully and
unconditionally  guaranteed all obligations of the special purpose trust related
to the trust  preferred  securities.  The  trust  preferred  securities  provide
BNCCORP  with a more  cost-effective  means  of  obtaining  Tier 1  capital  for
regulatory purposes than if BNCCORP itself were to issue preferred stock because
BNCCORP is allowed to deduct,  for income tax purposes,  amounts paid in respect
of the  debentures  and  ultimately  distributed  to the  holders  of the  trust
preferred  securities.  The sole  assets of the  special  purpose  trust are the
debentures.  BNCCORP owns all of the common  securities of the trust. The common
securities and debentures, along with the related income effects, are eliminated
within the consolidated financial statements. The preferred securities issued by
the  trust  rank  senior  to the  common  securities.  For  presentation  in the
consolidated  balance sheet, the securities are shown net of discount and direct
issuance costs.

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

In July 2000, BNCCORP  established a special purpose trust, BNC Capital Trust I,
for the  purpose  of issuing  $7.5  million of 12.045  percent  trust  preferred
securities.  The proceeds from the  issuance,  together with the proceeds of the
related  issuance of $232,000 of 12.045 percent common  securities of the trust,
were invested in $7.7 million of 12.045 percent junior  subordinated  deferrable
interest  debentures of BNCCORP.  Concurrent  with the issuance of the preferred
securities  by the  trust,  BNCCORP  fully and  unconditionally  guaranteed  all
obligations  of  the  special  purpose  trust  related  to the  trust  preferred
securities.   The  trust  preferred  securities  provide  BNCCORP  with  a  more
cost-effective means of obtaining Tier 1 capital for regulatory purposes than if
BNCCORP  itself  were to issue  preferred  stock  because  BNCCORP is allowed to
deduct,  for income tax purposes,  amounts paid in respect of the debentures and
ultimately  distributed to the holders of the trust  preferred  securities.  The
sole assets of the special purpose trust are the debentures. BNCCORP owns all of
the common securities of the trust. The common securities and debentures,  along
with  the  related  income  effects,  are  eliminated  within  the  consolidated
financial  statements.  The preferred securities issued by the trust rank senior
to the common  securities.  For presentation in the consolidated  balance sheet,
the securities are shown net of discount and direct issuance costs.
<PAGE>

The trust preferred  securities are subject to mandatory  redemption on July 19,
2030,  the stated  maturity  date of the  debentures,  or upon  repayment of the
debentures,  or  earlier,  pursuant to the terms of the trust  agreement.  On or
after July 19,  2010,  the trust  preferred  securities  may be redeemed and the
corresponding  debentures  may be prepaid at the option of  BNCCORP,  subject to
Federal Reserve Board approval,  at declining  redemption prices.  Prior to July
19,  2010,  the  securities  may be  redeemed  at the  option of  BNCCORP on the
occurrence  of certain  events  that result in a negative  tax impact,  negative
regulatory  impact  on the  trust  preferred  securities  or  negative  legal or
regulatory impact on the special purpose trust which would cause it to be deemed
to be an "investment company" for regulatory purposes. In addition,  BNCCORP has
the  right to defer  payment  of  interest  on the  debentures  and,  therefore,
distributions on the trust preferred securities for up to five years.

Pursuant to SFAS 150 and FIN 46, the  subordinated  debentures  are presented as
debt in the consolidated  financial  statements.  Previously they were presented
between the liabilities and equity sections of the balance sheets. Prior periods
have  been   reclassified   to  reflect  the   adoption   of  these   accounting
pronouncements.  The  subordinated  debentures  qualify  as Tier 1  capital  for
regulatory capital purposes, up to a certain allowed amount. Any excess over the
amount  allowed  in Tier 1 capital  can be  included  in Tier 2  capital,  up to
certain allowed  amounts.  (See Note 18 for further  discussion of the impact of
the subordinated  debentures on the Company's  consolidated  regulatory  capital
calculations).

15. Stockholders' Equity:

BNCCORP and the Bank are subject to certain  minimum capital  requirements  (see
Note 18 to these consolidated financial statements).  BNCCORP is also subject to
certain  restrictions  on the amount of dividends it may declare  without  prior
regulatory  approval in  accordance  with the Federal  Reserve Act. In addition,
certain  regulatory  restrictions  exist  regarding  the  ability of the Bank to
transfer funds to BNCCORP in the form of cash dividends.  Approval of the Office
of the Comptroller of the Currency ("OCC"), the Bank's principal  regulator,  is
required  for the Bank to pay  dividends  to BNCCORP in excess of the Bank's net
profits from the current year plus  retained net profits for the  preceding  two
years.  At December 31, 2004  approximately  $14.1 million of retained  earnings
were available for Bank dividend declaration without prior regulatory approval.

Pursuant to an asset purchase and sale agreement,  on December 31, 2004, BNCCORP
issued  15,692  shares of its common  stock to IASW for the  second  installment
related to Milne Scali's  acquisition of certain assets of IASW. Note 2 to these
consolidated   financial   statements   includes   information  related  to  the
acquisition of the assets.

On  October  29,  2004,  BNCCORP  repurchased  25  shares  of its  noncumulative
preferred stock from a trust  controlled by Richard W. Milne,  Jr. for cash. The
repurchased shares had a preferential  noncumulative  dividend at an annual rate
of 8.00 percent and a preferred liquidation value of $10,000 per share.

On September 14, 2004, BNCCORP issued 150 shares of its noncumulative  preferred
stock to a trust  controlled by Richard W. Milne, Jr. for cash. Each share has a
preferential  noncumulative  dividend  at an annual  rate of 8.00  percent and a
preferred  liquidation value of $10,000 per share. The  noncumulative  preferred
stock is not  redeemable  by BNCCORP  and  carries  no  conversion  rights.  The
proceeds of the issuance were used for general corporate purposes.

On June 30, 2004,  BNCCORP  repurchased the  then-outstanding  150 shares of its
noncumulative  preferred stock from trusts  controlled by Richard W. Milne,  Jr.
and  Terrence  M. Scali for cash.  The  repurchased  shares  had a  preferential
noncumulative  dividend  at an  annual  rate of  8.00  percent  and a  preferred
liquidation value of $10,000 per share.

Pursuant to an asset  purchase and sale  agreement,  on June 30,  2004,  BNCCORP
issued 26,607 shares of its common stock to the owners of Finkbeiner  Insurance,
Inc.  in  connection  with  Milne  Scali's  acquisition  of  certain  assets and
assumption  of certain  liabilities  of the  insurance  agency.  Note 2 to these
consolidated financial statements includes additional information related to the
acquisition of the assets and the assumption of the liabilities.

Pursuant to an asset  purchase and sale  agreement,  on March 31, 2004,  BNCCORP
issued  22,470  shares of its  common  stock to owners of The  Richard  Q. Perry
Agency in  connection  with Milne  Scali's  acquisition  of  certain  assets and
assumption  of certain  liabilities  of the  insurance  agency.  Note 2 to these
consolidated financial statements includes additional information related to the
acquisition of the assets and the assumption of the liabilities.

Pursuant to an asset purchase and sale  agreement  executed on December 1, 2003,
on January 5, 2004,  BNCCORP  issued 2,888 shares of its common stock to Lynk in
connection  with the Bank's  acquisition  of certain  assets of Lynk.  Note 2 to
these consolidated  financial statements includes additional information related
to the acquisition of the assets.

Pursuant to an asset purchase and sale agreement,  on December 31, 2003, BNCCORP
issued  12,701  shares of its  common  stock to IASW in  connection  with  Milne
Scali's  acquisition  of certain  assets of IASW.  Note 2 to these  consolidated
financial statements includes additional  information related to the acquisition
of the assets.
<PAGE>

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

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

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

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

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

16. Segment Disclosures:

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

Banking  operations  provide  traditional  banking  services to individuals  and
small- and  mid-sized  businesses,  such as  accepting  deposits,  consumer  and
mortgage  banking  activities  and making  commercial  loans.  The  mortgage and
commercial  banking  activities include the origination and purchase of loans as
well as the sale to and  servicing of commercial  loans for other  institutions.
Banking  operations  also engages in financing  programs  related to residential
mortgage loans and student loans.

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

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

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

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

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

                                                      2004                                             2004
                        -----------------------------------------------------------------------------------------------------------
                                                 Brokerage/
                                                   Trust/                          Reportable            Intersegment  Consolidated
                           Banking   Insurance   Financial   Other(a)    Totals     Segments    Other(a)  Elimination      Total
                        -----------  ----------  ----------  ---------  --------   ----------   -------- ------------  ------------
<S>                       <C>          <C>        <C>        <C>        <C>         <C>         <C>        <C>           <C>
Net interest income.....  $  17,890    $    46    $    223   $ (2,169)  $ 15,990    $ 18,159    $(2,169)   $     51      $  16,041

Other revenue-external
 customers..............      8,387     18,298       1,017         88     27,790      27,702         88      (4,340)        23,450
Other revenue-from
 other segments.........        697         --          96        918      1,711         793        918      (1,711)            --
Depreciation and
 amortization...........      1,661      1,112         131         10      2,914       2,904         10          --          2,914
Equity in the net
 income of investees....      1,242         --          --      5,107      6,349       1,242      5,107      (6,349)            --
Other significant
 noncash items:
  Provision for
   credit losses........        175         --          --         --        175         175         --          --            175
Segment pre-tax
 profit (loss)from
 continuing operations..      4,922      2,407        (190)    (2,591)     4,548       7,139     (2,591)         --          4,548
Income tax provision
 (benefit)..............      1,167        940         (75)      (888)     1,144       2,032       (888)         --          1,144
Segment profit (loss)...      3,755      1,467        (115)    (1,703)     3,404       5,107     (1,703)         --          3,404
Segment assets..........    653,484     33,438      16,747     77,714    781,383     703,669     77,714    (107,673)       673,710
<FN>
 ---------------------------------

(a)  The  financial  information  in the "other"  column is for the bank holding
     company.
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                                      2003                                             2003
                        -----------------------------------------------------------------------------------------------------------
                                                Brokerage/
                                                   Trust/                          Reportable            Intersegment  Consolidated
                           Banking   Insurance   Financial   Other(a)    Totals     Segments    Other(a)  Elimination      Total
                        -----------  ----------  ----------  ---------  --------   ----------   -------- ------------  ------------
<S>                       <C>          <C>        <C>        <C>        <C>         <C>         <C>        <C>           <C>
Net interest income.....  $  15,378    $    69    $      -   $ (2,121)  $ 13,326    $ 15,447    $(2,121)   $     52      $  13,378

Other revenue-external
 customers..............      6,189     14,712       1,457        118     22,476      22,358        118      (1,664)        20,812
Other revenue-from
 other segments.........        124         --          64        651        839         188        651        (839)            --
Depreciation and
 amortization...........      1,629        865          12         15      2,521       2,506         15          --          2,521
Equity in the net
 income of investees....      2,208         --          --      5,325      7,533       2,208      5,325      (7,533)            --
Other significant
 noncash items:
  Provision for credit
   losses...............      1,475         --          --         --      1,475       1,475         --          --          1,475
Segment pre-tax profit
 (loss)from continuing
 operations.............      3,787      3,709         372     (2,443)     5,425       7,868     (2,443)         --          5,425
Income tax provision
 (benefit)..............        960      1,438         144       (961)     1,581       2,542       (961)         --          1,581
Segment profit (loss)...      2,827      2,271         228     (1,482)     3,844       5,326     (1,482)         --          3,844
Segment assets..........    616,998     30,063       1,180     71,225    719,466     648,241     71,225     (97,989)       621,477
<FN>
----------------------------------

(a)  The  financial  information  in the "other"  column is for the bank holding
     company.
</FN>
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                   2002                                                 2002
                        -----------------------------------------------------------------------------------------------------------
                                                Brokerage/
                                                   Trust/                          Reportable            Intersegment  Consolidated
                           Banking   Insurance   Financial   Other(a)    Totals     Segments    Other(a)  Elimination      Total
                        -----------  ----------  ----------  ---------  --------   ----------   -------- ------------  ------------
<S>                       <C>          <C>        <C>        <C>        <C>         <C>         <C>        <C>           <C>
Net interest income.....  $  15,089    $    41    $     --   $ (3,931)  $ 11,199    $ 15,130    $(3,931)   $  1,883      $ 13,082

Other revenue-external
  customers.............      6,272      9,191       1,934        115     17,512      17,397        115      (1,216)       16,296
Other revenue-from
 other segments.........         99         --          55        648        802         154        648        (802)           --
Depreciation and
 amortization...........      1,518        633          33         17      2,201       2,184         17          --         2,201
Equity in the net
 income of investees....        639         --          --      3,620      4,259         639      3,620      (4,259)           --
Other significant
 noncash items:
  Provision for
   credit losses........      1,202         --          --         --      1,202       1,202         --          --         1,202
Segment pre-tax
 profit (loss)from
 continuing operations..      4,502      1,461        (677)    (2,439)     2,847       5,286     (2,439)         --         2,847
Income tax provision
 (benefit)..............      1,505        430        (255)      (858)       822       1,680       (858)         --           822
Income from
 discontinued Fargo
  branch, net of
  income taxes..........         49         --          --         --         49          49         --          --            49
Loss on sale of
 discontinued Fargo
 branch, net of income
   taxes................        (35)        --          --         --        (35)        (35)        --          --           (35)
Segment profit (loss)...      3,011      1,031        (422)    (1,581)     2,039       3,620     (1,581)         --         2,039
Segment assets..........    599,415     26,364       1,307     66,931    694,017     627,086     66,931     (91,789)      602,228

<FN>

(a)  The  financial  information  in the "other"  column is for the bank holding
     company.
</FN>
</TABLE>


17. Derivatives:

During May and June 2001, the Bank  purchased,  for $1.2 million,  interest rate
cap contracts with notional amounts totaling $40.0 million to mitigate  interest
rate risk in rising-rate scenarios.  The referenced interest rate is three-month
LIBOR with $20.0 million of 4.50 percent  contracts having  three-year  original
maturities  (matured  during  May and June of 2004)  and $20.0  million  of 5.50
percent contracts having five-year original maturities  (maturing during May and
June of 2006).  The remaining  $20.0  million of contracts,  classified as other
assets,  are reflected in the Company's  December 31, 2004 consolidated  balance
sheet at their then combined  fair value of $1,000.  The contracts are not being
accounted  for as hedges under SFAS 133. As a result,  the impact of marking the
contracts  to fair value has been,  and will  continue  to be,  included  in net
interest  income.  During the years ended December 31, 2004,  2003 and 2002, the
impact of marking the contracts to market  (reflected as an increase in interest
expense) was $55,000, $80,000 and $779,000, respectively.

18. Regulatory Capital:

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

Quantitative  measures established by the regulations to ensure capital adequacy
require  BNCCORP and the Bank to maintain  minimum amounts and ratios (set forth
in the  tables  that  follow)  of total and Tier 1 capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 capital (as
defined)  to average  assets  (as  defined).  Management  believes  that,  as of
December 31, 2004, BNCCORP and the Bank met all capital adequacy requirements to
which they are subject.
<PAGE>

Under current regulatory capital regulations,  BNCCORP's subordinated debentures
qualify as Tier 1 capital for purposes of the consolidated  capital calculations
up to 25 percent of Tier 1 capital prior to the deduction of intangible  assets.
The remainder of the subordinated  debentures qualify as Tier 2 capital provided
that the total of Tier 2 capital does not exceed Tier 1 capital.  As of December
31,  2004,  $14.6  million of the  subordinated  debentures  qualified as Tier 1
capital with the  remaining  $7.9 million  qualifying  as Tier 2 capital.  As of
December 31, 2003,  $13.1 million of the  subordinated  debentures  qualified as
Tier 1 capital with the  remaining  $9.3 million  qualifying  as Tier 2 capital.
These amounts are reflected in the consolidated capital amounts presented in the
table below.

As of December 31, 2004, the most recent  notifications from the OCC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total  risk-based,  Tier 1 risk-based and Tier 1 leverage  ratios as set
forth in the table that  follows.  There are no  conditions or events since that
notification that management believes have changed the institution's category.


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

<TABLE>
<CAPTION>
                                                                                                   To be Well Capitalized Under
                                                                        For Capital Adequacy         Prompt Corrective Action
                                                  Actual                      Purposes                      Provisions
                                          ------------------------    -------------------------    ------------------------------
                                             Amount       Ratio         Amount         Ratio         Amount           Ratio
                                          -------------  ---------    ------------   ----------    ------------   ---------------
                     2004
Total Capital (to risk-weighted assets):
<S>                                           <C>            <C>         <C>               <C>
     Consolidated.........................    $ 39,770       8.85 %      $ 35,940        8.0 %           N/A            N/A
     BNC National Bank....................      46,451      10.36          35,885        8.0         $44,856         10.0 %
Tier 1 Capital (to risk-weighted assets):
     Consolidated.........................      28,520       6.35          17,970        4.0             N/A            N/A
     BNC National Bank....................      43,116       9.61          17,942        4.0          26,914            6.0
Tier 1 Capital (to average assets):
     Consolidated.........................      28,520       4.51          25,268        4.0             N/A            N/A
     BNC National Bank....................      43,116       6.83          25,237        4.0          31,457            5.0

                     2003
Total Capital (to risk-weighted assets):
     Consolidated.........................    $ 42,905      10.63 %      $ 32,296        8.0 %           N/A            N/A
     BNC National Bank....................      48,074      11.92          32,260        8.0        $ 40,325         10.0 %
Tier 1 Capital (to risk-weighted assets):
     Consolidated.........................      28,815       7.14          16,148        4.0             N/A            N/A
     BNC National Bank....................      43,311      10.74          16,130        4.0          24,195            6.0
Tier 1 Capital (to average assets):
     Consolidated.........................      28,815       4.90          23,545        4.0             N/A            N/A
     BNC National Bank....................      43,311       7.37          23,522        4.0          29,403            5.0
</TABLE>

The change in capital  ratios over the 12-month  period ended  December 31, 2004
reflected an increase in total risk-weighted assets, for the consolidated group,
from $403.7  million at December 31, 2003 to $449.2 million at December 31, 2004
and, for the bank, from $403.3 million at December 31, 2003 to $448.6 million at
December 31, 2004.  The capital  ratios were also impacted by the payment of the
2004 earnout related to the Milne Scali acquisition (which increased goodwill by
$2.6 million), the payment of the accelerated earnout related to the Milne Scali
acquisition  (which  increased  goodwill by $3.4 million) and the acquisition of
three insurance  agencies and a mortgage company (which  increased  goodwill and
other  intangible  assets by  approximately  $1.6  million).  The payment of the
accelerated  earnout is the final payment due under the Milne Scali  acquisition
agreement and was  precipitated  by the  termination of an executive  officer of
Milne Scali.  The accelerated  earnout payment  represented  payments that would
have been made during 2005 and 2006 under the Milne Scali acquisition agreement.

<PAGE>

19. Fair Value of Financial Instruments:

The estimated fair values of the Company's financial  instruments are as follows
as of December 31 (in thousands):
<TABLE>
<CAPTION>
                                                                     2004                              2003
                                                      ---------------------------------  --------------------------------
                                                         Carrying            Fair            Carrying           Fair
                                                          Amount             Value            Amount            Value
                                                      ----------------  ---------------  ---------------- ---------------
Assets:
<S>                                                       <C>               <C>             <C>              <C>
     Cash and cash equivalents.......................     $    11,881       $  11,881       $    12,520      $   12,520
     Investment securities available
         for sale....................................         235,916          235,916          262,568         262,568
     Federal Reserve Bank and Federal Home
         Loan Bank stock.............................           7,541            7,541            7,596           7,596
     Loans held for sale.............................          60,197           60,197               --              --
     Loans and leases, net...........................         290,479          289,351          278,792         277,548
     Accrued interest receivable.....................           2,686            2,686            2,462           2,462
     Derivative financial instruments................               1                1               56              56
                                                      ----------------  ---------------  ---------------- ---------------
                                                              608,701       $  607,573          563,994      $  562,750
                                                                        ===============                   ===============
     Other assets....................................          65,009                            57,483
                                                      ----------------                   ----------------
                                                          $   673,710                       $   621,477
                                                      ================                   ================
Liabilities and Stockholders' Equity:
     Deposits, noninterest-bearing...................     $    63,386       $   63,386      $    44,725      $   44,725
     Deposits, interest-bearing......................         391,957          392,538          351,217         352,771
     Borrowings and advances.........................         140,976          145,835          152,223         158,439
     Accrued interest payable........................           1,584            1,584            1,183           1,183
     Guaranteed preferred beneficial interests in
         Company's subordinated debentures...........          22,509           23,867           22,397          23,795
                                                      ----------------  ---------------- ---------------  ---------------
                                                              620,412       $  627,210          571,745      $  580,913
                                                                        ===============                   ===============
     Other liabilities...............................           9,452                             9,546

     Stockholders' equity............................          43,846                            40,186
                                                      ----------------                   ----------------
                                                          $   673,710                       $   621,477
                                                      ================                   ================

Financial instruments with off-balance-sheet risk:
       Commitments to extend credit..................                       $     442                        $      155
       Standby and commercial letters of credit .....                             175                               106
                                                                        ---------------                   ---------------
                                                                            $     617                        $      261
                                                                        ===============                   ===============
</TABLE>
<PAGE>

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

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

Commitments  to Extend  Credit.  Commitments  to extend credit are agreements to
lend to a  customer  provided  there is no  violation  of any  condition  in the
contract.  Commitments  to extend credit are legally  binding and generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. The contractual amount represents the Bank's exposure to credit loss in the
event of default by the  borrower;  however,  at  December  31,  2004,  based on
current   information,   no  losses  were  anticipated  as  a  result  of  these
commitments. The Bank manages this credit risk by using the same credit policies
it applies to loans.  Collateral  is  obtained  to secure  commitments  based on
management's  credit  assessment of the  borrower.  The  collateral  may include
marketable securities,  receivables, inventory, equipment and real estate. Since
the Bank expects many of the  commitments to expire  without being drawn,  total
commitment  amounts do not  necessarily  represent the Bank's  future  liquidity
requirements related to such commitments.

Standby  and  Commercial  Letters  of  Credit.  Standby  letters  of credit  are
conditional  commitments  issued by the Bank to guarantee the  performance  of a
customer to a third party.  Commercial letters of credit are issued on behalf of
customers to ensure payment or collection in connection with trade transactions.
In the event of a customer's nonperformance,  the Bank's credit loss exposure is
the same as in any extension of credit, up to the letter's  contractual  amount;
however,  at December 31,  2004,  based on current  information,  no losses were
anticipated as a result of these commitments. Management assesses the borrower's
credit to  determine  the  necessary  collateral,  which may include  marketable
securities, real estate, accounts receivable and inventory. Since the conditions
requiring the Bank to fund letters of credit may not occur, the Bank expects its
liquidity  requirements  related  to such  letters of credit to be less than the
total outstanding commitments.

The  contractual  amounts of these financial  instruments  were as follows as of
December 31 (in thousands):

<TABLE>
<CAPTION>
                                                            2004                                  2003
                                              ---------------------------------     ---------------------------------
                                                   Fixed            Variable            Fixed            Variable
                                                   Rate               Rate              Rate               Rate
                                              ---------------    --------------     --------------    ---------------
<S>                                               <C>              <C>                <C>                <C>
 Commitments to extend credit...............      $  9,002         $ 143,177          $   6,547          $  87,590
 Standby and commercial letters of credit...           872            16,663                833              9,726
</TABLE>

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

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

                                               2004               2003
                                         --------------     --------------
<S>                                          <C>              <C>
Interest rate caps......................     $  20,000        $  40,000
</TABLE>
<PAGE>

21. Guarantees and Contingent Consideration

As of December 31, 2004,  the Company had entered into the  following  guarantee
arrangements:

Contingent Consideration in a Purchase Acquisition. Pursuant to the terms of the
agreement  related to the IASW asset  acquisition in December  2003,  additional
consideration of up to $320,000 may be payable to IASW, subject to the operation
of the acquired assets  achieving  certain  financial  performance  targets.  In
accordance with SFAS 141, there is no current  carrying  amount  associated with
this guarantee.  Additionally,  there are no recourse provisions associated with
this  guarantee  that would enable Milne Scali to recover from third parties any
of the amounts paid under the  guarantee  and there are no assets held either as
collateral or by third parties that, upon the occurrence of any triggering event
or condition  under the  guarantee,  Milne Scali could  obtain and  liquidate to
recover all of a portion of the amounts paid under the guarantee.

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

Performance  Standby  Letters of Credit.  As of December 31, 2004 and 2003,  the
Bank had  outstanding  $6.8 million and $641,000,  respectively  of  performance
standby letters of credit. Performance standby letters of credit are irrevocable
obligations  to the  beneficiary  on the  part of the  Bank to make  payment  on
account of any default by the account party in the performance of a nonfinancial
or commercial obligation. Under these arrangements, the Bank could, in the event
of the  account  party's  nonperformance,  be  required  to pay a maximum of the
amount of issued letters of credit. Under the agreements,  the Bank has recourse
against  the account  party up to and  including  the amount of the  performance
standby   letter  of  credit.   The  Bank   evaluates   each   account   party's
creditworthiness  on a case-by-case basis and the amount of collateral  obtained
varies and is based on  management's  credit  evaluation  of the account  party.
Effective  January 1, 2003,  such  guarantees  are required to be  recognized as
liabilities  at their  fair  values as they are  modified  or entered  into,  in
accordance with FIN 45.

Financial  Standby Letters of Credit. As of December 31, 2004 and 2003, the Bank
had outstanding  $44.5 and $43.8 million of financial standby letters of credit.
Of the $44.5  million of  financial  standby  letters of credit  outstanding  at
December  31,  2004,   $34.0  million  was   participated   to  other  financial
institutions. Financial standby letters of credit are irrevocable obligations to
the  beneficiary  on the part of the Bank to repay money borrowed by or advanced
to or for the account of the account  party or to make payment on account of any
indebtedness  undertaken  by the  account  party,  in the event that the account
party  fails  to  fulfill  its  obligation  to  the  beneficiary.   Under  these
arrangements,   the  Bank   could,   in  the  event  of  the   account   party's
nonperformance,  be required to pay a maximum of the amount of issued letters of
credit. Under the agreements, the Bank has recourse against the account party up
to and including the amount of the financial standby letter of credit.  The Bank
evaluates each account party's  creditworthiness on a case-by-case basis and the
amount  of  collateral  obtained  varies  and is  based on  management's  credit
evaluation of the account party.  Effective January 1, 2003, such guarantees are
required  to be  recognized  as  liabilities  at their  fair  values as they are
modified or entered into, in accordance with FIN 45.

Between January 1, 2004 and December 31, 2004, the Bank  originated  performance
and financial standby letters of credit totaling $200.0 million. Of that amount,
$135.7 million was participated to other financial institutions.  The balance of
performance and financial  standby  letters of credit  outstanding on the Bank's
books as of December 31, 2004 was $17.3 million.  These  outstanding  guarantees
were  recognized  as  liabilities  on the Bank's  balance sheet at their current
estimated combined fair value of approximately $84,000.

22. Related-Party/Affiliate Transactions:

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

In the  normal  course of  business,  loans are  granted  to, and  deposits  are
received  from,  executive  officers,  directors,   principal  stockholders  and
associates  of such  persons.  The  aggregate  dollar  amount  of  these  loans,
exclusive of loans to any such  persons  which in the  aggregate  did not exceed
$60,000, were $1.3 and $1.1 million at December 31, 2004 and 2003, respectively.
During 2004,  $436,000 of new loans were made and repayments  totaled  $246,000.
The total  amount of  deposits  received  from these  parties  was $3.5 and $6.5
million at December  31,  2004 and 2003,  respectively.  Loans to, and  deposits
received  from,  these  parties  were  made on  substantially  the  same  terms,
including  interest rates and  collateral,  as those  prevailing at the time for
comparable  transactions with unrelated persons and do not involve more than the
normal risk of collection.

The  following  additional  related  party  transactions   occurred  during  the
three-year period ended December 31, 2004:

On  October  29,  2004,  BNCCORP  repurchased  25  shares  of its  noncumulative
preferred stock from a trust controlled by Richard W. Milne,  Jr.,  Chairman and
President  of  Milne  Scali.   The   repurchased   shares  had  a   preferential
noncumulative  dividend  at an  annual  rate of  8.00  percent  and a  preferred
liquidation value of $10,000 per share.

On September 14, 2004, BNCCORP issued 150 shares of its noncumulative  preferred
stock, $0.01 par value per share, to a trust controlled by Richard W. Milne, Jr.
for aggregate cash  consideration of $1.5 million.  The noncumulative  preferred
stock has a preferred  noncumulative  dividend payable at an annual rate of 8.00
percent  and a  preferred  liquidation  value of $10,000  per share.  Richard W.
Milne, Jr. is Chairman and President of Milne Scali.

On September  14,  2004,  Milne Scali paid to the former  stockholders  of Milne
Scali the remaining  amount due under the earnout  provisions of the Milne Scali
purchase  agreement.  The accelerated  earnout payment of $3.4 million  included
payments to trusts  controlled  by Richard W. Milne,  Jr. and Terrence M. Scali.
Richard W. Milne,  Jr. is Chairman and  President of Milne Scali and Terrence M.
Scali is a director of  BNCCORP.  No further  amounts are payable as  additional
consideration under the Milne Scali purchase agreement.

On July 23, 2004,  Milne Scali paid to a former executive  officer,  Terrence M.
Scali,  $688,000  representing  the  remaining  salary due under his  multi-year
employment contract. Mr. Scali is a director of BNCCORP.

On June 30, 2004,  BNCCORP  repurchased the  then-outstanding  150 shares of its
noncumulative  preferred stock from trusts  controlled by Richard W. Milne,  Jr.
and Terrence M. Scali, at the time both executive  officers of the Company.  The
repurchased shares had a preferential  noncumulative  dividend at an annual rate
of 8.00 percent and a preferred liquidation value of $10,000 per share.

On May 28, 2004, Milne Scali paid to the former  stockholders of Milne Scali the
earnout  then due under the  earnout  provisions  of the  Milne  Scali  purchase
agreement.  The  earnout  payment of $2.6  million  included  payments to trusts
controlled  by Richard W. Milne,  Jr. and  Terrence  M. Scali,  at the time both
executive officers of the Company.

In October 2003, BNC  Insurance,  Inc.  ("BNC  Insurance")  purchased from Milne
Scali  Properties LLC, an Arizona limited  liability  company,  one share of the
class A voting redeemable common shares, $2,000 par value per share, of Mountain
View Indemnity, Ltd., a Bermuda limited liability company ("MVI"), and one share
of the non-voting  redeemable  preference shares,  $1.00 par value per share, of
MVI for  $65,000  in cash.  Milne  Scali  Properties  LLC is owned by Richard W.
Milne,  Jr. and Terrence M. Scali,  at the time both  executive  officers of the
Company. Under the by-laws of MVI, share value is established using stockholders
equity  plus  retained  earnings  divided  by the number of  stockholders.  This
methodology  was used for  purposes  of  valuing  the  shares  purchased  by BNC
Insurance.

On May 19, 2003, Milne Scali paid to the former  stockholders of Milne Scali the
earnout  then due under the  earnout  provisions  of the  Milne  Scali  purchase
agreement.  The  earnout  payment of $2.3  million  included  payments to trusts
controlled  by Richard W. Milne,  Jr. and  Terrence  M. Scali,  at the time both
executive officers of the Company.

During the first quarter of 2003, the Bank purchased the Milne Scali building at
1750 East Glendale  Avenue,  Phoenix,  Arizona.  The Bank purchased the building
from  Milne  Scali  Properties  LLC.  Milne  Scali  Properties  LLC is a limited
liability company whose members are Richard W. Milne, Jr. and Terrence M. Scali,
at the time both executive  officers of the Company.  The purchase price for the
building was the appraised amount of $3.9 million, which was funded through cash
generated from operations. An independent party completed the appraisal.

On May 3, 2002,  BNCCORP issued 150 shares of its noncumulative  preferred stock
to trusts controlled by Richard W. Milne, Jr. and Terrence M. Scali, at the time
both executive officers of the Company,  for cash. Each share had a preferential
noncumulative  dividend  at an  annual  rate of  8.00  percent  and a  preferred
liquidation  value of $10,000 per share. The  noncumulative  preferred stock was
not redeemable by BNCCORP and carried no conversion rights.
<PAGE>

The  Federal  Reserve  Act  limits  amounts  of,  and  requires  collateral  on,
extensions of credit by the Bank to BNCCORP,  and with certain  exceptions,  its
non-bank affiliates. There are also restrictions on the amounts of investment by
the Bank in stocks and other  subsidiaries  of BNCCORP and such  affiliates  and
restrictions  on the  acceptance of their  securities as collateral for loans by
the Bank. As of December 31, 2004, BNCCORP and its affiliates were in compliance
with these requirements.

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

The Bank recorded  write downs to estimated net  realizable  value of other real
estate owned and repossessed  assets, and related collection and other expenses,
of $44,000, $40,000 and $142,000 for the years ended December 31, 2004, 2003 and
2002, respectively. There were no repossessed assets recorded as of December 31,
2004.

24. Income Taxes:

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

                                             2004         2003           2002
                                         -----------  ------------   -----------
<S>                                         <C>          <C>            <C>
Continuing Operations -
   Current:
      Federal...........................    $  105       $  805         $  800
      State.............................       166          241            218
      Prior year state refunds
       from change in filing position...        --         (339)            --
                                         -----------  ------------   -----------
                                               271          707          1,018
                                         -----------  ------------   -----------
   Deferred:
      Federal...........................       725          726           (250)
      State.............................       148          148             54
                                         -----------  ------------   -----------
                                               873          874           (196)
                                         -----------  ------------   -----------
      Total from continuing operations..    $1,144       $1,581         $  822
                                         ===========  ============   ===========

Discontinued Operations -
   Current:
      Federal...........................    $   --       $   --         $   5
      State.............................        --           --             1
                                         -----------  ------------   -----------
      Total from discontinued
       operations.......................    $   --       $   --         $   6
                                         ===========  ============   ===========
</TABLE>

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):
<TABLE>
<CAPTION>

                                        2004            2003            2002
                                    -----------     -----------      ----------
<S>    <C>                            <C>             <C>              <C>
Tax at 34% statutory rate..........   $  1,547        $ 1,845          $   967
     Prior year state refunds
      (net of Federal benefit).....         --           (229)              --
     State taxes (net of
      Federal benefit).............        191            266              108
     Tax-exempt interest...........       (501)          (473)            (289)
     Increase in cash surrender
      value of bank-owned life
        insurance..................       (158)           (62)              --
     Other, net....................         65            234               36
                                    -----------     -----------      ----------
                                      $  1,144        $ 1,581          $   822
                                    ===========     ===========      ==========
</TABLE>
<PAGE>

Temporary  differences  between the financial statement carrying amounts and tax
bases of assets and  liabilities  that  result in  significant  portions  of the
Company's  deferred tax assets and  liabilities are as follows as of December 31
(in thousands):
<TABLE>
<CAPTION>

                                                    2004             2003
                                                 -----------      -----------
<S>                                               <C>               <C>
Deferred tax asset:
     Loans, primarily due to
      differences in accounting
       for credit losses.......................   $  1,197          $ 1,737
     Difference between book and
       tax amortization of branch
       premium acquisition
       costs...................................        392              373
     Other.....................................        678              564
                                                 -----------      -----------
              Deferred tax asset...............      2,267            2,674
                                                 -----------      -----------
Deferred tax liability:
     Unrealized gain on securities
      available for sale.......................         40              605
     Leases, primarily due to
      differences in accounting for leases.....        439              706
     Difference between book and tax
      amortization of acquired intangibles.....
                                                       912              490
     Premises and equipment, primarily
      due to differences in original cost
         basis and depreciation................        997              677
                                                 -----------      -----------
              Deferred tax liability...........      2,388            2,478
                                                 -----------      -----------
              Valuation allowance..............       (310)            (319)
                                                 -----------      -----------
              Net deferred tax liability.......   $   (431)         $  (123)
                                                 ===========      ===========
</TABLE>

The valuation allowance primarily represents the tax benefits of a certain state
net operating loss carryforward which may expire without being utilized.  During
2004, the valuation  allowance decreased $9,000. This decrease primarily relates
to a state net  operating  loss  carryforward  for which  the  Company  does not
anticipate receiving a benefit in future periods.

25. Earnings Per Share:

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


<PAGE>
<TABLE>
<CAPTION>
                                                   Net
                                                  Income         Shares       Per-Share
                                               (Numerator)   (Denominator)      Amount
                                              -------------  -------------  -------------
                           2004
          Basic earnings per common share:
<S>                                            <C>             <C>             <C>
Income from continuing operations............. $ 3,404,000
Less: Preferred stock dividends...............     (93,000)
                                              -------------
Income attributable to common stockholders.... $ 3,311,000     2,813,531       $   1.18
                                              =============                  ============
Effect of dilutive shares -
    Options and contingent stock..............                    82,710
                                                             ------------
          Diluted earnings per common share:

Income from continuing operations............. $ 3,404,000
Less: Preferred stock dividends...............     (93,000)
                                              -------------
Income attributable to common stockholders.... $ 3,311,000     2,896,241       $   1.14
                                              =============                  ============

                                                   Net
                                                  Income         Shares       Per-Share
                                               (Numerator)   (Denominator)      Amount
                                              -------------  -------------  -------------
                           2003
          Basic earnings per common share:
Income from continuing operations............. $ 3,844,000
Less: Preferred stock dividends...............    (120,000)
                                              -------------
Income attributable to common stockholders.... $ 3,724,000     2,705,602       $   1.38
                                              =============                 =============
Effect of dilutive shares -
    Options and contingent stock..............                    59,214
                                                             -------------
          Diluted earnings per common share:
Income from continuing operations............. $ 3,844,000
Less: Preferred stock dividends...............    (120,000)
                                              -------------
Income attributable to common stockholders.... $ 3,724,000     2,764,816       $   1.35
                                              =============                 =============


                           2002
          Basic earnings per common share:
Income from continuing operations............. $ 2,025,000
Less: Preferred stock dividends...............     (79,000)
                                              -------------
Income from continuing operations available
 to common stockholders.......................   1,946,000     2,611,629       $   0.74
Income from discontinued Fargo branch,
 net of income taxes..........................      14,000     2,611,629           0.01
                                              -------------                 -------------
Income attributable to common stockholders.... $ 1,960,000     2,611,629       $   0.75
                                              =============                 =============
Effect of dilutive shares -
    Options...................................                    17,169
                                                             -------------
          Diluted earnings per common share:
Income from continuing operations............. $ 2,025,000
Less: Preferred stock dividends...............     (79,000)
                                              -------------
Income from continuing operations
 available to common stockholders.............   1,946,000     2,628,798       $   0.74
Income from discontinued Fargo
 branch, net of income taxes..................      14,000     2,628,798           0.01
                                              -------------                 -------------
Income attributable to common stockholders.... $ 1,960,000     2,628,798       $   0.75
                                              =============                 =============
</TABLE>
<PAGE>


The following options,  with exercise prices ranging from $7.25 to $17.75,  were
outstanding   during  the  periods  indicated  but  were  not  included  in  the
computation  of diluted EPS because their  exercise  prices were higher than the
average price of the Company's common stock for the period:
<TABLE>
<CAPTION>

                                   2004             2003             2002
                                -------------   --------------   --------------

<S>                 <C>                <C>             <C>              <C>
Quarter ended March 31.........        3,250           77,185           97,508
Quarter ended June 30..........       61,850           63,500           96,145
Quarter ended September 30.....       61,850           62,027          103,498
Quarter ended December 31......       60,550            3,250           91,989

</TABLE>


26. Benefit Plans:

BNCCORP has a qualified,  tax-exempt  401(k) savings plan covering all employees
of BNCCORP and its subsidiaries who meet specified age and service requirements.
Under the BNCCORP plan,  eligible  employees may elect to defer up to 50 percent
of  compensation  each year not to exceed the dollar  limit set by law. At their
discretion, BNCCORP and its subsidiaries provide matching contributions of up to
50 percent of employee  deferrals up to a maximum employer  contribution of five
percent of employee compensation.  Generally, all participant  contributions and
earnings  are fully and  immediately  vested.  The  Company  makes its  matching
contribution  during the first calendar  quarter  following the last day of each
calendar year and an employee must be employed by the Company on the last day of
the calendar year in order to receive the current  year's  employer  match.  The
anticipated  matching  contribution  is expensed  monthly over the course of the
calendar year based on employee  contributions  made  throughout  the year.  The
Company made matching contributions of $368,000, $341,000 and $261,000 for 2004,
2003 and 2002,  respectively.  Under the investment  options available under the
401(k)  savings plan,  employees  may elect to invest their salary  deferrals in
BNCCORP common stock. At December 31, 2004, the assets in the plan totaled $11.9
million and included $2.8 million  (171,277  shares)  invested in BNCCORP common
stock.

27. Commitments and Contingencies:

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

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

In conjunction with its 1998 business combination with Lips & Lahr, Inc., ("Lips
& Lahr") BNC Insurance assumed five-year employment agreements with two officers
of Lips & Lahr (the "Officers").  The agreements,  which originally provided for
salaries based upon a percentage of all net annual commissions  received by Lips
& Lahr on business written by the Officers,  were amended to provide for minimum
annual  salaries  through the remainder of the contract term,  which ran through
December  31,  2000.  Additionally,  the  agreements  provide for the payment of
deferred  compensation for a term of 10 years commencing on February 1, 2001 and
continuing monthly until paid in full.  Finally,  as separate  consideration for
the release of all present and future claims to the Officers'  books of business
at the end of the term of the  employment  contract  and for other  terms of the
contract  involving  confidentiality,   nonpiracy  and  a  restrictive  covenant
covering a period of five years after the term of the agreement,  the agreements
provide for 120  monthly  payments  also  commencing  on  February 1, 2001.  The
deferred  compensation  payments  have been accrued for as of December 31, 2004.
Both of the  Officers  resigned  and Milne  Scali  remains  obligated  under the
deferred  compensation  and  non-compete  provisions of the original  employment
agreements.
<PAGE>

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

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

Leases.  The Bank has  entered  into  operating  lease  agreements  for  certain
facilities  and  equipment  used in its  operations.  Rent expense for the years
ended  December 31, 2004,  2003 and 2002,  was $993,000,  $1.0 and $1.2 million,
respectively,  for facilities, and $157,000, $107,000 and $94,000, respectively,
for equipment and other items.  At December 31, 2004,  the total minimum  annual
base  lease  payments  for  operating  leases  were as follows  (amounts  are in
thousands):
<TABLE>
<CAPTION>

<C>                                    <C>
2005........................           $ 1,057
2006........................               835
2007........................               800
2008........................               462
2009........................               243
Thereafter..................               276
</TABLE>

Milne Scali is  subleasing a building in Bismarck.  The sublease runs for a term
of 18 months, with initial termination on December 31, 2004,  renewable for five
additional  two-year  terms.  Future  minimum  rentals to be received  under the
sublease  are  $84,300 per annum,  paid  annually in advance by each June 1. The
Bank is also  subleasing  a portion  of its  office  space in  Minneapolis.  The
sublease  runs for a term of 12 months,  with  initial  termination  on June 30,
2004, at which time it reverted to a month-to-month  lease.  Rent received under
the sublease is $3,000 per month.

28. Stock-Based Compensation:

BNCCORP's  1995 Stock  Incentive Plan (the "1995 Stock Plan") and its 2002 Stock
Incentive Plan (the "2002 Stock Plan," together, the "Stock Plans") are intended
to provide  long-term  incentives to its key employees,  including  officers and
directors  who are  employees  of the  Company.  The 1995 Stock  Plan,  which is
administered  by the  compensation  committee  of the Board  (the  "Committee"),
provides  for an  authorization  of 250,000  shares of common stock for issuance
thereunder.  The 2002 Stock Plan,  which is also  administered by the Committee,
provides  for an  authorization  of 125,000  shares of common stock for issuance
thereunder.  Under the Stock Plans,  the Company may grant  employees  incentive
stock options, nonqualified stock options, restricted stock, stock awards or any
combination thereof.  The Committee  establishes the exercise price of any stock
options  granted under the Stock Plans  provided that the exercise price may not
be less than the fair  market  value of a share of  common  stock on the date of
grant. The Committee  determines vesting  requirements,  which may vary, and the
maximum term of options granted is generally 10 years.

As of December 31, 2004,  58,973  restricted  shares issued under the 1995 Stock
Plan were  outstanding.  38,723 of the shares were fully vested.  The balance of
the shares vest incrementally  between now and December 31, 2010. As of December
31,  2004,  33,000  restricted  shares  issued  under the 2002  Stock  Plan were
outstanding.  None of the shares  were  vested.  The shares  vest  incrementally
between   December  31,  2005  and  July  31,  2010.  The  Company  records  the
compensation  expense related to restricted stock on a straight-line  basis over
the  applicable  service  period.  Compensation  cost charged to operations  was
$153,000, $136,000 and $9,000 in 2004, 2003 and 2002, respectively.  The Company
issued  43,000,  24,500 and 0 shares of restricted  stock during 2004,  2003 and
2002, respectively.

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

The Company  applies APB 25 and related  interpretations  in accounting for both
the Stock Plans and the Directors' Plan.  Accordingly,  no compensation cost has
been recognized for the options issued under the plans in 2004, 2003 or 2002. As
of December 31,  2004,  186,476  options had been  awarded  under the 1995 Stock
Plan. 47,885 of them had been exercised and 138,591 remained outstanding.  As of
December 31, 2004,  35,000  options had been awarded  under the 2002 Stock Plan.
All of these remained  outstanding.  3,250 options  awarded under the Directors'
Plan remained outstanding. Had compensation cost been determined on the basis of
fair value  pursuant to SFAS 123,  net income and EPS would have been reduced as
follows for the years ended December 31 (amounts in thousands):
<TABLE>
<CAPTION>

                             2004                   2003               2002
                        ----------------      -----------------   ----------------
<S>                          <C>                  <C>                <C>
Net Income:
     As Reported........     $  3,404             $  3,844           $  2,039
     Pro Forma..........        3,364                3,793              2,005
Basic EPS:
     As Reported........         1.18                 1.38               0.75
     Pro Forma..........         1.13                 1.30               0.72
Diluted EPS:
     As Reported........         1.14                 1.35               0.75
     Pro Forma..........         1.10                 1.27               0.72
</TABLE>

Following is a summary of stock option transactions for the years ended December
31:

<TABLE>
<CAPTION>
                                              2004                          2003                            2002
                                   --------------------------   ----------------------------    ----------------------------
                                     Options        Weighted       Options         Weighted       Options         Weighted
                                        To          Average          to            Average           to           Average
                                     Purchase       Exercise      Purchase         Exercise       Purchase        Exercise
                                      Shares         Price         Shares           Price          Shares          Price
                                   -----------    -----------   ------------   -------------    -----------    -------------
<S>                                    <C>           <C>             <C>            <C>            <C>             <C>
Outstanding, beginning of year....     173,285       $  10.41        173,935        $ 10.48        208,408         $ 10.37
Granted...........................       2,000          14.00         17,500           7.00          2,500            7.51
Exercised.........................     (26,044)          6.48        (11,066)          6.79         (4,000)           6.03
Forfeited.........................      (5,400)          9.05         (7,084)          9.31        (32,973)          10.12
                                    -----------                  ------------                   -----------
Outstanding, end of year..........     143,841          11.22        173,285          10.41        173,935           10.48
                                    ===========                  ============                   ===========
Exercisable, end of year..........     105,341          12.90        110,702          12.71         92,248           12.87
                                    ===========                  ============                   ===========
Weighted average fair value
 of options:
    Granted.......................    $   7.53                      $   3.76                       $  3.35
                                    ===========                  ============                   ===========
    Exercised.....................    $   3.13                      $   3.14                       $  2.91
                                    ===========                  ============                   ===========
    Forfeited.....................    $   4.45                      $   4.23                       $  4.61
                                    ===========                  ============                   ===========
</TABLE>

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

Weighted average -                   2004             2003              2002
                                 -------------    --------------    -------------
<S>                                     <C>               <C>              <C>
   Dividend yield...............        0.00%             0.00%            0.00%
   Risk-free interest rate -
    seven-year treasury
    yield.......................        3.75%             3.66%            3.35%
   Volatility...................       36.24%            36.39%           36.73%
   Expected life................    7.0 years         7.0 years        7.0 years

</TABLE>
<PAGE>

Following  is a summary of the status of options  outstanding  at  December  31,
2004:
<TABLE>
<CAPTION>
                                                     Outstanding Options                              Exercisable Options
                                   -----------------------------------------------------------    -------------------------------
                                                                                    Weighted                           Weighted
                                                         Weighted Average           Average                            Average
                                                            Remaining               Exercise                           Exercise
                                      Number            Contractual Life             Price            Number            Price
                                   --------------    ------------------------     ------------    ---------------    ------------
<S>                                     <C>                 <C>                     <C>                <C>             <C>
Options with exercise prices
 ranging from:
    $14.00 to $17.75                    62,650              3.2 years               $ 16.94            60,650          $ 17.04
    $5.88 to $10.00                     81,191              5.5 years                  6.81            44,691             7.27
                                   --------------                                                 ---------------
                                       143,841                                                        105,341
                                   ==============                                                 ===============
</TABLE>

29. Condensed Financial Information-Parent Company Only:

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

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

                                                                                 2004              2003
                                                                             --------------    --------------
<S>                                                                              <C>              <C>
Assets:
     Cash and cash equivalents..........................................         $  2,867         $  2,977
     Investment in subsidiaries.........................................           73,579           68,300
     Receivable from subsidiaries.......................................              415              259
     Deferred charges and intangible assets, net........................              154              154
     Other..............................................................              765              513
                                                                             --------------    --------------
                                                                                 $ 77,780         $ 72,203
                                                                             ==============    ==============
Liabilities and stockholders' equity:
     Subordinated debentures............................................         $ 22,656         $ 22,570
     Long term note.....................................................           10,000            8,500
     Accrued expenses and other liabilities.............................            1,278              947
                                                                             --------------    --------------
                                                                                   33,934           32,017
                                                                             --------------    --------------
     Preferred stock, $.01 par value - 2,000,000 shares                                --               --
         authorized; 125 and 150 shares issued and outstanding..........
     Capital surplus - preferred stock..................................            1,250            1,500
         Common stock, $.01 par value - 10,000,000 shares authorized;
         2,884,876 and 2,749,196 shares issued and outstanding (excluding
         43,901 and 42,880 shares held in treasury).....................               29               28
     Capital surplus - common stock.....................................           18,601           17,074
     Retained earnings..................................................           24,430           21,119
     Treasury stock (43,901 and 42,880 shares)..........................             (530)            (513)
     Accumulated other comprehensive income, net of income taxes........               66              978
                                                                             --------------    --------------
     Total stockholders' equity.........................................           43,846           40,186
                                                                             --------------    --------------
                                                                                 $ 77,780         $ 72,203
                                                                             ==============    ==============

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                               Parent Company Only
                         Condensed Statements of Income
                         For the Years Ended December 31

                                 (In thousands)

                                                                            2004             2003            2002
                                                                        --------------   --------------  -------------

Income:
<S>                                                                        <C>               <C>            <C>
     Management fee income...........................................      $    918          $   650        $   649
     Interest........................................................            28               36             83
     Other...........................................................            88              120            114
                                                                        --------------   --------------  -------------
         Total income................................................         1,034              806            846
                                                                        --------------   --------------  -------------
Expenses:
     Interest........................................................         2,197            2,156          2,185
     Personnel expense...............................................           626              530            521
     Legal and other professional....................................           376              216            210
     Depreciation and amortization...................................            10               14             17
     Other...........................................................           416              332            352
                                                                        --------------   --------------  -------------
         Total expenses..............................................         3,625            3,248          3,285
                                                                        --------------   --------------  -------------
Loss before income tax benefit and equity in undistributed income of         (2,591)          (2,442)        (2,439)
     subsidiaries....................................................
Income tax benefit...................................................           888              961            858
                                                                        --------------   --------------  -------------
Loss before equity in undistributed income of subsidiaries...........        (1,703)          (1,481)        (1,581)
Equity in undistributed income of subsidiaries.......................         5,107            5,325          3,606
                                                                        --------------   --------------  -------------
Income from continuing operations....................................         3,404            3,844          2,025
Equity in undistributed income from operations of discontinued branch            --               --             14
                                                                        --------------   --------------  -------------
         Net income..................................................      $  3,404         $  3,844        $ 2,039
                                                                        ==============   ==============  =============
</TABLE>



<PAGE>

<TABLE>
<CAPTION>

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

                                                                                   2004           2003            2002
                                                                              -------------- --------------  --------------
<S>                                                                               <C>           <C>              <C>
Operating activities:
     Net income.............................................................      $  3,404      $   3,844        $  2,039
     Adjustments to reconcile net income to net cash used in operating
         activities -
         Depreciation and amortization......................................            10             14              18
         Equity in undistributed income of subsidiaries.....................        (5,107)        (5,325)         (3,620)
         Change in prepaid expenses and other receivables...................          (410)           300             265
         Change in accrued expenses and other liabilities...................           331             23            (123)
         Other..............................................................             1             (2)           (482)
                                                                              -------------- --------------  --------------
              Net cash used in operating activities.........................        (1,771)        (1,146)         (1,903)
                                                                              -------------- --------------  --------------
Investing activities:
     Net decrease in loans..................................................           --              --               5
     Increase in investment in subsidiaries ................................        (1,085)          (181)        (13,000)
     Additions to premises and equipment, net...............................            (8)             5             (21)
                                                                              -------------- --------------  --------------
              Net cash used in investing activities.........................        (1,093)          (176)        (13,016)
                                                                              -------------- --------------  --------------
Financing activities:
     Proceeds from long-term borrowings.....................................         1,500             --           8,500
     Proceeds from issuance of preferred stock..............................         1,500             --           1,500
     Repurchase of preferred stock..........................................        (1,750)            --              --
     Proceeds from issuance of common stock.................................         1,511            462           2,524
     Amortization of discount on subordinated debentures....................            86             86              86
     Payment of preferred stock dividends...................................           (93)          (120)            (79)
     Other, net.............................................................            --             --               9
                                                                              -------------- --------------  --------------
              Net cash provided by financing activities.....................         2,754            428          12,540
                                                                              -------------- --------------  --------------
Net decrease in cash and cash equivalents...................................          (110)          (894)         (2,379)
Cash and cash equivalents, beginning of year................................         2,977          3,871           6,250
                                                                              -------------- --------------  --------------
Cash and cash equivalents, end of year......................................      $  2,867      $   2,977        $  3,871
                                                                              ============== ==============  ==============
Supplemental cash flow information:
     Interest paid..........................................................      $  1,871      $   2,172        $  2,050
                                                                              ============== ==============  ==============

     Income tax payments received from subsidiary bank(s), net of income
         taxes paid.........................................................      $    512      $     903        $  1,563
                                                                              ============== ==============  ==============

</TABLE>


<PAGE>


30. Quarterly Financial Data (unaudited, in thousands, except shares and EPS):
<TABLE>
<CAPTION>

                                                                                         2004
                                                           -----------------------------------------------------------------
                                                               First            Second           Third            Fourth
                                                              Quarter           Quarter          Quarter          Quarter
                                                           -------------    --------------    -------------    -------------
<S>                                                            <C>                <C>             <C>            <C>
Interest income........................................        $  7,859           $ 6,954         $ 7,376        $   7,952
Interest expense.......................................           3,489             3,379           3,518            3,714
                                                           -------------    --------------    -------------    -------------
Net interest income....................................           4,370             3,575           3,858            4,238
Provision for credit losses............................              --                --              --              175
                                                           -------------    --------------    -------------    -------------
Net interest income after provision for credit losses..           4,370             3,575           3,858            4,063

Noninterest income.....................................           6,007             6,055           5,598            5,790
Noninterest expense....................................           7,887             8,663           9,367            8,851
                                                           -------------    --------------    -------------    -------------
Income before income taxes.............................           2,490               967              89            1,002
Income tax provision (benefit).........................             677               261             (34)             240
                                                           -------------    --------------    -------------    -------------
Net income.............................................        $  1,813           $   706         $   123        $     762
                                                           =============    ==============    =============    =============

Dividends on preferred stock...........................        $     30           $    30         $     5        $      28
                                                           -------------    --------------    -------------    -------------
Net income attributable to common stockholders.........        $  1,783           $   676         $   118        $     734
                                                           =============    ==============    =============    =============

Basic earnings per common share:
                                                           -------------    --------------    -------------    -------------
Basic earnings per common share........................        $   0.65           $  0.24         $  0.04        $    0.26
                                                           =============    ==============    =============    =============

Diluted earnings per common share:
                                                           -------------    --------------    -------------    -------------
Diluted earnings per common share......................        $   0.63           $  0.23         $  0.04        $    0.25
                                                           =============    ==============    =============    =============

Average common shares:
Basic..................................................       2,757,882         2,793,045         2,839,309      2,863,065
Diluted................................................       2,852,315         2,882,567         2,927,476      2,921,794
</TABLE>

                Unaudited - see accompanying accountant's report.


<PAGE>

<TABLE>
<CAPTION>


                                                                                         2003
                                                           -----------------------------------------------------------------
                                                               First            Second           Third            Fourth
                                                              Quarter           Quarter          Quarter          Quarter
                                                           -------------    --------------    -------------    -------------
<S>                                                            <C>               <C>             <C>             <C>
Interest income........................................        $  7,468          $  7,265        $  6,734        $   7,179
Interest expense.......................................           4,026             3,897           3,697            3,648
                                                           -------------    --------------    -------------    -------------
Net interest income....................................           3,442             3,368           3,037            3,531
Provision for credit losses............................             775               400             300               --
                                                           -------------    --------------    -------------    -------------
Net interest income after provision for credit losses..           2,667             2,968           2,737            3,531

Noninterest income.....................................           5,219             5,411           5,402            4,780
Noninterest expense....................................           6,454             6,701           6,834            7,301
                                                           -------------    --------------    -------------    -------------
Income before income taxes.............................           1,432             1,678           1,305            1,010
Income tax provision (benefit).........................             415               504             389              273
                                                           -------------    --------------    -------------    -------------
Net income.............................................        $  1,017          $  1,174         $   916        $     737
                                                           =============    ==============    =============    =============

Dividends on preferred stock...........................        $     30          $     30         $    30        $      30
                                                           -------------    --------------    -------------    -------------
Net income attributable to common stockholders.........        $    987          $  1,144         $   886        $     707
                                                           =============    ==============    =============    =============

Basic earnings per common share:
                                                           -------------    --------------    -------------    -------------
Basic earnings per common share........................        $   0.37          $   0.42         $  0.33        $    0.26
                                                           =============    ==============    =============    =============

Diluted earnings per common share:
                                                           -------------    --------------    -------------    -------------
Diluted earnings per common share......................        $   0.36          $   0.41         $  0.32        $    0.25
                                                           =============    ==============    =============    =============

Average common shares:
Basic..................................................       2,701,274         2,703,071       2,706,323        2,711,620
Diluted................................................       2,731,213         2,758,171       2,766,118        2,803,674
</TABLE>


                Unaudited - see accompanying accountant's report.

<PAGE>


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

None.

Item 9A. Controls and Procedures

Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
As of the end of the period  covered  by this  annual  report on Form  10-K,  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls and procedures ("Disclosure  Controls"),  and our internal control over
financial  reporting  ("Internal  Controls").  This  evaluation  (the  "Controls
Evaluation")  was done  under  the  supervision  and with the  participation  of
management,  including  our President and Chief  Executive  Officer  ("CEO") and
Chief Financial  Officer ("CFO").  Rules adopted by the SEC require that in this
section of the annual report we present the  conclusions  of the CEO and the CFO
about  the  effectiveness  of our  Disclosure  Controls  and any  change  in our
Internal  Controls that occurred  during our most recent fiscal quarter that has
materially affected,  or is reasonably likely to materially affect, our Internal
Controls based on and as of the date of the Controls Evaluation.

CEO and CFO Certifications.  Appearing, as Exhibits 31.1 and 31.2 to this annual
report,  there are  "Certifications"  of the CEO and the CFO. The Certifications
are required in accordance with the Exchange Act and the SEC's implementing Rule
13a-14 (the "Rule 13a-14 Certifications").  This section of the annual report is
the  information  concerning  the  Controls  Evaluation  referred to in the Rule
13a-14  Certifications  and this information  should be read in conjunction with
the Rule 13a-14  Certifications for a more complete  understanding of the topics
presented.

Disclosure  Controls and Internal Controls.  Disclosure  controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed  in our reports  filed  under the  Exchange  Act,  such as this annual
report, is recorded, processed,  summarized and reported within the time periods
specified in the SEC's rules and forms.  Disclosure  Controls are also  designed
with the objective of ensuring that  material  information  relating to BNCCORP,
including  its  consolidated  subsidiaries,  is made known to the CEO and CFO by
others  within  those  entities,  particularly  during  the  period in which the
applicable report is being prepared.  Internal Controls are procedures which are
designed  with the  objective of  providing  reasonable  assurance  that (1) our
transactions  are properly  authorized;  (2) our assets are safeguarded  against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported,  all  to  permit  the  preparation  of  our  financial  statements  in
conformity with accounting principles generally accepted in the United States.

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

Scope of the  Controls  Evaluation.  The CEO/CFO  evaluation  of our  Disclosure
Controls and our Internal Controls included a review of the controls' objectives
and design,  our controls'  implementation and the effect of the controls on the
information  generated  for use in this  annual  report.  In the  course  of the
Controls  Evaluation,  we sought to identify data errors,  controls  problems or
acts of fraud and to  confirm  that  appropriate  corrective  action,  including
process improvements,  were being undertaken. This type of evaluation is done on
a quarterly basis so that the conclusions  concerning controls effectiveness can
be  reported  in our  quarterly  reports on Form 10-Q and annual  report on Form
10-K.  Our  Internal  Controls  are also  evaluated  on an ongoing  basis by our
internal audit and credit review  departments in connection with their audit and
review activities.  The overall goals of these various evaluation activities are
to  monitor  our  Disclosure  Controls  and our  Internal  Controls  and to make
modifications as necessary.  Our external auditors also review Internal Controls
in connection with their audit and review activities.  Our intent in this regard
is that the  Disclosure  Controls and Internal  Controls  will be  maintained as
dynamic systems that change  (including with  improvements  and  corrections) as
conditions warrant.
<PAGE>
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in our Internal Controls
which are reasonably likely to adversely affect our ability to record,  process,
summarize and report  financial  information,  or whether we had  identified any
acts of fraud, whether or not material,  involving management or other employees
who have a  significant  role in our Internal  Controls.  This  information  was
important both for the Controls  Evaluation  generally and because item 5 in the
Rule  13a-14  Certifications  of the CEO and CFO  require  that  the CEO and CFO
disclose that  information to our Board's audit committee and to our independent
auditors and to report on related  matters in this section of the annual report.
In the professional auditing literature, "significant deficiencies" are referred
to as  "reportable  conditions."  These are  control  issues  that  could have a
significant  adverse  effect on the ability to record,  process,  summarize  and
report  financial  data in the financial  statements.  A "material  weakness" is
defined  in  the  auditing  literature  as  a  particularly  serious  reportable
condition  where the internal  control does not reduce to a relatively low level
the risk that  misstatements  caused by error or fraud may occur in amounts that
would be material in relation to the  financial  statements  and not be detected
within a timely  period by employees in the normal  course of  performing  their
assigned  functions.  We also sought to deal with other controls  matters in the
Controls Evaluation, and in each case if a problem was identified, we considered
what  revision,  improvement  and/or  correction to make in accordance  with our
ongoing procedures.

Conclusions.  Based upon the Controls Evaluation, our CEO and CFO have concluded
that,  subject to the  limitations  noted  above,  our  Disclosure  Controls are
effective  to ensure  that  material  information  relating  to BNCCORP  and its
consolidated  subsidiaries  is made known to  management,  including the CEO and
CFO,  particularly  during  the  period  when our  periodic  reports  are  being
prepared,  and that our Internal  Controls are  effective to provide  reasonable
assurance that our financial  statements are fairly presented in conformity with
accounting  principles  generally  accepted in the United States.  Additionally,
there has been no change in our Internal  Controls that occurred during our most
recent fiscal quarter that has materially  affected,  or is reasonably likely to
materially affect, our Internal Controls.

Item 9B. Other Information

None.
                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information  concerning our directors and executive  officers called for by this
item will be included in our definitive  Proxy Statement  prepared in connection
with the 2005  Annual  Meeting of  Stockholders  and is  incorporated  herein by
reference.

Item 11. Executive Compensation

Information  concerning the  compensation  of our executives  called for by this
item will be included in our definitive  Proxy Statement  prepared in connection
with the 2005  Annual  Meeting of  Stockholders  and is  incorporated  herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information  concerning  security  ownership  of certain  beneficial  owners and
management  called for by this item will be  included  in our  definitive  Proxy
Statement  prepared in connection  with the 2005 Annual Meeting of  Stockholders
and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions called for
by this item will be  included in our  definitive  Proxy  Statement  prepared in
connection  with the 2005 Annual  Meeting of  Stockholders  and is  incorporated
herein by reference.

Item 14. Principal Accounting Fees and Services

Information  concerning  fees to, and  services  provided  by,  our  independent
auditor  called  for by this  item  will be  included  in our  definitive  Proxy
Statement  prepared in connection  with the 2005 Annual Meeting of  Stockholders
and is incorporated herein by reference.

                                     PART IV

Item 16. Exhibits, Financial Statement Schedules

     (a) Exhibits.

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


                                   Signatures

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 29, 2005.


                                  BNCCORP, Inc.
                                    By:   /s/ Gregory K. Cleveland
                                        ----------------------------------------
                                          President and Chief Executive Officer

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

/s/ Tracy Scott                                                     3-15-05
-------------------------------                               ------------------
    Tracy Scott                   Chairman of the Board and           Date
                                         Director


/s/ Gregory K. Cleveland                                            3-28-05
-------------------------------                               ------------------
    Gregory K. Cleveland         President, Chief Executive           Date
                                   Officer and Director
                                (Principal Executive Officer)

/s/ Brenda L. Rebel                                                 3-29-05
-------------------------------                               ------------------
    Brenda L. Rebel               Chief Financial Officer             Date
                                        and Director
                                (Principal Financial Officer)
                                (Principal Accounting Officer)

/s/ Denise Forte-Pathroff, M.D.                                     3-16-05
-------------------------------                               ------------------
    Denise Forte-Pathroff, M.D.           Director                    Date


/s/ Gaylen Ghylin                                                   3-22-05
-------------------------------                               ------------------
    Gaylen Ghylin                         Director                    Date


/s/ John A. Hipp, M.D.                                              3-18-05
-------------------------------                               ------------------
    John A. Hipp, M.D.                    Director                    Date


/s/ Richard M. Johnsen, Jr.                                         3-16-05
-------------------------------                               ------------------
    Richard M. Johnsen, Jr.               Director                    Date


/s/ Mark W. Sheffert                                                3-18-05
-------------------------------                               ------------------
    Mark W. Sheffert                      Director                    Date


/s/ Jerry R. Woodcox                                                3-17-05
-------------------------------                               ------------------
    Jerry R. Woodcox                      Director                    Date





<PAGE>


                                  EXHIBIT INDEX



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    14.1 Code of Ethics and Business Conduct.

    21.1 Subsidiaries of Company.

    23.1 Consent of Independent Auditors.

    31.1 Chief Executive Officer's Certification Under Section 302 of the
         Sarbanes-Oxley Act of 2002.

    31.2 Chief Financial Officer's Certification Under Section 302 of the
         Sarbanes-Oxley Act of 2002.

    32.1 Certification Under Section 906 of the Sarbanes-Oxley Act of 2002.