U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                      -----
                                   FORM 10-KSB
                                      -----
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF
      1934 For the fiscal year ended December 31, 1996
                                         or
[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                           Commission File No. 0-26290

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

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

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

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

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

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

      Check if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. 

      The issuer's revenues for its most recent fiscal year: $23,053,000

      The aggregate market value of the voting stock held by  non-affiliates  of
the  Registrant  at March 1, 1997  computed by reference to the closing price on
the NASDAQ National Market was $20,746,000.

      The number of shares of the Registrant's common stock outstanding on March
1, 1997 was 2,338,720 common shares.

      Documents  incorporated by reference.  Portions of the Registrant's  proxy
statement to be filed with the Securities and Exchange  Commission in connection
with the  Registrant's  1997 annual meeting of stockholders  are incorporated by
reference into Part III hereof.

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


<PAGE>



                                  BNCCORP, INC.

                          ANNUAL REPORT ON FORM 10-KSB
                     FOR FISCAL YEAR ENDED DECEMBER 31, 1996


                                TABLE OF CONTENTS

                                                                           Page

                                     PART I
Item 1  Description of Business............................................... 1
Item 2  Description of Property............................................... 8
Item 3  Legal Proceedings..................................................... 8
Item 4  Submission of Matters to a Vote of Security Holders................... 8

                                     PART II
Item 5  Market for Common Equity and Related Stockholder Matters...............9
Item 6  Management's Discussion and Analysis or Plan of Operation..............9
Item 7  Financial Statements..................................................33
Item 8  Changes In and Disagreements With Accountants on Accounting and 
        Financial Disclosure..................................................57

                                      PART III
Item 9  Directors, Executive Officers, Promoters and Control Persons; 
        Compliance with Section 16(a) of the Exchange Act ....................57
Item 10. Executive Compensation...............................................57
Item 11. Security Ownership of Certain Beneficial Owners and Management.......57
Item 12. Certain Relationships and Related Transactions.......................57

                                    PART IV
Item 13. Exhibits and Reports on Form 8-K.....................................57



<PAGE>



                                     PART I


Item 1.     Description of Business

General

BNCCORP,  Inc.  (together  with  its  consolidated  subsidiaries,  "BNC"  or the
"Company") is a bank holding  company  headquartered  in Bismarck,  North Dakota
which  provides a full range of  commercial  and consumer  banking and financial
services to small and mid-size  businesses and to  individuals  through its nine
full service banking facilities in North Dakota and Minnesota.  The Company also
provides asset-based commercial financing. The Company was incorporated in North
Dakota in 1987 and was reincorporated in Delaware in 1995 in connection with its
initial  public  offering  (see  Notes  1 and 8 to  the  Consolidated  Financial
Statements  included under Item 7 below).  Note 2 to the Consolidated  Financial
Statements included under Item 7 below details the Company's recent acquisitions
and other  corporate  developments, all of which  were  driven by the  Company's
growth and operating strategies discussed below.

BNC  operates  through  its  two  commercial banking subsidiaries,  BNC National
Bank of Bismarck ("BNC -- North Dakota")  (headquartered  in Bismarck with seven
additional branches in North Dakota) and BNC National Bank of Minnesota ("BNC --
Minnesota")  (located in  Minneapolis,  Minnesota),  and its non-bank commercial
finance subsidiary,  BNC Financial Corporation ("BNC Financial") (located in St.
Cloud, Minnesota).

Growth Strategy

BNC continued to experience significant internal growth in 1996 due to its focus
on  customer  service and local  relationship  banking  with small and  mid-size
businesses  and  professionals  in its market areas (see "Market  Area"  below).
Management believes that the Company's  entrepreneurial  approach to banking and
the  introduction of new products and services will continue to attract small to
mid-size  businesses which often are not of sufficient size to be of interest to
the larger banks in its market areas.  Professionals  frequently have difficulty
finding  banking  services that meet their specific  needs and have sought,  and
management  believes  will  continue to seek,  banking  relationships  with more
relationship-oriented  financial  institutions.  BNC has  positioned  itself  to
provide  an  increasing  number of  banking  and  finance-related  products  and
services (see "Products and Services" below).

External growth has and will continue to be part of the Company's strategy.  BNC
has established  itself in the Minnesota  market and intends to generate further
external  growth  through the  acquisition  of financial  institutions  or their
branches  in  North  Dakota,  South  Dakota,  Minnesota  and  possibly  Iowa and
Wisconsin. Management believes that regulatory burdens and competitive pressures
to increase  efficiency  will generate  continued  consolidation  in the banking
industry  and  provide  acquisition  opportunities  for BNC.  The  Company  will
continue to analyze opportunities to expand through de novo branching. Potential
opportunities  exist where  multiple  acquisitions  by other  institutions  have
resulted in significant  overlap in market areas served by different banks owned
by the same holding  company.  Consolidation  of multiple  banking  locations in
these cases may create market  opportunities for other  institutions such as BNC
to establish new locations at a relatively low cost.

BNC's strategies to date have created  significant  growth for the Company.  Net
loans have  increased  from  $39.7  million as of  December  31,  1990 to $201.4
million as of December 31, 1996. As of December 31, 1996, total assets had grown
to $288.6 million,  deposits to $239.8 million and stockholders' equity to $22.6
million.  The Company's goal continues to be the creation of a  well-capitalized
$500  million to $1 billion  financial  services  organization  focused on local
relationship  banking.   Efforts  are  ongoing  to  ensure  that  the  executive
management team and operating systems are in place to achieve this goal.


                                         1

<PAGE>



Operating Strategy

BNC's objective is to continue to build a growing,  profitable  banking network.
The principal elements of BNC's operating strategy are:

     .     Emphasize high  quality  customer service. BNC believes that service 
           is a critical competitive factor  in  its  market  areas  and  a key 
           determinant of its future success. Customer service is emphasized in
           all  aspects of its  operations  and is an integral component of all 
           employee training programs. BNC's decentralized management approach,
           coupled with the continuity of  service  by  the same staff members, 
           enables BNC to  develop  long-term customer  relationships, maintain
           high  quality  service  and  respond  quickly  to   customer  needs. 
           Management  believes  that  BNC's  customers  are  willing  to pay a 
           premium for high quality service, and faster, more flexible decision 
           making.

     .     Emphasize community banking. BNC believes that considering the needs
           of local communities in which it operates is critical to its success
           and  customer  satisfaction.  BNC  follows a  decentralized  banking
           approach and provides  substantial autonomy to the senior management
           of its banking offices over credit and pricing decisions, subject to
           loan committee approval for larger credits.

     .     Encourage  entrepreneurial  attitude.  BNC  strives to  maintain  an
           entrepreneurial  attitude at all organizational  levels.  Management
           desires to lead rather than follow other  banking  organizations  in
           its market  areas by  applying  new  technologies  and  implementing
           creative ideas in providing  products and customer service.  BNC now
           provides an array of products and services  typically  found in only
           major regional banks.

     .     Maintain high asset quality.  BNC seeks credit risks of good quality
           within its market areas that exhibit good  historical trends, stable 
           cash  flows  and  secondary  sources  of  repayment  from   tangible
           collateral.  BNC seeks to  maintain  high  asset  quality  through a
           program  that  includes regular reviews of loans by responsible loan
           officers,  BNC's  senior  credit  officers,  and independent outside
           professionals,  training  and  supervision  of lending officers, and
           prompt  and  strict adherence to established credit policies.  BNC's
           compensation  system  for  its  lending  officers is  geared towards
           maintaining  high  asset  quality  rather  than  loan  growth.  As a
           result,   BNC's   ratio  of   nonperforming  loans  to  total  loans
           decreased from 7.56% as of December 31, 1990 to .14% as of December
           31, 1996.

     .     Achieve   efficiencies   through   centralized   administrative  and
           support  functions.  BNC  seeks to  maximize operational and support
           efficiencies  consistent  with   maintaining  high  quality customer
           service. BNC strives to improve  its  efficiency  through the use of
           technology  and  to  continue  to reduce  its  ratio of  noninterest
           expense  to  revenue.  Various  management,  administrative and data
           processing  functions,  including  consumer  credit  processing  and
           lending,    investment    management   and   accounting   have  been
           consolidated  to   enable  personnel  to  better  focus on  customer
           service   and    sales.   Management   believes   these    operating
           efficiencies   will   simplify   the  integration  of any  financial
           institutions that may be acquired in the future into BNC's operating
           systems and management structure.
                                         2

<PAGE>



Market Area

BNC's primary market areas are the Bismarck/Mandan  (North Dakota)  metropolitan
area, the  Minneapolis/St.  Paul  (Minnesota)  metropolitan  area, and the rural
communities  surrounding  the  branch  offices of BNC -- North  Dakota  (Linton,
Ellendale,  Garrison,  Stanley, Kenmare, Crosby and Watford City, North Dakota).
The  asset-based  lending  activities  of  BNC  Financial  have  been  conducted
primarily in the Minnesota market area. A substantial  majority of the Company's
total  consolidated net loans are attributable to customers located in the North
Dakota market area,  although in 1996 BNC -- Minnesota  experienced  significant
loan  growth  in  the  Minneapolis/St.  Paul  market  area  (see  Note  4 to the
Consolidated Financial Statements included under Item 7 below).  Generally, each
branch draws most of its deposits  from its general  market area.  The following
table presents certain information about each of BNC's locations:


                                             As of December 31, 1996
                                             -----------------------
                                Year Opened     Total
       Bank Location            or Acquired   Deposits     Gross Loans
----------------------------    -----------   ---------    ----------
                                                 (in thousands)
BNC -- North Dakota
  Bismarck..................         1990    $  81,148    $  148,068
  Linton....................         1987       47,059        10,462
  Ellendale.................         1995       12,212           863
  Garrison..................         1995       14,744           543
  Stanley...................         1995       15,455           462
  Kenmare...................         1995       17,540           543
  Crosby....................         1995       17,451            83
  Watford City..............         1995       15,340           175
BNC-- Minnesota.............         1996       18,821        35,955
BNC Financial...............         1996           --         5,636
BNCCORP (parent company)....           --           --           545
                                             ---------    ----------
      Total.................                 $ 239,770    $  203,335
                                             =========    ==========

BNC's staff focuses on establishing and maintaining long-term relationships with
customers.  Officers are encouraged to  participate  in community  organizations
and, within credit standards and rate of return parameters, BNC attempts to meet
the  credit  needs of its  communities.  BNC  also  invests  in local  municipal
securities  (see  "Management's  Discussion and Analysis or Plan of Operation --
Financial Condition -- Investment Securities" under Item 6 below).

Products and Services

Loans and Investments

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



                                         3

<PAGE>

Interest  rates  charged  on loans  may be fixed or  variable  and vary with the
degree of risk, loan term,  underwriting and servicing costs,  loan amount,  and
extent of other  banking  relationships  maintained  with  customers.  Rates are
further subject to competitive pressures, the current interest rate environment,
availability  of  funds  and  government  regulations.  As of December 31, 1996,
approximately 56%  of the loans  in  BNC's  portfolio  had interest  rates  that
float with BNC's base rate or some other reference rate.

The  following  is a brief  description  of the types of lending and  investment
activities  engaged  in  by  the  Company.  Further  information  regarding  the
Company's lending activities is presented below at "Management's  Discussion and
Analysis or Plan of Operation -- Financial Condition -- Loan Portfolio." Further
information  regarding the Company's investment activities is presented below at
"Management's  Discussion  and  Analysis  or  Plan  of  Operation  --  Financial
Condition -- Investment Securities."

Commercial and Industrial  Loans.  Commercial and industrial loans represent the
largest portion of BNC's loan portfolio.  These loans consist primarily of loans
to  small  or  mid-size  businesses  and  professionals  in a  wide  variety  of
industries.  The  loans,  which are made for  various  purposes,  generally  are
collateralized by inventory, accounts receivable or other commercial assets.

Agricultural  Loans.  Agricultural  loans include  loans to feed lot  operators,
dairy farmers and commercial  farming  organizations.  These loans are generally
collateralized by accounts receivable, equipment, and other assets.

Real Estate Mortgage Loans. These loans include various types of loans for which
BNC holds real property as collateral.

Real  Estate  Construction  Loans.  The  Company  makes  loans  to  finance  the
construction  of  residential  and  nonresidential  property.  These  loans  are
generally  collateralized  by  first  liens  on the real  estate.  BNC  conducts
periodic  inspections,  either  directly or through an architect or other agent,
prior to approval  of  periodic  draws on these  loans.  The  Company  generally
requires that a permanent financing  commitment be in place prior to approval of
a residential construction loan.

Consumer Loans. Consumer loans include home equity loans, credit cards and other
installment loans. Consumer loans generally have terms of two to five years.

Lease Financing. BNC provides lease financing to its business customers in order
to provide a full range of lending services. The leases are generally structured
as financing leases such that BNC retains title to the assets leased in order to
secure  payment.  BNC generally  provides lease  financing to customers who have
other relationships with the Company.

Asset  Based  Lending.  Asset  based  commercial  financing  is  offered  by BNC
Financial,  the non-bank commercial finance company acquired in 1996 (see Note 2
to the  Consolidated  Financial  Statements  included  under  Item 7 below). The
financing offerings consist of asset based working capital and term financing to
small to mid-size companies for  refinancings,  recapitalizations,  acquisitions
and seasonal borrowing through senior loans  secured  by business assets such as
equipment,  accounts  receivable  and inventory. Revolving credit facilities and
term  loans are cross-collateralized. Management of BNC Financial is experienced
in  this  type  of lending and has adopted policies and procedures which address
the risks associated with this type of lending.

Credit Commitments.  In the ordinary course of business, BNC enters into various
types of transactions that include commitments to extend credit. BNC applies the
same credit  standards to these  commitments  as it uses in its regular  lending
activities and has included these  commitments in its lending risk  evaluations.
See  Note 11  to the  Consolidated  Financial  Statements  included under Item 7
below.



                                         4

<PAGE>



Investment  Portfolio.  The purpose of the Company's  investment portfolio is to
provide a source of earnings and, secondarily, to manage liquidity.  Investments
are  centrally  managed to  maximize  compliance  and  effectiveness  of overall
investing  activities.  BNC  maintains,  through the  President  of BNC -- North
Dakota, an investment grade portfolio oriented toward U.S. Treasury  securities,
U.S.  government  agency  securities  and a small  amount  of  investment  grade
obligations of state and political  subdivisions.  In managing its interest rate
exposure,  the Company also invests in  mortgage-backed  securities and floating
rate collateralized  mortgage obligations.  Investment securities totaled $ 59.5
million as of December 31, 1996 (see  "Management's  Discussion  and Analysis or
Plan of Operation -- Financial Condition -- Investment Securities").

Deposit and Other Products and Services

Deposits.  Each of BNC's bank branches  offers the usual and customary  range of
depository products provided by commercial banks,  including  checking,  savings
and money market deposits and  certificates of deposit.  Deposits are insured by
the Federal Deposit Insurance  Corporation  ("FDIC") up to statutory limits. BNC
banks also purchase  brokered  deposits from time to time when such transactions
are beneficial to the banks (see  "Management's  Discussion and Analysis or Plan
of Operation -- Financial Condition -- Deposits and Borrowed Funds").

Trust, Personal Banking,  Investment and Insurance Products. Since January 1997,
BNC -- North Dakota's newly  established  Financial  Services  division has been
providing a wide array of trust,  personal  banking,  investment  and  insurance
services for corporations and individuals.  Management believes the introduction
of these new services  enhances  BNC's ability to meet the banking and financial
needs of its current  customer base and establish new customer  relationships in
its markets.  The new division will provide  services ranging from fiduciary and
personal trust  services to tax planning and  preparation,  payroll  processing,
financial planning,  retirement planning,  employee stock option plans, employee
benefit plans,  individual  retirement  accounts ("IRAs"),  including  custodial
self-directed IRAs, asset preservation,  charitable giving and related services.
Management  views the  establishment  of this new division as an  opportunity to
solidify customer  relationships by enhancing BNC's ability to identify and meet
a wide variety of customer financial needs.

Consulting  Services.  In  addition  to its  asset based  lending  program,  BNC
Financial  manages a consulting  services  division  which  provides a number of
services including  pre-funding due diligence,  collateral review,  problem loan
consulting, bankruptcy support and asset valuation.

Competition

The North Dakota and  Minnesota  market areas are located in highly  competitive
banking  environments.  Competition is encountered primarily in seeking deposits
and  in  obtaining  loan  customers.   Principal  competitors  include  regional
financial institutions such as Norwest Corporation,  First Bank System, Inc. and
Community First Bancshares, Inc. as well as large and small thrifts, independent
banks,  credit unions and all of the national and regional brokerage houses. BNC
also competes with other nonfinancial institutions, including retail stores that
maintain their own credit programs and government agencies that make low cost or
guaranteed  loans  available  to  certain   borrowers.   Many  competitors  have
emphasized  retail banking and financial  services leaving the small to mid-size
business  market  underserved.  This has allowed BNC to compete  effectively  by
emphasizing customer service,  establishing long-term customer relationships and
providing  services  meeting the needs of such  businesses  and the  individuals
associated  with them.  The  banking  business  is highly  competitive,  and the
profitability of the Company will depend on its ability to compete in its market
areas.


                                         5

<PAGE>



Supervision and Regulation

General.  Financial  institutions  and their holding  companies are  extensively
regulated  under  federal and state laws. As a result,  the business,  financial
condition and  prospects of the Company can be  materially  affected not only by
management  decisions and general  economic  conditions,  but also by applicable
statutes  and  regulations  and the  legislative  and  governmental  actions  of
Congress and the various federal and state regulatory agencies with jurisdiction
over the Company.  The impact of applicable  statutes,  regulations and policies
can be significant,  cannot be predicted with a high degree of certainty and can
change  over  time.   Furthermore,   such   statutes,   regulations   and  other
pronouncements and policies are generally intended to protect the Company's bank
depositors and the FDIC's deposit  insurance funds, not BNC  stockholders.  Bank
holding  companies  and  banks  are  subject  to  enforcement  actions  by their
regulators  for statutory  and  regulatory  violations  and safety and soundness
considerations.

The statutory  requirements  pertaining to, and regulatory  supervision of, bank
holding  companies and banks are not static.  Legislation may be introduced from
time to time that could, if enacted, have a significant impact on the operations
of BNC. Recently enacted legislation includes the Deposit Insurance Funds Act of
1996 ("DIFA")  (see below) and  legislation  allowing bank holding  companies to
engage in certain activities without the advance approval of the Federal Reserve
Board  ("FRB").  Congress has  recently  considered  legislation  to broaden the
powers of bank holding companies and permit other financial service companies to
own banks.  Legislation  also has been introduced in the Congress to restructure
the federal bank regulatory  system.  There is no certainty as to the effect, if
any, that such legislation would have on BNC or its business and affairs.

Significant  Statutes,  Regulations  and  Pronouncements.  The  following  brief
discussions  and  descriptions  of  some  of the  more  significant  regulations
applicable  to banks and their  parent  holding  companies  are not  intended to
constitute  a complete  statement  of all legal  restrictions  and  requirements
applicable  to the  Company and all such  descriptions  are  qualified  in their
entirety by reference to applicable  statutes,  regulations,  pronouncements and
policies.

BNC is a bank holding company  registered  under the Bank Holding Company Act of
1956,  as  amended  ("BHCA"),  and is  subject to  regulation,  supervision  and
examination  by the FRB. BNC is required to file  periodic  reports with the FRB
and such other reports as the FRB  may  require  pursuant to the BHCA. As a non-
bank subsidiary, BNC Financial is also subject to  regulation by the FRB. BNC --
North Dakota  and BNC -- Minnesota (the "Banks") are  national  banking associa-
tions and are subject to  supervision, regulation and examination  by the Office
of the Comptroller of the Currency ("OCC")  and the FDIC.  Deposits of the Banks
are insured by the FDIC (see  below)  and  the  Banks are also  members  of  the
Federal Reserve System.

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

Under Section 23A of the Federal Reserve Act (the "Act"),  certain  restrictions
are placed on loans and other  extensions  of credit by the Banks to BNC and BNC
Financial who are defined as  "affiliates"  of the Banks under the Act.  Section
23B of the Act places  standards  of fairness and  reasonableness  on the Banks'
transactions with their affiliates.

Under  federal law,  permissible  loans to one  borrower by banks are  generally
limited  to 15  percent of the bank's  unimpaired  capital,  surplus,  undivided
profits and loan loss  reserves.  BNC banks seek  participations  to accommodate
borrowers whose financing needs exceed lending limits of the Banks.


                                         6

<PAGE>



Certain limitations and reporting  requirements are also placed on extensions of
credit by the Banks to  principal  stockholders  of the Company and to directors
and  certain  executive  officers of the Banks (and the Company and its non-bank
subsidiaries  provided certain  criteria are met) and to "related  interests" of
such principal  stockholders,  directors and officers. In addition, any director
or officer of the Company or the Banks or principal  shareholder  of the Company
may  be  limited  in  his  or  her  ability  to  obtain  credit  from  financial
institutions with which the Banks maintain correspondent relationships.

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

Capital  adequacy of BNC and the Banks is  monitored  by the federal  regulatory
agencies using a combination of risk-based and leverage ratios.  Failure to meet
the applicable  capital guidelines could subject BNC or the Banks to supervisory
or  enforcement  actions (see Note 9 to the  Consolidated  Financial  Statements
included under Item 7 below).

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

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

FDIC-insured  depository  institutions  that  are  members  of the  FDIC's  Bank
Insurance  Fund  ("BIF") and Savings  Association  Insurance  Fund  ("SAIF") pay
insurance premiums at rates based on their assessment risk classification, which
is determined in part based on the Bank's  capital ratios and in part on factors
that the FDIC deems  relevant  to  determine  the risk of loss to the  insurance
funds. The DIFA imposed a one time special  assessment on SAIF insured financial
institutions.  The SAIF insured deposits  acquired by BNC -- North Dakota during
1995 (see Note 2 to the Consolidated  Financial Statements included under Item 7
below)  were  acquired  after the  assessment  determination  date so no special
assessment was required to be paid.

Other provisions of the DIFA,  combined with additional recent amendments to the
deposit insurance  regulations have reduced the Company's FDIC deposit insurance
expense  (see  "Management's  Discussion  and  Analysis or Plan of  Operation --
Results of Operations" included under Item 6 below).

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 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.

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.

Employees

At December 31, 1996, BNC had  approximately  120 employees,  which included 110
full-time  employees.  None  of  BNC's  employees  is  covered  by a  collective
bargaining  agreement and  management  believes that its  relationship  with its
employees is good.


                                         7

<PAGE>



Item 2.     Description of Property

The  principal  offices of BNC and BNC -- North Dakota are located in BNC's main
office building at 322 East Main Avenue, Bismarck, North Dakota. The building is
owned by BNC -- North  Dakota.  BNC -- North  Dakota  also owns a branch  office
located  at 219 South  3rd  Street  in  Bismarck.  In early  1997,  the  Company
purchased an office  building at 116 North 4th Street,  Bismarck,  approximately
one half block from the  principal  office  building.  Certain  bank and holding
company  departments will be housed at this facility upon expected completion of
remodeling  during  the  second  quarter  of  1997.  BNC also  owns its  banking
facilities at Linton, Crosby, Ellendale, Kenmare and Stanley, North Dakota.

Facilities in Garrison and Watford City, North Dakota and additional  facilities
in Bismarck are leased. The Garrison and Watford City leases expire in June 2000
and April 1998, respectively.  Office facilities in Bismarck are being leased on
a month to month  basis  pending  completion  of  remodeling  at the 4th  Street
location in Bismarck.  The land at BNC -- North Dakota's  branch office on South
3rd Street is also leased. This lease expires in 2006.

The Company also leases the facilities occupied by BNC -- Minnesota at 333 South
Seventh Street,  Minneapolis,  Minnesota. Leases on this property expire in June
2001.  Facilities  housing BNC  Financial at 4150 South 2nd Street,  St.  Cloud,
Minnesota are leased. The lease on this property expires in April 2002.

BNC owns land in north  Bismarck and will  construct a branch  office for BNC --
North Dakota during 1997 (see  "Management's  Discussion and Analysis or Plan of
Operation -- Financial Condition -- Capital Resources and Expenditures" included
under Item 6 below).

All owned and leased  properties are considered in good operating  condition and
are  believed  adequate  for  the  Company's  present  and  foreseeable   future
operations.  BNC  does not  anticipate  any  difficulty  in  leasing  additional
suitable space upon expiration of present lease terms.

See Note 14 to the Consolidated Financial Statements included under Item 7 below
for additional information concerning lease commitments.


Item 3.     Legal Proceedings

BNC is currently not a party to any material  legal  proceedings.  Periodically,
and in the ordinary  course of business,  various  claims and lawsuits which are
incidental to BNC's business may be brought against or by BNC, such as claims to
enforce  liens,  condemnation  proceedings  on  properties  in which  BNC  holds
security  interests,  claims involving the making and servicing of real property
loans and other issues incidental to the Company's business.


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, 1996.


                                         8

<PAGE>



                                     PART II


Item 5.     Market for Common Equity and Related Stockholder Matters

The Company's common stock,  $.01 par value ("Common  Stock"),  is traded on the
Nasdaq  National Market under the symbol "BNCC".  Prior to July 17, 1995,  there
was no public market for the Company's common stock.

The following  table lists the high and low sales prices of the Common Stock for
the periods  indicated  as reported by the Nasdaq  National  Market.  The quotes
represent  "inter-dealer"  prices without adjustment or mark-ups,  mark-downs or
commissions and may not represent actual transactions.


                       For the Year Ended December 31,
                    --------------------------------------
                           1996                1995
                    ------------------  ------------------
Period                High       Low     High       Low
                    --------   -------  -------   --------
First Quarter.......$  10.38   $  9.25      N/A        N/A
Second Quarter......$  10.25   $  8.00      N/A        N/A
Third Quarter.......$  11.50   $  9.00  $ 10.75   $   9.75
Fourth Quarter......$  12.50   $ 10.50  $ 12.00   $   9.75


On March 1, 1997, there were 113 record holders of the Company's Common Stock.

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


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

Management's  discussion  and  analysis  analyzes  the  major  elements  of  the
Company's  statements of financial  condition and income. This section should be
read in conjunction  with the Company's  Consolidated  Financial  Statements and
notes therewith and other detailed information appearing elsewhere herein.

Selected Financial Data

The  selected  consolidated  financial  data  presented  below under the caption
"Income  Statement  Data" and "Balance Sheet Data" for and as of the years ended
December  31,  1996,  1995 and  1994 are  derived  from the  historical  audited
consolidated financial statements of the Company. The Consolidated Statements of
Condition  as of  December  31,  1996  and  1995  and the  related  Consolidated
Statements of Income,  Stockholders' Equity and Cash Flows for each of the three
years in the period ended December 31, 1996 were audited by Arthur Andersen LLP,
independent  public  accountants.  The  financial  data below  should be read in
conjunction with and are qualified by the Consolidated  Financial Statements and
the notes thereto included under Item 7 below.


                                         9

<PAGE>



                             Selected Financial Data


                                             For the Years Ended December 31,
                                           ----------------------------------
                                              1996         1995       1994
                                            ---------    --------   --------
                                            (in thousands except share data)
Income Statement Data:
Gross interest income........................$  20,957    $ 15,283   $ 10,263
Gross interest expense.......................   11,107       8,542      4,411
                                             ---------    --------   --------
Net interest income..........................    9,850       6,741      5,852
Provision for loan losses....................      739         168        179
Noninterest income (1).......................    2,096       1,736      1,399
Noninterest expense..........................    8,213       6,511      5,202
Provision for income taxes...................    1,147         641        679
                                             ---------    --------   --------
Net income...................................$   1,847    $  1,157   $  1,191
                                             =========    ========   ========
Balance Sheet Data: (at end of period)
Total assets.................................$ 288,558    $240,399   $147,645
Investments and federal funds sold...........   66,391      97,366     25,161
Loans........................................  202,997     120,683    110,471
Allowance for loan losses....................    1,594       1,048      1,021
Total deposits...............................  239,770     211,048    124,649
Short-term borrowings........................   11,437       1,000      7,360
Long-term borrowings.........................   10,615       3,354      3,570
Stockholders' equity.........................   22,635      20,887      9,540
Book value per common share outstanding......$    9.68(2) $   8.93(2)$   7.87(2)
Earnings Performance Data:
Return on average total assets...............     .71%        .59%       .87%
Return on average stockholders' equity.......    8.53%       8.11%     12.34%
Net interest margin..........................    4.09%       3.71%      4.70%
Net interest spread..........................    3.63%       3.27%      4.34%
Earnings per share...........................   $  .79      $  .67     $  .98
Balance Sheet and Other Key Ratios:
Nonperforming assets to total assets.........     .15%        .20%       .44%
Nonperforming loans to total loans...........     .14%        .40%       .49%
Net loan (charge-offs) recoveries to 
     average loans ..........................   (.11)%      (.03)%       .13%
Allowance for loan losses to total loans.....     .78%        .87%       .92%
Allowance for loan losses to nonperforming 
     loans ..................................     555%        218%       188%
Average stockholders' equity to average 
     total assets ...........................    8.34%       8.69%      6.46%

--------------------
(1)   Includes recognizable loan fees of $1.3 million, $559,000 and $650,000 for
      the years ended December 31, 1996, 1995 and 1994, respectively.
(2)   Based on total common shares outstanding of 2,338,720 at December 31, 1996
      and 1995 and 1,212,720 at December 31, 1994.


                                         10

<PAGE>



Overview

For the year ended December 31, 1996, net income was $1.8 million, compared with
$1.2 million for the year ended December 31, 1995.  This strong  earnings growth
was due primarily to a sharp increase in net interest income which was driven by
strong loan growth and an increase in non-interest income.

Loans totaled $203.0 million at December 31, 1996, an increase of $82.3 million,
or 68%, from December 31, 1995. Total assets increased $48.2 million, or 20%, to
$288.6  million as of December 31, 1996  compared to $240.4  million at December
31, 1995. Total deposits  increased $28.8 million,  or 14%, to $239.8 million at
December 31, 1996 compared to $211.0 million at December 31, 1995.

Results of Operations

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

1996 vs. 1995.  Net interest  income  increased  $3.1  million,  or 46%, to $9.9
million for the year ended  December  31, 1996 as compared to the same period in
1995. Total interest income increased $5.7 million, or 37%, to $21.0 million for
1996 as compared to the $15.3 million  recorded in 1995. Loan growth during 1996
caused the increase in interest income as average earning assets increased $59.0
million, or 32%, to $240.9 million for the twelve months ended December 31, 1996
as compared to $181.9  million for the same period in 1995. The yield on average
earning assets  increased 30 basis points to 8.70% for 1996 as compared to 8.40%
for 1995. A change in mix of the earning asset portfolio also contributed to the
increase in interest  income.  During 1996, the average  earning asset portfolio
was comprised of 29% investments (yielding 6.50%) and 71% loans (yielding 9.54%)
as compared to 36% investments  (yielding  6.13%) and 64% loans (yielding 9.58%)
in 1995.  The volume  increase and change in mix of the earning asset  portfolio
were caused by the Company's significant loan growth as investments were sold to
fund loans. The increase in yield resulted from the increase in investment yield
noted  above and the change in mix of the  earning  asset  portfolio  from lower
yielding investments to higher yielding loans.

Total interest expense increased $2.6 million,  or 30%, to $11.1 million for the
twelve  months ended  December 31, 1996 as compared to $8.5 million for the same
period in 1995.  The  increase in interest  expense was caused by an increase in
volume of average  interest-bearing  liabilities  offset by decreases in cost on
these liabilities.  Total average  interest-bearing  liabilities increased $52.6
million,  or 32%,  to $219.1  million  for the year ended  December  31, 1996 as
compared  to $166.5  million  for the year  ended  December  31,  1995.  Average
interest-bearing  deposits  and  borrowings  increased  $41.6  million and $11.0
million, or 27% and 105%, respectively, for the twelve months ended December 31,
1996  as   compared  to  the  same   period  in  1995.   The  average   cost  on
interest-bearing  deposits  decreased  47,  55,  15  and  26  basis  points  for
interest-bearing  checking and money market  accounts,  savings  accounts,  time
deposits  under  $100,000 and time deposits of $100,000 and over,  respectively.
The  decreased  costs of  deposits on a category  by  category  basis,  however,
resulted in only a 7 basis point decrease in total deposit cost to 4.93% for the
year ended  December  31, 1996 as compared to 5.00% for the year ended  December
31, 1995.  Offsetting  the  by-category  cost  decreases  was a shift in average
deposit  portfolio  mix as time  deposits  accounted  for 71% of  total  average
deposit  balances for the year ended  December 31, 1996 as compared to less then
65% for the same  period in 1995.  This mix change was caused  primarily  by the
deposit  acquisition  in 1995;  over 80% of the $94.2  million in  acquired  and
retained  deposits were time  deposits (a portion of the acquired  deposits were
sold  along  with  Farmers  &  Merchants Bank of Beach ("FMB") in October  1995;
see below and Note 2 to the  Consolidated Financial  Statements  included  under
Item 7 below).


                                         11

<PAGE>



1995 vs 1994. Net interest income  increased  $889,000,  or 15%, to $6.7 million
for the year ended  December 31, 1995 as compared to the $5.9  million  recorded
for the same period in 1994.  Total interest income  increased $5.0 million,  or
49%, to $15.3  million for 1995 as  compared  to the $10.3  million  recorded in
1994. The increased  interest income was the net result of rate,  volume and mix
variances in the earning asset portfolio.  The most  significant  factor was the
increase in average  earning assets of $57.4 million,  or 46%, to $181.9 million
for the twelve months ended  December 31, 1995 as compared to $124.5 million for
the same period in 1994. The yield on earning  assets  increased 16 basis points
to 8.40% for 1995 as compared to 8.24% for 1994.  A change in mix of the earning
asset portfolio also occurred.  During 1995, the average earning asset portfolio
was comprised of 36% investments (yielding 6.13%) and 64% loans (yielding 9.58%)
as compared to 21% investments  (yielding  5.34%) and 79% loans (yielding 8.95%)
in 1994.  The  increases  in loan and  investment  yields were offset by the mix
change noted above.  The volume  increase and change in mix of the earning asset
portfolio were caused by a combination of the Company's  corporate  developments
in 1995 including the deposit  acquisition  (as acquired  funds were  invested),
internal  loan growth and the sale of FMB (the  Consolidated  Statement  of Cash
Flows in the  Consolidated  Financial  Statements  included  under  Item 7 below
provides details of the cash flows relating to the corporate  transactions noted
above).

Net interest  expense  increased  $4.1 million,  or 94%, to $8.5 million for the
twelve  months ended  December 31, 1995 as compared to $4.4 million for the same
period in 1994.  The  increase in interest  expense was caused by an increase in
volume of average  interest-bearing  liabilities  and  increases on costs of the
liabilities. Total average interest-bearing liabilities increased $53.6 million,
or 47%, to $166.5  million for the year ended  December  31, 1995 as compared to
$112.9  million for the year ended December 31, 1994.  Average  interest-bearing
deposits and  borrowings  increased  $52.6 million and $1.0 million,  or 51% and
10%, respectively,  for the twelve months ended December 31, 1995 as compared to
the same period in 1994. The average cost on interest-bearing deposits increased
to 5.00%  for 1995 as  compared  to 3.81%  for  1994.  The  increase  in cost of
deposits was caused by an aggressive  bid for deposits at BNC -- North Dakota in
late 1994 and early 1995 and the higher than  anticipated  cost on the  deposits
acquired in August 1995. The high  percentage of time deposits to total deposits
acquired also contributed to the overall increase in average deposit cost as the
mix of the deposit  portfolio  changed such that a higher percentage of deposits
were in time deposits versus noninterest and low interest-bearing  deposits (see
"Financial Condition -- Deposits and Borrowered Funds" below).

The following table sets forth, for the periods,  indicated certain  information
relating  to BNC's  average  balance  sheets and  reflects  the yield on average
assets and cost of average liabilities.  Such yields  and  costs are  derived by
dividing income and expense by the average balance of assets and liabilities. No
tax equivalent adjustments were made, and all average balances have been derived
from monthly  averages  which are indicative of daily averages.


                                         12

<PAGE>



             Analysis of Average Balances, Interest and Yields/Rates

<TABLE>
<CAPTION>

                                                                          Year ended December 31,
                                        ------------------------------------------------------------------------------------------
                                                     1996                           1995                        1994
                                        ---------------------------   -----------------------------  -----------------------------
                                                 Interest  Average               Interest   Average           Interest    Average
                                        Average    earned  yield or   Average      earned  yield or  Average    earned    yield or
                                        balance   or paid    cost     balance     or paid    cost    balance   or paid     cost
                                        -------   -------   -----     ---------   -------   ------   -------   -------    ------
                                                    (dollars in thousands)
<S>                                      <C>       <C>       <C>        <C>        <C>      <C>      <C>         <C>      <C> 
Assets
  Federal funds sold...................  $2,714    $ 145     5.34%      $11,348    $ 651    5.74%    $4,086      $ 110    2.69%
  Taxable investments..................  66,547    4,359     6.55%       52,154    3,213    6.16%    21,260      1,211    5.70%
  Tax-exempt investments...............   1,090       70     6.42%        1,705      134    7.86%     1,287        100    7.77%
  Loans (1)............................ 171,780   16,383     9.54%      117,773   11,285    9.58%    98,749      8,842    8.95%
  Allowance for loan losses............  (1,265)       -                 (1,117)       -               (871)         - 
                                       --------   ------               --------   ------           --------     ------
    Total interest-earning assets(2)... 240,866   20,957     8.70%      181,863   15,283    8.40%   124,511     10,263    8.24%
  Noninterest-earning assets:
    Cash and due from banks............   5,240                           5,290                       4,216
    Other..............................  13,393                          10,095                       7,883
                                       --------                        --------                    --------
      Total assets.....................$259,499                        $197,248                    $136,610
                                       ========                        ========                    ========

Liabilities and Stockholders' Equity
  Deposits:
    NOW and money market accounts .....$ 38,920   $1,004     2.58%      $38,941   $1,187    3.05%   $36,423      $ 990    2.72%
    Savings............................   8,498      196     2.31%        7,598      217    2.86%     7,187        189    2.63%
  Certificates of deposit:
    Under $100,000..................... 124,682    7,055     5.66%       93,983    5,456    5.81%    50,259      2,277    4.53%
    $100,000 and over..................  25,499    1,483     5.82%       15,486      942    6.08%     9,523        488    5.12%
                                       --------   ------               --------   ------           --------     ------
  Total interest-bearing deposits...... 197,599    9,738     4.93%      156,008    7,802    5.00%   103,392      3,944    3.81%
  Short-term borrowings:
    Securities and loans sold under
      agreements to repurchase and
      federal funds purchased..........   7,340      408     5.56%        3,546      172    4.85%     3,366         60    1.78%
    FHLB notes payable.................   7,192      406     5.65%        3,483      231    6.63%     2,667        130    4.87%
  Long-term borrowings.................   7,027      555     7.90%        3,499      337    9.63%     3,525        277    7.86%
                                       --------   ------               --------   ------           --------     ------
      Total interest-bearing 
          liabilities.................. 219,158   l1,107     5.07%      166,536    8,542    5.13%   112,950      4,411    3.90%
Noninterest-bearing demand accoounts...  15,147                          13,233                      11,942
                                       --------                        --------                    --------
      Total deposits and interest-
        bearing liabilities............ 234,305                         179,769                     124,892
Other noninterest-bearing liabilities..   3,539                           3,208                       2,068
                                       --------                        --------                    --------
      Total liabilities................ 237,844                         182,977                     126,960
Stockholders' equity...................  21,655                          14,271                       9,650
                                       --------                        --------                    --------   
      Total liabilities and 
        stockholders' equity...........$259,499                        $197,248                    $136,610
                                       ========                        ========                    ========
Net interest income....................           $9,850                          $6,741                        $5,852
                                                  ======                          ======                        ======
Net interest spread....................                      3.63%                          3.27%                         4.34%
                                                             =====                          =====                         =====
Net interest margin....................                      4.09%                          3.71%                         4.70%
                                                             =====                          =====                         =====
Ratio of average interest-earning 
  assets to average interest-bearing
  liabilities.......................... 109.91%                         109.20%                     110.24%
                                        =======                         =======                     =======
</TABLE>

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

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

                                         13

<PAGE>



The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest  expense for the major  components
of interest  earning assets and interest bearing  liabilities and  distinguishes
between the increase related to higher  outstanding  balances and the volatility
of interest  rates.  Changes in net interest  income due to both volume and rate
have been included in the changes due to rate:

                        Analysis of Changes in Net Interest Income

                                         For the Years Ended December 31,
                                   --------------------------------------------
                                   1996 Compared to 1995  1995 Compared to 1994
                                   ---------------------  ----------------------
                                   Change Due to          Change Due to
                                   --------------         --------------
                                   Volume   Rate  Total   Volume   Rate   Total
                                   ------- ------ ------  ------- ------ -------
                                                    (in thousands)
Interest-Earning Assets
   Federal funds sold...............$ (496) $ (10) $(506) $  196  $ 345  $   541
   Investments......................    856    226  1,082   1,821    215   2,036
   Loans............................  5,175   (77)  5,098   1,703    740   2,443
                                    ------- ------ ------ ------- ------ -------
      Total increase in interest 
          income....................  5,535    139  5,674   3,720  1,300   5,020
                                    ------- ------ ------ ------- ------ -------
Interest-Bearing Liabilities
   NOW and money market accounts....    (1)  (182)  (183)      68    129     197
   Savings..........................     26   (47)   (21)      11     17      28
   Certificates of Deposit:
      Under $100,000................  1,782  (183)  1,599   1,981  1,198   3,179
      $100,000 and over.............    609   (68)    541     306    148     454
   Short-term borrowings:
      Securities and loans sold 
       under agreements to 
       repurchase and federal 
       funds purchcased.............    184    52     236      3      109    112
      FHLB notes payable............    246   (71)    175     40      61     101
   Long-term borrowings.............    340  (122)    218     (2)     62      60
                                    ------- ------ ------ ------- ------ -------
      Total increase (decrease) 
        in interest expense ........  3,186  (621)  2,565   2,407  1,724   4,131
                                    ------- ------ ------ ------- ------ -------
      Increase (decrease) in net 
        interest income             $ 2,349 $  760 $3,109 $ 1,313 $ (424) $  889
                                    ======= ====== ====== ======= ====== =======

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

The provision for loan losses for the twelve months ended  December 31, 1996 was
$739,000,  an increase of $571,000,  or 340%,  over the  provision  for the same
period in 1995.  The  provision for loan losses was $168,000 in 1995, a decrease
of $11,000, or 6%, from 1994's provision for loan losses of $179,000. Management
increased the loan loss provision in 1996 due to the Company's  significant loan
growth.  Management believes the resulting allowance for loan losses is adequate
to cover  anticipated  losses in the loan  portfolio at December  31, 1996.  The
decrease in the  provision  for 1995 as compared to 1994  reflects the fact that
$9.2  million  of loans  were  sold  with FMB  during  1995  (see  Note 2 to the
Consolidated Financial

                                         14

<PAGE>



Statements  included under Item 7 below) resulting in a lower average risk grade
in the Company's  loan  portfolio  and an allowance  for loan losses  considered
adequate to cover anticipated losses in the loan portfolio at December 31, 1995.

Net charge-offs  through the allowance for loan losses were $193,000 and $41,000
for the years ended  December 31, 1996 and 1995,  respectively.  Net  recoveries
through the allowance for loan losses during 1994 were  $129,000.  The allowance
for loan losses was $1.6  million as of December 31, 1996 and $1.0 million as of
December 31, 1995 and 1994.  See  "Financial  Condition  --  Allowance  for Loan
Losses".

Noninterest Income. The following table presents, for the periods indicated, the
major categories of the Company's noninterest income:


                               Noninterest Income
                                  For the Years Ended December 31,
                                  ---------------------------------
                                    1996         1995        1994
                                  ---------    --------    --------
                                           (in thousands)
Loan fees ....................... $   1,276    $    559    $    650
Service charges..................       418         401         259
Rental income....................        34          37         126
Net gain (loss) on sales of 
   securities ...................        19        (18)          28
Other noninterest income.........       349         757         336
                                  ---------    --------    --------
Total noninterest income......... $   2,096    $  1,736    $  1,399
                                  =========    ========    ========


Total  noninterest  income increased  $360,000,  or 21%, to $2.1 million for the
year ended  December  31, 1996 as  compared  to the same  period in 1995.  Total
noninterest  income for the year ended  December 31, 1995 was $1.7  million,  an
increase of $337,000,  or 24%, from the $1.4 million recorded for the year ended
December 31, 1994.

Loan fee income  totaled $1.3 million for the twelve month period ended December
31, 1996, a $717,000  increase over the same period in 1995. Loan fee income for
the year ended  December  31, 1995 was  $559,000 as compared to $650,000 for the
same period in 1994. The increase in loan fee income for the year ended December
31,  1996 as  compared  to the same  period in 1995 is  primarily  the result of
recognition  of  loan   origination  fees  on  several  large  commercial  loans
originated and sold without  recourse during 1996.  BNC- North Dakota  generated
over $1 million of the $1.3 million in loan fees recognized in 1996.  Management
cannot  predict with any degree of  certainty  the amount of loans which will be
originated and related loan fees which will be recognized in future periods.

Service  charges  totaled  $418,000  for the year  ended  December  31,  1996 as
compared  to  $401,000  for the same  period in 1995.  Service  charges  in 1995
increased $142,000,  or 55%, from the $259,000 recorded in 1994. The increase in
service charge income for the year ended  December 31, 1995 as  compared to  the
same period  in  1994 is due  primarily to  volume-related increases in  service
charge income on commercial transaction accounts  coupled with increases in fees
charged for certain account activity.


                                         15

<PAGE>



Rental income was $34,000, $37,000 and $126,000 for the years ended December 31,
1996,  1995 and 1994,  respectively.  The decrease in rental  income in 1996 and
1995  as  compared  to  1994 is  attributable  to the  growth  the  Company  has
experienced. Excess space in the Company's principal office building in Bismarck
was rented to outside  entities in 1994.  During  1995 and 1996,  that space was
occupied by BNC personnel.

Net  investment  securities  gains were $19,000 for the year ended  December 31,
1996 as compared to net losses of $18,000 and net gains of $28,000 for the years
ended  December 31, 1995 and 1994,  respectively.  In 1996,  the  proceeds  from
securities sales were $49 million with resultant gross gains and losses recorded
of $32,000 and $13,000,  respectively.  In 1995,  the proceeds  from  securities
sales were $89 million with resultant  gross gains and losses recorded of $5,000
and $23,000,  respectively. In 1994, the proceeds from securities sales were $18
million with  resultant  gross gains and losses  recorded of $33,000 and $5,000,
respectively.

Other noninterest  income,  which includes various fee income items,  commission
income  from the sale of  nondeposit  investments,  consulting  income and other
miscellaneous  income items was $349,000 for the year ended December 31, 1996 as
compared to $757,000  and  $336,000  for the years ended  December  31, 1995 and
1994, respectively. The decrease in other noninterest income of $408,000 for the
year ended  December 31, 1996 as compared to the year ended December 31, 1995 is
primarily the result of the $316,000  gain  recognized on the sale of FMB during
1995. Commission income on sales of nondeposit investments decreased $135,000 in
1996 as compared  to 1995 due to a  reduction  of  personnel  in the  nondeposit
investment  sales area.  These items were offset by smaller  increases  in other
miscellaneous  fee income and income derived from the  consulting  activities of
BNC Financial.  The increase of $421,000 in other noninterest income for 1995 as
compared to 1994 is a result of the $316,000 gain on the sale of FMB recorded in
1995 and an increase of $217,000 in commission  income on the sale of nondeposit
investments  in 1995 as  compared  to  1994.  The  increased  commission  income
recorded  for the year ended  December  31,  1995 as  compared to the year ended
December  31,  1994  reflects  the fact  that  1995 was the  first  full year of
nondeposit  investment  sales  activities for the Company.  The increased income
from the sale of nondeposit  investments and the gain on the sale of FMB in 1995
were  offset by smaller  decreases  in fee income,  consulting  income and other
miscellaneous income in 1995.

Noninterest Expense. The following table presents, for  the  periods  indicated,
the major categories of the Company's noninterest expense:


                               Noninterest Expense
                                      For the Years Ended December 31,
                                      --------------------------------
                                        1996        1995        1994
                                      --------    --------    --------
                                               (in thousands)
                                                  --------    --------
Salaries and employee benefits....... $  4,311    $  3,352    $  2,990
Depreciation and amortization........      980         619         444
Occupancy............................      675         413         305
Office supplies, telephone and 
   postage...........................      505         521         227
Professional services................      360         246         236
Marketing and promotion..............      352         424         211
FDIC and other assessments...........      239         296         308
Other................................      791    640              481
                                      --------    --------    --------
Total noninterest expense............ $  8,213    $  6,511    $  5,202
                                      ========    ========    ========
Efficiency ratio (1).................   68.75%      76.81%      71.74%

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


                                         16

<PAGE>



Total  noninterest  expense for the year ended  December 31, 1996 increased $1.7
million, or 26%, as compared to total noninterest expense for the same period in
1995.  Total  noninterest  expense for the year ended December 31, 1995 was $6.5
million,  an increase of $1.3 million,  or 25%, as compared to total noninterest
expense  for the  year  ended  December  31,  1994.  The  overall  increases  in
noninterest expense result from the growth and expansion the Company experienced
during this two year period (see Note 2 to the Consolidated Financial Statements
included under Item 7 below).

Salaries and employee  benefits  represent the largest  category of  noninterest
expense at 52%,  51% and 57% of total  noninterest  expense  for the years ended
December 31, 1996, 1995 and 1994,  respectively.  Salaries and benefits  totaled
$4.3 million for the year ended  December 31, 1996, an increase of $959,000,  or
29%, as compared to the same period in 1995.  The total  salaries  and  benefits
expense  of  $3.4  million  recorded  for  the  year  ended  December  31,  1995
represented  an  increase  of  $362,000,  or 12%,  over the total  salaries  and
benefits  recorded for the year ended  December  31,  1994.  Salary and employee
benefits expense includes salaries,  applicable payroll and unemployment  taxes,
premiums  for  health,  life and  disability  insurance,  incentive  bonuses and
contributions to the Company's 401(k) plan. Salaries and incentives totaled $3.7
million,  $3.0 million and $2.4  million for the years ended  December 31, 1996,
1995 and 1994,  respectively.  Officer and employee  insurance  expenses totaled
$215,000,  $132,000 and $140,000 for the years ended December 31, 1996, 1995 and
1994, respectively.  These increases are attributable to the Company's expansion
which resulted in average full-time  equivalent  employees of 105, 68 and 54 for
the years ended December 31, 1996, 1995 and 1994, respectively.

Depreciation  and  amortization  expense  totaled  $980,000  for the year  ended
December  31,  1996,  an increase of  $361,000,  or 58%, as compared to the year
ended  December 31, 1995. The total  depreciation  and  amortization  expense of
$619,000  recorded for the year ended December 31, 1995  represented an increase
of $175,000,  or 39%, over the $444,000 recorded for the year ended December 31,
1994.  Total  depreciation  and  amortization  expense  on  premises,  leasehold
improvements and equipment recorded for the twelve month periods ending December
31, 1996, 1995 and 1994 was $499,000, $377,000 and $348,000,  respectively,  the
increases  resulting  from  additions to premises,  leasehold  improvements  and
equipment  of $1.4  million,  $2.0  million and  $345,000  for the twelve  month
periods  ending  December 31, 1996,  1995 and 1994,  respectively.  Amortization
expense on  intangible  assets  totaled  $481,000,  $242,000 and $96,000 for the
twelve month periods ending December 31, 1996, 1995 and 1994, respectively.  The
increased  expense is attributable to intangible assets recorded on acquisitions
during 1995 and 1996, including $3.6 million in deposit premiums and acquisition
costs  relating  to the August 1995  deposit  acquisition,  and certain  smaller
intangibles relating to BNC's other acquisitions (see Note 2 to the Consolidated
Financial Statements included under Item 7 below).

Occupancy  expense for the year ended December 31, 1996 increased  $262,000,  or
63%,  as compared  to the year ended  December  31,  1995.  The total  occupancy
expense of $413,000 recorded for the year ended December 31, 1995 represented an
increase of  $108,000,  or 35%,  over the year ended  December  31,  1994.  This
expense category includes rent expense,  building maintenance,  utilities,  real
estate taxes,  property  insurance,  and  furniture  and fixture,  EDP and other
maintenance.  The  $262,000  increase  in  occupancy  expense  in 1996 is caused
primarily by increased rent expense of $187,000 attributable to BNC's facilities
in  Minneapolis  and St. Cloud,  Minnesota as well as Garrison and Watford City,
North Dakota (see Part I, Item 2, "Description of Property").  The  remainder of
the $262,000 increase consists of small increases in each of the other occupancy
expense categories  attributable to operation of the facilities  acquired during
the second  half of 1995 and early 1996.  The  $108,000  increase  in  occupancy
expense  recorded in 1995 as compared to 1994 resulted  from small  increases in
most of the occupancy expense categories and was attributable to the acquisition
of the North Dakota  branches  during  third quarter 1995 and the operation of a
loan production office by BNC -- North  Dakota in  Minneapolis  prior  to BNC --
Minnesota being chartered in January 1996.


                                         17

<PAGE>



Total office supplies,  telephone and postage expense decreased slightly for the
year ended  December  31, 1996 in  comparison  to the same  period in 1995.  The
increase in expense in this category of $294,000 from the $227,000  recorded for
the year ended  December  31, 1994 to the  $521,000  recorded for the year ended
December 31, 1995 was caused primarily by expenses  incurred in opening the loan
production  office in  Minneapolis  and bringing the BNC -- North Dakota  branch
offices on line in August 1995.  Expenses  included in this  category are office
supplies,  special forms,  customer checks, data processing supplies,  telephone
and postage and freight expense.  BNC recorded  decreases in expense relating to
office  supplies,  special forms,  customer checks and data processing  supplies
during  1996 as  compared to 1995.  Telephone  and postage and freight  expense,
however, increased in 1996 as a result of the number of facilities operating and
the additional customers acquired in the 1995 branch acquisition.

Professional  services expense includes legal, audit and tax preparation fees as
well as  software  support  and other  consulting  expense.  Total  professional
expense of  $360,000,  $246,000  and  $236,000 was recorded for the years ending
December 31, 1996, 1995 and 1994,  respectively.  The $114,000 increase for 1996
as  compared to 1995 was mainly  attributable  to  increases  in legal and audit
fees.

The Company's  marketing and promotion  expense totaled  $352,000,  $424,000 and
$211,000 for the years ended  December 31,  1996,  1995 and 1994,  respectively.
This  category  includes   advertising,   public  and  community  relations  and
miscellaneous  promotional  campaign  expenses.  The  $213,000  increase in this
category  for 1995 as compared  to 1994 is almost  entirely  attributable  to ad
campaigns  relating  to the 1995  branch  acquisitions  and  merger of BNC's two
subsidiary  banks (and related name change of the surviving bank) (see Note 1 to
the Consolidated Financial Statements included under Item 7 below).

FDIC and other assessments  expense includes FDIC deposit insurance premiums and
OCC  assessments.  Total FDIC and OCC  assessments  were $239,000,  $296,000 and
$308,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The
decreases in this expense  category have been caused primarily by changes in the
FDIC's risk  related  deposit  insurance  premiums.  During 1994 the Company was
paying FDIC assessments of 23 basis points annually on its BIF insured deposits.
In  1995,  the  Company  acquired  approximately  $94  million  of  SAIF insured
deposits. The addition of the SAIF deposits and the increased  insurance expense
attributable  to  them  was  offset  by  the  reduction  of premium rates on BIF
deposits  to 0 basis points for BNC's banks and an FDIC deposit insurance refund
paid to BIF insured banks due to the recapitalization of the BIF to the required
level  of 1.25% of insured  deposits.  During  1996,  the  Company's  assessment
expenses further decreased  because  of  the reduction of premium rates on  SAIF
deposits  to  0 basis points  and  a  deposit  insurance  refund  paid  to  SAIF
insured banks upon recapitalization  of the SAIF to 1.25% of  insured  deposits.
Unless  there  are  additional  changes  to the deposit  insurance  regulations,
management  expects expense in this category to further decline in 1997 as BNC's
banks are currently being  assessed  only  for  interest  payable  on  Financing
Corporation bonds (issued between  1987 and 1989 to resolve  failed  savings and
loan  associations).  The  assessments  are 1.30 basis  points  annually on  BIF
insured  deposits  and 6.48 basis points annually on SAIF insured deposits.

Other  noninterest  expense  includes  directors  fees,  blanket  bond and other
insurance expense,  education and development  expense,  correspondent  changes,
travel,  dues,  conventions and other miscellaneous  expense  categories.  Total
other  noninterest  expense was  $791,000,  $640,000  and $481,000 for the years
ended December 31, 1996, 1995 and 1994,  respectively.  The increase of $151,000
in this expense  category for 1996 as compared to 1995 is  attributable to small
increases in several of the categories mentioned above. The increase of $159,000
for 1995 as compared to 1994 is also  caused by small  increases  in many of the
categories mentioned above.

Income Taxes.  The income tax  provision  for the years 1996,  1995 and 1994 was
$1.1  million,  $641,000 and $679,000,  respectively.  As a percentage of pretax
income,  income tax expense for 1996 was 38.3%, as compared to 35.7% in 1995 and
36.3% in 1994.  The increase in income tax expense  relative to pretax income in
1996 as compared to 1995 is a result of an increase in the percentage of taxable
income on municipal  bonds.  Consolidated  federal income tax returns were filed
for all of the periods presented.


                                         18

<PAGE>



Financial Condition

Investment  Securities.  BNC's  investment  policy is designed  to:  enhance net
income and return on equity through prudent management of risk; ensure liquidity
for cash-flow requirements; help manage interest rate risk; ensure collateral is
available for public deposits,  advances and repurchase  agreements;  and manage
asset  diversification.  In managing the  portfolio and the  composition  of the
entire balance  sheet,  the Company seeks a balance among  earnings,  credit and
liquidity  considerations,  with a goal of maximizing  the  longer-term  overall
profitability of the Company.

Investments  are  centrally  managed by the  President of BNC -- North Dakota in
order to  maximize  compliance  (federal  laws  and  regulations  place  certain
restrictions  on the  amounts  and  types  of  investments  BNC  may  hold)  and
effectiveness of overall investing activities.  BNC's liquidity is monitored and
managed and the maturity  dates of the Company's  investments  are structured to
maintain necessary liquidity (see "Liquidity" below).  However, the primary goal
of BNC's investment  policy is to maintain an appropriate  relationship  between
assets and liabilities while maximizing interest rate spreads.  Accordingly, BNC
monitors the  sensitivity  of its assets and  liabilities to changes in interest
rates  and  maturities  and  directs  the  Company's  overall   acquisition  and
allocation of funds (see "Asset/Liability Management" below).

The following  tables present the  composition  and maturities of the investment
portfolio by major category as of the periods indicated:
<TABLE>
<CAPTION>

                             Investment Portfolio Composition
                                                           December 31,
                              -----------------------------------------------------------------------
                                      1996                     1995                     1994
                              ---------------------    ---------------------    ---------------------
                                          Estimated                Estimated                Estimated
                              Amortized   Fair Market  Amortized   Fair Market  Amortized   Fair Market
                                Cost        Value        Cost        Value        Cost        Value
                              --------    ---------    --------    ---------    --------    ---------
                                                      (dollars in thousands)
<S>                           <C>         <C>          <C>         <C>          <C>         <C>
Available for Sale:
U.S. Treasury securities..... $ 13,814    $  13,856    $ 25,041    $  25,101    $  8,973    $   8,860
U.S. government agency
   mortgage-backed 
   securities................    9,555        9,559       4,798        4,843       5,205        5,102
U.S. government agencies 
   securities................    3,633        3,642       7,513        7,520       7,363        7,263
Collateralized mortgage 
   obligations...............   23,898       23,855      44,800       44,803       1,881        1,734
Other securities.............    7,773        7,779      10,882       10,885       1,004        1,004
State and municipal bonds....      759          800       1,162        1,264          --           --
                              --------    ---------    --------    ---------    --------    ---------
Total........................   59,432       59,491      94,196       94,416      24,426       23,963
                              --------    ---------    --------    ---------    --------    ---------
Held to Maturity:
State and municipal bonds....       --           --          --           --       1,148        1,195
                              --------    ---------    --------    ---------    --------    ---------
Total........................        0            0           0            0       1,148        1,195
                              --------    ---------    --------    ---------    --------    ---------
Total investments............ $ 59,432    $  59,491    $ 94,196    $  94,416    $ 25,574    $  25,158
                              ========    =========    ========    =========    ========    =========
</TABLE>



                                            19

<PAGE>

<TABLE>
<CAPTION>


           Investment Portfolio -- Maturity and Yields (as of December 31, 1996)


                                                           Maturing
                               --------------------------------------------------------------------
                                                   After 1 but       After 5 but
                                Within 1 year    within 5 years   within 10 years    After 10 years        Total
                               ---------------   --------------   ----------------   --------------    --------------
                                             (1)              (1)                (1)              (1)
                                Amount   Yield   Amount   Yield   Amount     Yield   Amount   Yield    Amount   Yield
                               -------   -----   ------   -----   -------    -----   ------   -----    ------   -----
                                                                   (dollars in thousands)
<S>                            <C>       <C>     <C>      <C>     <C>        <C>     <C>      <C>     <C>       <C>
Available for Sale: (2)
U.S. Treasury securities.....  $ 4,799   5.97%   $9,015   6.06%   $   --      -- %   $ --      -- %   $13,814   6.03%
U.S. government agency
  mortgage-backed
  securities (3).............       --    -- %    1,897   6.86%     7,303    6.53%     355    7.76%     9,555   6.64%
U.S. government agencies
  securities.................       --    -- %    3,633   7.17%       --      -- %     --      -- %     3,633   7.17%
Collateralized mortgage
  obligations (3)............       --    -- %      317   6.03%    11,470    6.11%   12,111   6.28%    23,898   6.20%
Other securities.............    6,682   7.02%      --     -- %       --      -- %    1,091   6.27%     7,773   6.92%
State and municipal bonds....       50   6.06%      200   8.25%       161    7.50%      348   5.47%       759   6.67%
                               -------   -----   ------   -----   -------    -----   ------   -----    ------   -----
  Total book value of
   investment securities.....  $11,531   6.58%   $15,062  6.46%   $18,934    6.28%  $13,905   6.30%   $59,432   6.39%
                               =======   =====   =======  =====   =======    =====  =======   =====   -------   -----
Unrealized holding gain on
  securities available for 
  sale ......................                                                                              59
                                                                                                       ------
Total investment in securities
  (at estimated fair market
  value).....................                                                                          $59,491   6.38%(4)
                                                                                                       =======   =====
</TABLE>

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

(1)Yields do not  include  adjustments  for tax  exempt  interest  because  such
   interest is not  material;  yields also do not reflect  changes in fair value
   that are reflected as a separate component of stockholders' equity (except as
   noted in (4) below).
(2)Based on amortized cost/book value.
(3)Maturities  of  mortgage-backed   securities  and   collateralized   mortgage
   obligations are based on contractual maturities.
(4)Yield  reflects  changes  in  fair  value  that  are  reflected as a separate
   component of stockholders equity.


As of December 31, 1996,  BNC had $59.5 million of securities in the  investment
portfolio  as  compared to $94.4  million and $25.1  million for the years ended
December 31, 1995 and 1994, respectively.  The increase in investment securities
at  December  31,  1995 as  compared  to one year  earlier is a result of having
invested the funds received in the August 1995 branch acquisition (see Note 2 to
the Consolidated Financial Statements included under Item 7 below). The decrease
in  investment  securities  in 1996  resulted  from the  transfer  of funds from
investments  to  loans  as  the  company  funded  the  significant  loan  growth
experienced  during 1996 (see "Results of Operations -- Net Interest Income" and
"Financial Condition -- Loan Portfolio"). Investments accounted for 21%, 39% and
17% of total assets as of December 31, 1996, 1995 and 1994, respectively.

At December 31, 1996,  BNC held no securities of any single  issuer,  other than
the U.S. Treasury and U.S. government agencies securities,  that exceeded 10% of
stockholders'   equity.  A  significant  portion  of  the  Company's  investment
securities  portfolio  (approximately  59% at  December  31,  1996)  is  used as
collateral for public funds time deposits,  securities sold under  agreements to
repurchase and other BNC borrowings.


                                         20

<PAGE>



Loan Portfolio. The following  table  presents the composition of  the Company's
loan portfolio at the end of the periods indicated:
<TABLE>
<CAPTION>


                             Loan Portfolio Composition

                                                  December 31,
                                 ----------------------------------------------------------
                                         1996                1995                1994
                                 -----------------   ------------------   -----------------
                                  Amount      %        Amount      %        Amount     %
                                 --------   ------   ---------   ------   --------   ------
                                                      (dollars in thousands)
<S>                              <C>        <C>       <C>        <C>      <C>        <C>
Commercial and industrial(1).... $ 94,701     47.0    $ 41,639     34.8   $ 39,218     35.9
Agricultural....................   20,673     10.3      18,046     15.1     22,144     20.2
Real estate-mortgage............   47,451     23.6      36,606     30.6     32,805     30.0
Real estate-construction........    8,806      4.4       5,884      4.9      3,992      3.6
Consumer........................   18,734      9.3       9,960      8.3      9,331      8.5
Lease financing.................   12,970      6.4       8,660      7.2      3,076      2.8
                                 --------   ------   ---------   ------   --------   ------
Total face amount of loans......  203,335    101.0     120,795    100.9    110,566    101.0
Deferred loan fees and costs....     (338)    (0.2)       (112)    (0.1)       (95)    (0.1)
                                 --------   ------   ---------   ------   --------   ------
Loans...........................  202,997    100.8     120,683    100.8    110,471    100.9
Less allowance for loan losses..   (1,594)    (0.8)     (1,048)    (0.8)    (1,021)    (0.9)
                                 --------   ------   ---------   ------   --------   ------
Net loans....................... $201,403    100.0   $119,635     100.0   $109,450    100.0
                                 ========   ======   =========   ======   ========   ======
</TABLE>

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

(1) The commercial  and  industrial  loan  category  includes  asset based loans
    totaling $5.6 million at December 31, 1996.


The  Company's  primary  source  of  income is  interest  earned  on loans.  The
Company's loan portfolio has grown significantly  during the past three years as
a  result  of  BNC's  strategy  of  increasing the amount of high quality  loans
outstanding to increase net interest income.  Net loans increased $81.8 million,
or 68%, to $201.4  million at December 31, 1996 as compared to $119.6 million at
December  31,  1995.  In 1995,  net loans  increased  $10.2  million,  or 9%, as
compared  to December  31,  1994 ($9.2  million in loans were sold in 1995 along
with FMB (see Note 2 to the  Consolidated  Financial  Statements  included under
Item 7 below)).

BNC's   significant  loan  growth  is  attributable  in  part  to  each  of  its
subsidiaries.  BNC -- North Dakota had continued growth mainly in the commercial
and  industrial  loan  category but also in each other loan  category  presented
above. BNC -- Minnesota added significant growth  particularly in the commercial
and  industrial  category.   BNC  Financial  had  $5.6  million  of  asset based
commercial and  industrial  loans as of December 31, 1996.  While  prospects for
continued  loan growth  appear  favorable,  management  cannot  predict with any
degree of certainty the Company's future loan growth potential.

Credit Policy and Approval Procedures.  BNC follows a uniform credit policy that
sets forth  underwriting  and loan  administration  criteria.  The loan  policy,
including  lending  guidelines  for the various  types of credit  offered by the
Company,  is  established by the Board of Directors (the "Board") based upon the
recommendations  of senior lending management and the executive credit committee
(comprised  of BNCCORP's  President and  Executive  Vice  President for Business
Development,  BNC -- Minnesota's Chief Executive Officer and two of BNC -- North
Dakota's Executive Vice Presidents (the "Loan  Committee")).  The loan policy is
reviewed and reaffirmed by the Board at least  annually.  Underwriting  criteria
are based  upon the risks  associated  with  each  type of credit  offered,  the
related borrowers and types of collateral.


                                         21

<PAGE>



The Company delegates lending decision  authority among various lending officers
and the Loan Committee based on the size of the customer's  credit  relationship
with BNC.  Individual  loan  officers at BNC banks are  assigned  loan  approval
limits not exceeding $200,000. Senior lenders at BNC -- North Dakota may approve
credit  relationships at BNC -- North Dakota above individual  officer limits up
to $500,000.  Relationships  over  $500,000  and up to the bank's legal  lending
limit must be approved by the Loan  Committee.  The Executive  Vice President of
Credit  Administration  at BNC -- Minnesota may approve BNC -- Minnesota  credit
relationships  in excess of officer limits up to the bank's legal lending limit,
not to exceed $1 million. All BNC -- Minnesota credit relationships in excess of
$1 million and up to the bank's legal lending limit must be approved by the Loan
Committee.  The  President/CEO of BNC Financial may approve BNC Financial credit
relationships  up to  $750,000.  All BNC  Financial  credit  relationships  over
$750,000 must be approved by a loan committee comprised of  BNCCORP's  President
and  Executive Vice President for Business Development, BNC -- Minnesota's Chief
Executive Officer and BNC Financial's President/CEO.  All loans and  commitments
in excess of $300,000 are presented to the Board on a monthly  basis for summary
review.  Any  exceptions to loan policies and  guidelines are subject to special
approval by bank executive lenders or the Loan Committee.

Loan  Participations.  Pursuant to BNC's lending policy, loans do not exceed 85%
of  bank  lending  limits  (except  to the  extent  collateralized  by  treasury
securities or bank deposits and,  accordingly,  excluded from the bank's lending
limit). To accommodate customers whose financing needs exceed its lending limits
and internal loan restrictions relating primarily to industry concentration, BNC
sells loan participations to outside participants without recourse.  At December
31, 1996, 1995 and 1994, the outstanding balances of loan participations sold by
BNC to outside  banks were  $57.3  million,  $35.0  million  and $23.4  million,
respectively.  At December 31, 1996 loan  participations  sold to outside  banks
totaled  $54.1  million  and $3.2  million  for BNC -- North  Dakota  and BNC --
Minnesota,  respectively.  All outstanding  participations  at December 31, 1995
were attributable to BNC -- North Dakota.  BNC has retained  servicing rights on
loan  participations  sold and  traditionally  has been able to  recognize  loan
origination fees received in respect to such loans.  Management  cannot reliably
predict BNC's ability to continue to generate or sell loan participations or the
terms of any such sales.

Commercial and  industrial  loans,  the largest  component of the Company's loan
portfolio in each of the years presented, increased to $94.7 million at December
31,  1996,  an  increase  of $53.1  million,  or 127% from  December  31,  1995.
Commercial and industrial  loans  represented  47%, 35% and 36% of the Company's
loan portfolio at December 31, 1996, 1995 and 1994, respectively. As of December
31, 1996,  commercial and industrial loans totaled $65.5 million,  $23.6 million
and $5.6 million at BNC -- North  Dakota,  BNC -- Minnesota  and BNC  Financial,
respectively.  All of BNC  Financial's  loans are asset based loans.  Management
anticipates  growth of asset based loans at BNC Financial could  approximate $15
to $25  million   during  1997.  (See  "Deposits  and  Borrowings"  for  further
discussion regarding anticipated funding for the Company's asset based loans).

Agricultural loans increased $2.6 million,  or 15%, to $20.7 million at December
31,  1996 as  compared to  December  31,  1995.  The sale of FMB in 1995 and the
strong growth in commercial and industrial loans resulted in agricultural  loans
representing  10% of the  Company's  loan  portfolio  at  December  31,  1996 as
compared to 15% and 20% at December 31, 1995 and 1994, respectively.

Real estate mortgage loans increased $10.8 million,  or 30%, to $47.4 million at
December  31,  1996  as  compared  to  $36.6   million  at  December  31,  1995.
Approximately  $4.0  million  of this  growth was  attributable  to BNC -- North
Dakota while  approximately  $6.8 million was  attributable to BNC -- Minnesota.
Real  estate  mortgage  loans  represented  24%,  31% and 30% of the total  loan
portfolio at December 31, 1996,  1995 and 1994,  respectively.  A large  portion
of these loans (approximately 42% at December 31, 1996) were made to  commercial
customers  where  the  collateral for the loan is, among other things, the  real
estate occupied  by  the business of the  customer.  Whenever  practicable,  the
Company seeks to receive real estate as collateral in making commercial loans in
addition to  other  appropriate  collateral. Accordingly,  many  loans  in  this
category  can  be characterized  as  commercial loans that are  secured  by real
estate.


                                         22

<PAGE>



Real estate  construction loans increased $2.9 million,  or 50%, to $8.8 million
at  December  31,  1996 as  compared  to $5.9  million  at  December  31,  1995.
Construction  loans  represented  4% of the Company's loan portfolio at December
31, 1996 as compared to 5% and 4% at December 31, 1995 and 1994, respectively.

Consumer loans increased $8.7 million,  or 88%, to $18.7 million at December 31,
1996 as  compared  to $10  million at December  31,  1995.  BNC -- North  Dakota
accounted for $6.2 million of the increase due to increased consumer loan demand
in the Bismarck market and consumer loan  originations at the branches  acquired
in  1995.  Consumer  loans  represented  9%,  8% and 9% of  the  Company's  loan
portfolio at December 31, 1996, 1995 and 1994, respectively.

Financing leases increased $4.3 million,  or 50%, to $13 million at December 31,
1996 as compared to $8.7 million at December 31, 1995. These leases  represented
6% of the Company's loan portfolio at December 31, 1996 as compared to 7% and 3%
as of December 31, 1995 and 1994, respectively.

There was no  concentration  of loans to any single  industry  exceeding  10% of
total loans (other than those listed above) nor were there any loans  classified
as highly leveraged transactions as of December 31, 1996.

The following  table sets forth the remaining  maturities of loans in each major
category of BNC's portfolio.  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:

                             Maturities of Loans (1)

                                   Over 1 Year
                                Through 5 years       Over 5 Years
                              -------------------- ------------------
                   Less than    Fixed    Floating   Fixed    Floating
                   one year     Rate       Rate      Rate      Rate      Total
                   --------   --------   --------- --------- --------  ---------
                                            (in thousands)
Commercial and 
   industrial......$ 30,810   $ 18,347   $  35,949 $   4,971 $  4,624  $  94,701
Agricultural.......   9,974      2,226       3,220     1,527    3,726     20,673
Real estate-
   mortgage........   4,257      8,638       4,435    11,153   18,968     47,451
Real estate-
   construction....   8,545         37          --        --      224      8,806
Consumer...........   7,599      7,772       2,778       575       10     18,734
Lease financing....   3,428   9,480             --        62       --     12,970
                   --------   --------   --------- --------- --------  ---------
Total face amount 
   of loans........$ 64,613   $ 46,500   $  46,382 $  18,288 $ 27,552  $ 203,335
                   ========   ========   ========= ========= ========  =========
--------------------

(1)Maturities are based upon contractual maturities. Floating rate loans include
   loans  that  would  reprice  prior to  maturity  if base  rates  change.  See
   "Asset/Liability Management" below for further discussion regarding repricing
   of loans and other assets.


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


                                         23

<PAGE>



The  following  table sets forth the  amounts of  nonperforming  loans and other
assets at the ends of the periods indicated:

                                Nonperforming Assets
                                                              December 31,
                                                     ---------------------------
                                                       1996       1995     1994
                                                     -------   --------  -------
                                                         (dollars in thousands)
Nonperforming loans:
   Loans 90 days or more delinquent and still
      accruing interest............................. $   129   $    290  $    39
   Nonaccrual loans (1) (2).........................      22         71      248
   Restructured loans (1) (2).......................     136        119      257
                                                     -------   --------  -------
      Total nonperforming loans.....................     287        480      544
Real estate acquired by foreclosure.................     159          -      100
                                                     -------   --------  -------
   Total nonperforming assets....................... $   446   $    480  $   644
                                                     =======   ========  =======
Allowance for loan losses........................... $ 1,594   $  1,048  $ 1,021
                                                     =======   ========  =======
Ratio of total nonperforming loans to total loans...   l.14%       .40%     .49%
Ratio of total nonperforming assets to total assets.    .15%       .20%     .44%

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

(1)If the Company's  nonaccrual and restructured  loans at December 31, 1996 had
   been current in accordance  with their original  terms,  additional  interest
   income would have been  recognized into earnings in the amount of $12,000 for
   the year ended December 31, 1996.
(2)The interest income on nonaccrual and restructured loans actually included in
   the Company's net income was approximately $6,000 for the year ended December
   31, 1996.


Loans 90 Days or More Delinquent and Still Accruing Interest.  The loans 90 days
or more delinquent and still accruing  interest  category includes loans over 90
days past due which management  believes,  based on its specific analysis of the
loan,  do not present  doubt about the  collection  of interest and principal in
accordance  with the loan contract.  Loans in this category must be well-secured
and in the  process of  collection.  These  loans are  monitored  closely by BNC
lending and management personnel.

Nonaccrual Loans.  Accrual of interest is discontinued on a loan when management
believes,  after  considering  economic and business  conditions  and collection
efforts,  that the borrower's financial condition is such that the collection of
interest is doubtful. A delinquent loan is generally placed on nonaccrual status
when it becomes 90 days or more past due unless the loan is well-secured  and in
the process of collection.  When a loan is placed on nonaccrual status,  accrued
but  uncollected  interest  income  applicable to the current period is reversed
against interest income of the current period.  Accrued but uncollected interest
income  applicable to previous periods is charged against the allowance for loan
losses as BNC  provides  for a  reserve  for  accrued  interest.  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.

Restructured  Loans.   Restructured  loans  are  those  for  which  concessions,
including  a  reduction  of the  interest  rate or the  deferral  of interest or
principal, have been granted due to the borrower's weakened financial condition.
Interest on restructured  loans is accrued at the restructured  rates when it is
anticipated that no loss of its original principal will occur.


                                         24

<PAGE>



Other Real Estate Owned. Other real estate owned represents  properties acquired
through  foreclosures  or other  proceedings  or those  considered  in-substance
foreclosures,  and is stated  at the lower of cost or fair  value at the date of
acquisition. Write-downs to fair value at the time of acquisition are charged to
the  allowance for loan losses;  write-downs  and costs  incurred  subsequent to
acquisition  are charged to expense as incurred.  As of December  31, 1996,  the
Company  had  a  recorded   investment  of  $159,000  of  property  acquired  in
foreclosure  proceedings or under  agreements  with  delinquent  borrowers.  The
Company had no other real estate owned or  properties  acquired in  in-substance
foreclosures as of December 31, 1995.

Potential  Problem Loans. In addition to the loans presented  above,  management
has identified,  through its internal loan monitoring activities,  approximately
18 loans with stated  balances  totaling $2.8 million at December 31, 1996 which
exhibit a higher than  normal  credit  risk but are not  considered  impaired or
nonperforming  under the  definitions  presented  above.  These loans are not in
default but 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  or interest  payments.  The  ultimate
resolution  of these  credits is subject to changes in economic  conditions  and
other factors.  These loans are  monitored  closely to ensure that the Company's
position as a creditor is protected.

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

The  allowance  is  maintained  at a level  considered  adequate  to provide for
anticipated  loan  losses  based  on  past  loss  experience,  general  economic
conditions,  information  about specific  borrower  situations  including  their
financial position, collateral values, and other factors and estimates which are
subject to change over time.  Estimating  the risk of loss and amount of loss on
any loan is  subjective  and ultimate  losses may vary from  current  estimates.
These estimates are reviewed  periodically and, as adjustments become necessary,
they are reported in income through the provision for loan losses in the periods
in which they become  known.  The adequacy of the  allowance  for loan losses is
monitored  by  management  and  reported to the  Company's  board of  directors.
Although  management  believes that the allowance for loan losses is adequate to
absorb any losses on existing loans that may become uncollectible,  there can be
no  assurance  that the  allowance  will prove  sufficient  to cover actual loan
losses in the future. In addition,  various regulatory agencies,  as an integral
part of their  examination  process,  periodically  review the  adequacy  of the
Company's  allowance  for loan  losses.  Such  agencies  may require BNC to make
additional  provisions  to  the  allowance  based  upon  their  judgments  about
information available to them at the time of their examination.

The  following  table  summarizes,  for the periods  indicated,  activity in the
allowance for loan 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:


                                         25

<PAGE>



                        Analysis of Allowance for Loan Losses

                                                      Year ended December 31,
                                                  ------------------------------
                                                    1996       1995       1994
                                                  --------   --------   --------
                                                      (dollars in thousands)
Balance of allowance for loan losses at 
   beginning of period .......................... $  1,048   $  1,021   $    713
                                                  --------   --------   --------
Charge-offs:
   Commercial and industrial.....................      104        114         22
   Agricultural..................................       22        130         --
   Real estate-mortgage..........................       --         --         --
   Real estate-construction......................       --         --         --
   Consumer......................................        6          4          1
   Lease financing...............................      218         --         --
                                                  --------   --------   --------
      Total charge-offs..........................      350        248         23
                                                  --------   --------   --------
Recoveries:
   Commercial and industrial.....................        5        116        147
   Agricultural..................................      146         84         --
   Real estate-mortgage..........................        6          3         --
   Real estate-construction......................       --         --         --
   Consumer......................................       --          4          5
   Lease financing...............................       --         --         --
                                                  --------   --------   --------
      Total recoveries...........................      157        207        152
                                                  --------   --------   --------
Net (charge-offs) recoveries.....................    (193)       (41)        129
Provision for loan losses charged to operations..      739        168        179
Allowance attributable to FMB....................       --      (100) (1)     --
                                                  --------   --------   --------
Balance of allowance for loan losses at end 
   of period .................................... $  1,594   $  1,048   $  1,021
                                                  ========   ========   ========
Ratio of net (charge-offs) recoveries to 
   average loans.................................   (.11%)     (.03%)       .13%
                                                  ========   ========   ========
Average gross loans outstanding during 
   the period.................................... $171,780   $117,773   $ 98,749
                                                  ========   ========   ========
Ratio of allowance for loan losses to total 
   loans.........................................     .78%       .87%       .92%
                                                  ========   ========   ========
Ratio of allowance for loan losses to 
   nonperforming loans...........................  555.00%    218.00%    188.00%
                                                  ========   ========   ========

--------------------
 (1)  In  connection  with  the sale of FMB in  October  1995,  $100,000  of the
      Company's allowance for loan and lease losses, together with approximately
      $9.2  million of loans  originated  by FMB, was  transferred  to Community
      First Bancshares, Inc.


                                         26

<PAGE>



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

                                                            December 31,
                                ----------------------------------------------------------------------------
                                         1996                    1995                      1994
                                ----------------------   -----------------------   -------------------------
                                           Loans in                  Loans in                    Loans in
                                         category as a             category as a               category as a
                                 Amount    percentage     Amount     percentage     Amount      percentage
                                   of       of total        of        of total        of         of total
                               allowance   gross loans   allowance   gross loans   allowance    gross loans
                               ---------   -----------   ---------   -----------   ---------    -----------
                                                          (Dollars in thousands)
<S>                            <C>         <C>           <C>         <C>           <C>          <C>  
Commercial and industrial......$   721         47%       $   355         31%        $   265         35%
Agricultural...................    176         10%           318         15%            395         20%
Real estate-mortgage...........    306         24%           213         30%            267         30%
Real estate-construction.......     57          4%            41          5%             24          4%
Consumer.......................     97          9%            58          8%             52          8%
Leasing........................     63          6%            41          4%             --          --
Unallocated....................    174          0%            22          7%             18          3%
                               ---------   -----------   ---------   -----------   ---------    -----------
Total..........................$ 1,594        100%       $ 1,048        100%        $ 1,021        100%
                               =========   ===========   =========   ===========   =========    ===========

</TABLE>

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

The following tables set forth the distribution of BNC's average deposit account
balances  and average  cost of funds rates on each  category of deposits for the
periods indicated:

                                         27

<PAGE>

<TABLE>
<CAPTION>


                              Average Deposits and Deposit Costs

                                                                    For the Years Ended December 31,
                                        ----------------------------------------------------------------------------------
                                                    1996                       1995                        1994
                                        ---------------------------  --------------------------   -------------------------
                                                   Percent    Wgtd.             Percent   Wgtd.            Percent    Wgtd.
                                         Average     of       Avg.   Average      of      Avg.    Average    of       Avg.
                                         Balance   Deposits   Rate   Balance    Deposits  Rate    Balance  Deposits   Rate
                                        --------   --------   -----  --------   --------  -----   -------  --------   -----
<S>                                     <C>        <C>        <C>    <C>        <C>       <C>     <C>      <C>        <C>
Interest-bearing demand depoists......  $ 38,920     18.29%   2.58%  $ 38,941    23.01%   3.05%   $36,423   31.58%    2.72%
Savings deposits......................     8,498      3.99%   2.31%     7,598     4.49%   2.86%     7,187    6.23%    2.63%
Time deposits ("CDs"):
CDs under $100,000....................   124,682     58.61%   5.66%    93,983    55.53%   5.81%    50,259   43.58%    4.53%
CDs $100,000 and over.................    25,499     11.99%   5.82%    15,486     9.15%   6.08%     9,523    8.26%    5.12%
                                        --------   --------          --------   --------          -------  --------
Total time deposits...................   150,181     70.60%   5.69%   109,469    64.68%   5.84%    59,782   51.84%    4.63%
                                        --------   --------          --------   --------          -------  --------
Total interest-bearing deposits.......   197,599     92.88%   4.93%   156,008    92.18%   5.00%   103,392   89.65%    3.81%
Noninterest-bearing demand
   deposits...........................    15,147      7.12%     --     13,233     7.82%     --     11,942   10.35%      --
                                        --------   --------          --------   --------          -------  --------
Total deposits........................  $212,746    100.00%   4.58%  $169,241    100.0%   4.61%  $115,334  100.00%    3.42%
                                        ========   ========          ========   =======           =======  =======

</TABLE>

Average total deposits  increased  $43.5 million,  or 26%, to $212.7 million for
the year ended  December  31, 1996 as  compared  to $169.2  million for the year
ended  December 31, 1995.  The average total deposits of $169.2 million for 1995
represented  an  increase  of $53.9  million,  or 47%, as compared to the $115.3
million for 1994. In 1996,  average  noninterest-bearing  deposits  increased to
$15.1  million as compared to $13.2 million and $11.9 million for 1995 and 1994,
respectively.  Total average interest-bearing deposits in 1996 of $197.6 million
represented  an  increase  of $41.6  million,  or 27%, as compared to the $156.0
million in 1995.  The $156.0  million in 1995  represented  an increase of $52.6
million,  or 51%,  as  compared  to  1994's  $103.4  million.  The  1995  branch
acquisition and sale of FMB (see Note 2 to the Consolidated Financial Statements
included  under Item 7 below),  coupled  with the  internal  deposit  growth the
Company has generated,  have impacted the amount,  composition and cost of BNC's
deposit portfolio (see "Results of Operations -- Net Interest Income").

Since 1994,  earning asset growth has outpaced core deposit growth  resulting in
the use of more  brokered  and out of market  certificates  of deposit and other
borrowed  funds (see below).  As of December 31, 1996, BNC held a total of $11.5
million of brokered  certificates  of deposit.  Under current FDIC  regulations,
only  "well-  capitalized"  financial  institutions  may  fund  themselves  with
brokered deposits without prior approval of regulators.  BNC -- North Dakota and
BNC -- Minnesota were both well  capitalized at December 31, 1996 (See Note 9 to
the Consolidated Financial Statements included under Item 7 below).

Time  deposits in  denominations  of $100,000 and more totaled  $39.7 million at
December 31, 1996 as compared to $16.6 million and $11.7 million at December 31,
1995 and 1994,  respectively.  The  following  table  sets  forth the amount and
maturities of time deposits of $100,000 or more as of December 31, 1996:


                       Time Deposits of $100,000 and Over
                                 (in thousands)
               Maturing in:
               3 months or less....................$   15,846
               Over 3 months through 6 months......    10,448
               Over 6 months through 12 months.....     8,911
               Over 12 months......................     4,520
                                                   ----------
                  Total............................$   39,725
                                                   ==========

                                       28

<PAGE>

BNC uses  short-term  borrowings  to support  its asset base.  These  borrowings
include  federal  funds  purchased  and U.S.  Treasury  tax and loan note option
accounts,  securities sold under agreements to repurchase,  and FHLB borrowings.
At December 31, 1996,  short term  borrowings  were $11.4 million or 4% of total
liabilities  as compared to $1.0 million or 1% of total  liabilities at December
31, 1995 and $7.4 million or 5% of total liabilities at December 31, 1994. Short
term  borrowings  averaged $14.5 million in 1996 as compared to $7.0 million and
$6.0 million in 1995 and 1994, respectively.

The following  table provides a summary of the Company's  short term  borrowings
including period end  outstandings,  average  balances,  maximum  borrowings and
average  borrowings  outstanding  and weighted  average  interest  rates for the
periods presented:

                              Short-Term Borrowings
                                                       Year ended December 31,
                                                    ----------------------------
                                                      1996       1995      1994
                                                    -------   --------   -------
                                                       (dollars in thousands)
Short-term borrowings outstanding at period end.....$11,437   $  1,000   $ 7,360
Weighted average interest rate at period end........  5.60%      6.69%     4.35%
Maximum month-end balance during the period.........$23,416   $ 34,648   $ 8,952
Average borrowings outstanding for the period.......$14,532   $  7,029   $ 6,033
Weighted average interest rate for the period.......  5.60%      5.74%     3.15%


As of December 31, 1996, the Company's long-term debt included a $3 million term
loan  and $7  million  revolving  line of  credit  from  Firstar.  $615,000  was
outstanding on a $2 million revolving line of credit with Bank Windsor (see Note
7 to the Consolidated Financial Statements included under Item 7 below). BNC was
in compliance with all related debt covenants at December 31, 1996.

During February 1997, the Company's loan agreements with Firstar were amended to
increase the revolving  line of credit to $12 million and to extend the maturity
of the term loan and line of credit to February 1998.

The  Company's  increased  usage  of  long-term  borrowings  ($10.6  milliion at
December 31, 1996 as compared to $3.4 million  and $3.6  million at December 31,
1995 and 1994, respectively)  has been  primarily  for  the  purpose of  funding
the asset based lending at BNC Financial. As of December 31, 1996, BNC Financial
had outstanding loans of $5.6 million. Management anticipates loan growth at BNC
Financial  could approximate  $15 to $25 million  during  1997.  Funding for the
projected  loan growth  will be provided  through  additional  use of  the  Bank
Windsor  revolving line of credit, the increase in the Firstar revolving line of
credit noted above and  other  fund  raising  options the  Company is  presently
considering.

Capital   Resources  and  Expenditures.   BNC's  management   actively  monitors
compliance with bank regulatory capital  requirements,  including risk-based and
leverage  capital  measures.  Under the  risk-based  capital  method of  capital
measurement,  the ratio  computed is dependent on the amount and  composition of
assets  recorded  on the  balance  sheet,  and the  amount  and  composition  of
off-balance  sheet  items,  in addition  to the level of capital.  Note 9 to the
Consolidated Financial Statements included under Item 7 below includes a summary
of the risk-based and leverage capital ratios of BNC and its subsidiary banks as
of December 31, 1996 and 1995.

As indicated under  "Description of Property" under Item 2 above,  the Company's
newly acquired office building in Bismarck is currently  undergoing  remodeling.
The initial cost of the building was $525,000 and expected cost of remodeling is
approximately  $250,000.  Construction  on a branch office in north  Bismarck is
expected to be  completed  during  1997.  Architects  estimate  the cost of this
facility to  approximate $600,000. The cost of these two projects will be funded
from current operations.

                                         29

<PAGE>



Liquidity

BNC actively  manages its  liquidity  position to maintain  sufficient  funds to
respond to the needs of depositors and  borrowers,  as well as to take advantage
of  earnings  enhancement  opportunities.  In addition  to  liquidity  from core
deposit   growth,   together  with   repayments  and  maturities  of  loans  and
investments,  BNC utilizes brokered deposits,  sells securities under agreements
to repurchase,  and borrows  overnight  federal funds.  BNC -- North Dakota is a
member of the FHLB,  which affords the bank the  opportunity  to borrow funds in
terms ranging from  overnight to 10 years and beyond.  Borrowings  from the FHLB
are  collateralized  by the bank's first mortgage  residential loans and various
securities from the Company's investment portfolio.

In order to monitor  its  position,  BNC's  management  measures  its  liquidity
position regularly.  Key factors that determine the Company's liquidity are: the
reliability  or stability of its deposit  base;  the maturity  structure and the
pledged/nonpledged  status of its investments;  and potential loan demand. BNC's
liquidity  management  system  divides  the balance  sheet into  liquid  assets,
illiquid  assets,  reliable funds,  and volatile  funds.  The four variables and
other key factors such as expected  loan demand,  are tied together to provide a
measure of the Company's liquidity.  Management has a targeted range and manages
its operations such that these targets can be achieved.

Cash inflows from operating  activities exceeded operating cash outflows by $1.8
million  in  1996,  $2.6  million  in 1995 and $3.4  million  in 1994.  Interest
received net of interest paid is the principal  source of operating cash inflows
in each of these periods.

Net cash  outflows  from  investing  activities  were  $53.1  million in 1996 as
compared  to $86.2  million  in 1995 and  $24.8  million  in 1994.  Loan  growth
accounted  for the majority of the cash  outflows in 1996 at $82.7 million while
investment activities resulted in a net cash inflow of $34.9 million. Investment
activities were the largest component of cash outflow from investing  activities
in  1995  as  the  Company  invested  the  funds  acquired  in the  1995  branch
acquisition (see Note 2 to the Consolidated  Financial Statements included under
Item 7 below).  The cash payment  (outflow) for the acquisition was $5.4 million
and internal loan growth  produced cash  outflows of $20.3  million.  These cash
outflows  were offset  somewhat by cash  inflows of $16.2  million for loans and
investments and $3.8 million in sales proceeds associated with the FMB sale (see
Note 2 to the Consolidated  Financial  Statements  included under Item 7 below).
Growth in loans was the most  significant  source  of cash  outflows  in 1994 at
$26.5 million.

Net cash  inflows  from  financing  activities  were $46.4  million in 1996,  as
compared  to $89.4  million  in 1995 and $21.5  million in 1994.  In 1996,  cash
inflows  of  $7.1  million  and  $21.6  million   resulted  from   increases  in
noninterest-bearing and low cost deposits and time deposits,  respectively. Cash
inflows of $10.4 million and $9.9 million  resulted from the net change in short
term  borrowings  and proceeds  from long term  borrowings,  respectively.  Cash
outflows due to repayments  of long term  borrowings  totaled $2.6 million.  The
most  significant  cash inflow from  financing  activities  in 1995 was the time
deposits of $86.6 million and the  noninterest-bearing  and low cost deposits of
$18.1  million  acquired  in the branch  acquisition.  Internal  deposit  growth
contributed  $20.9 million of cash inflows while the  Company's  initial  public
offering generated $9.7 million of cash inflows.  These cash inflows were offset
by cash  outflows of $6.4 million  from the net change in short term  borrowings
and $39.3 million from the sale of deposits in the FMB sale.  Primary sources of
cash  inflow in 1994 were  increases  in time  deposits of $18.2  million,  $5.1
million  caused by the net change in short term  borrowings  and $1.5 million in
proceeds from long term  borrowings.  These were offset by cash outflows of $2.4
million  due to  decreases  in  noninterest-bearing  and low cost  deposits  and
$550,000 in repayments on long term debt.


                                         30

<PAGE>



Asset/Liability Management

BNC's  asset/liability  management  objectives  are to  manage,  to  the  degree
possible,  its  exposure  to  interest  rate risk over both a one year  planning
period and a  longer-term  strategic  period  and,  at the same time,  provide a
stable and  steadily  increasing  flow of net  interest  income.  The  Company's
primary  measurement  of  interest  rate  risk is  earnings  at  risk,  which is
determined  through  computerized  simulation  modeling.  The modeling estimates
changes in net  interest  income in response to increases or decreases in market
interest  rates.  The  model  uses the  rates and  maturities  of the  Company's
existing  interest-earning  assets and interest-bearing  liabilities and revises
each based on how the market  interest  rates move and how the specific  Company
product would respond to the rates.  The  structuring  of the Company's  balance
sheet  is  determined  by  ensuring  that  the  earnings  at risk do not  exceed
predetermined  maximum  limits.  The Company's  policy requires that earnings at
risk do not exceed 10% for each 100 basis  point  increase or decrease in rates.

The Company  also uses  static gap  analysis to monitor  interest  rate risk.  A
static gap matrix is prepared  reflecting  repricing  and  maturity  differences
between interest-earning assets and interest-bearing liabilities within specific
time periods. The Company's gap position (see chart below) is asset sensitive in
the  immediate  short term (0 to 3 months),  liability  sensitive in the four to
twelve month timeframe,  and asset sensitive in the longer term (over one year).
Asset sensitive means net interest margin is impacted  positively during periods
of rising  interest  rates and  negatively  during  periods of falling  interest
rates.  Liability  sensitive  means net interest  margin is impacted  negatively
during periods of rising rates and  positively  during periods of falling rates.
During periods of rising or falling rates,  the negative impacts of rate changes
are minimized through restructuring of the Company's balance sheet. For example,
in an asset sensitive position,  management's  response to increases in interest
rates is to  extend  funding  to  lengthen  liabilities  and to  modify  product
offerings to shorten asset maturities.  In other words, in expectation of rising
rates,  BNC's  marketing  and sales force would  emphasize  floating rate loans,
including  home equity  loans,  adjustable  rate  mortgages  and  variable  rate
commercial loans and longer term certificates of deposit and demand deposits. In
addition,  wholesale  funding such as funding  through the FHLB and/or  brokered
certificates of deposit would be extended in term.

The following table sets forth information  concerning interest rate sensitivity
of BNC's consolidated assets and liabilities as of December 31, 1996. Assets and
liabilities are classified by the earliest possible  repricing date or maturity,
whichever comes first.


                                         31

<PAGE>



                          Interest Sensitivity Gap Analysis

                                        Estimated maturity or repricing at 
                                              December 31, 1996
                                   ---------------------------------------------
                                      0-3     4-12      1-5     Over
                                    months   months    years   5 Years   Total
                                   -------- --------  -------  -------   -------
                                              (dollars in thousands)
Interest-earning assets:
   Cash equivalents............... $    865   $   --    $  --    $  --   $   865
   Federal funds sold.............    6,900       --       --       --     6,900
   Investment securities avail- 
      able for sale (1)...........    9,373   15,035   32,837    2,246    59,491
   Fixed rate loans (2)...........   11,024   19,580   46,916   11,434    88,954
   Floating rate loans (2)........  103,481    7,487    3,412       --   114,380
                                   -------- --------  -------  -------   -------
      Total interest-earning 
         assets................... $131,643 $ 42,102  $83,165  $13,680  $270,590
                                    ======== ========  =======  ======= ========
Interest-bearing liabilities:
   NOW and money market accounts.. $ 43,627 $   --    $  --    $  --    $ 43,627
   Savings........................    8,856       --       --       --     8,856
   Time deposits under $100,000...   29,479   63,945   30,261    1,659   125,344
   Time deposits $100,000 and 
      over........................   15,846   19,359    4,520       --    39,725
   Borrowings.....................   11,437      615   10,000       --    22,052
                                   -------- --------  -------  -------  --------
      Total interest-bearing 
         liabilities.............. $109,245 $ 83,919  $44,781  $ 1,659  $239,604
                                   ======== ========  =======  =======  ========
Interest rate gap................. $ 22,398 $(41,817) $38,384  $12,021  $ 30,986
                                   ======== ========  =======  =======  ========
Cumulative interest rate gap at 
   December 31, 1996.............. $122,398 $(19,419) $18,965  $30,986
                                   ======== ========  =======  =======
Cumulative interest rate gap to 
   total assets...................    7.76%  (6.73)%    6.57%   10.74%

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

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

(2)Loans are stated gross of the allowance for loan losses and are placed in the
   earliest timeframe in which maturity or repricing may occur.


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

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


                                         32

<PAGE>



Effects of Inflation

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

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

Recent Accounting Pronouncements

Notes 1 and 15 to the Consolidated  Financial  Statements  included under Item 7
below include discussions of recent accounting  pronouncements applicable to the
activities and financial reporting of BNC.


Item 7.    Financial Statements


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
Consolidated Financial Statements:

Report of Independent Public Accountants......................................34

Consolidated Statements of Financial Condition - December 31, 1996 and 1995...35

Consolidated Statements of Income - the years ended December 31, 
   1996, 1995 and 1994 .......................................................36

Consolidated Statements of Stockholders' Equity - the periods ended 
   December 31, 1996, 1995 and 1994...........................................37

Consolidated Statements of Cash Flows - the years ended December 31, 
   1996, 1995 and 1994........................................................38

Notes to Consolidated Financial Statements....................................39


                                         33

<PAGE>






                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To BNCCORP, Inc.:

We have audited the accompanying consolidated  statements of financial condition
of BNCCORP,  Inc. (a Delaware  corporation)  and Subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income,  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31,  1996.  These  financial  statements  are the  responsibility  of  BNCCORP's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of BNCCORP,  Inc. and
Subsidiaries  as of  December  31,  1996  and  1995,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

                                              ARTHUR ANDERSEN LLP


Minneapolis, Minnesota,
   February 21, 1997

                                         34

<PAGE>



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



                         ASSETS                               1996       1995
                                                           ----------  ---------
CASH AND DUE FROM BANKS................................... $   6,360   $ 11,259
FEDERAL FUNDS SOLD.......................................      6,900      2,950
SECURITIES AVAILABLE FOR SALE (Note 3)...................     59,491     94,416
LOANS, net (Note 4)......................................    201,403    119,635
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, 
   net (Note 5)..........................................      6,657      5,778
ACCRUED INTEREST RECEIVABLE..............................      2,442      1,963
OTHER ASSETS.............................................      1,440        439
COST IN EXCESS OF NET ASSETS ACQUIRED, net...............      3,865      3,959
                                                          ----------  ---------
                                                          $  288,558  $ 240,399
                                                          ==========  =========
           LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
   Noninterest-bearing................................... $   22,218  $  16,874
   Interest-bearing--
     Savings, NOW and money market.......................     52,483     50,732
     Time deposits over $100,000.........................     39,725     16,576
     Other time deposits.................................    125,344    126,866
NOTES PAYABLE (Note 7)...................................     22,052      4,354
OTHER LIABILITIES........................................      4,101      4,110
                                                          ----------  ---------
         Total liabilities...............................    265,923    219,512
                                                          ----------  ---------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 14) 
STOCKHOLDERS' EQUITY (Note 8):
   Preferred stock, $.01 par value, 2,000,000 shares 
      authorized; no shares issued or outstanding........       --          --
   Common stock, $.01 par value, 10,000,000 shares 
      authorized; 2,364,100 shares issued, 
      2,338,720 shares outstanding.......................         23         23
   Capital surplus.......................................     13,768     13,776
   Retained earnings.....................................      9,017      7,170
   Treasury stock (25,380 shares)........................       (216)      (216)
   Unrealized holding gain on securities available 
      for sale, net of income tax effects of $16 
      and $86 (Note 3)...................................         43        134
                                                          ----------  ---------
         Total stockholders' equity......................     22,635     20,887
                                                          ----------  ---------
                                                            $288,558   $240,399
                                                          ==========  =========

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

                                         35

<PAGE>



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

                                                     1996      1995     1994
                                                   --------   ------   -------
INTEREST INCOME:
   Interest on loans...............................$ 16,383   $11,285  $8,842
   Interest on investment securities--
   U.S. Treasury and agency........................     770      506       351
   State and municipal.............................      70      134       100
   Other...........................................   3,734    3,358       970
                                                   --------   ------   -------
         Total interest income.....................  20,957   15,283    10,263
                                                   --------   ------   -------
INTEREST EXPENSE:
   Deposits........................................   9,738    7,802     3,944
   Notes payable...................................   1,369      740       467
                                                   --------   ------   -------
         Total interest expense....................  11,107    8,542     4,411
                                                   --------   ------   -------
         Net interest income.......................   9,850    6,741     5,852
PROVISION FOR LOAN LOSSES (Note 4).................     739      168       179
                                                   --------   ------   -------
NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES.....................................   9,111    6,573     5,673
                                                   --------   ------   -------
NONINTEREST INCOME:
   Fees on loans...................................   1,276      559       650
   Service charges.................................     418      401       259
   Rental income...................................      34       37       126
   Net gain (loss) on sales of securities..........      19     (18)        28
   Other...........................................     349      757       336
                                                   --------   ------   -------
         Total noninterest income..................   2,096    1,736     1,399
                                                   --------   ------   -------
NONINTEREST EXPENSE:
   Salaries and employee benefits..................   4,311    3,352     2,990
   Depreciation and amortization...................     980      619       444
   Occupancy.......................................     675      413       305
   Office supplies, telephone and postage..........     505      521       227
   Professional services...........................     360      246       236
   Marketing and promotion.........................     352      424       211
   FDIC and other assessments......................     239      296       308
   Other...........................................     791      640       481
                                                   --------   ------   -------
         Total noninterest expense.................   8,213    6,511     5,202
                                                   --------   ------   -------
INCOME BEFORE TAXES................................   2,994    1,798     1,870
INCOME TAXES (Note 6)..............................   1,147      641       679
                                                   --------   ------   -------
NET INCOME.........................................$  1,847   $1,157   $1,191
                                                   ========   ======   =======
EARNINGS PER SHARE.................................$    .79   $ .67    $  .98
                                                   ========   ======   =======

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

                                         36

<PAGE>



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

<TABLE>
<CAPTION>

                                                                                           Unrealized
                                                                                           Gain (Loss)
                                                                                          on Securities
                                           Common Stock     Capital   Retained  Treasury   Available
                                        Shares     Amount   Surplus   Earnings    Stock    for Sale    Total
                                       ------------------   -------   --------   ------    --------   -------
<S>                                    <C>         <C>      <C>       <C>        <C>       <C>        <C>
BALANCE, December 31, 1993............ 1,238,100   $   12   $ 4,070   $  4,822   $   --    $     --   $ 8,904
   Cumulative effect of change in
     accounting for securities
     available for sale ..............      --         --       --         --        --        (110)     (110)
   Purchase of treasury stock.........      --         --       --         --      (216)         --      (216)
   Net income.........................      --         --       --       1,191       --          --     1,191
   Change in unrealized holding loss
     on securities available for 
     sale, net of income taxes........      --         --       --         --        --        (229)     (229)
                                       ---------   ------   -------   --------   ------    --------   -------
BALANCE, December 31, 1994............ 1,238,100       12     4,070      6,013     (216)       (339)    9,540
   Net income.........................      --         --       --       1,157       --          --     1,157
   Change in unrealized holding gain
     on securities available for 
     sale, net of income taxes........      --         --       --         --        --         473       473
   Shares issued...................... 1,126,000       11     9,706        --        --          --     9,717
                                       ---------   ------   -------   --------   ------    --------   -------
BALANCE, December 31, 1995............ 2,364,100       23    13,776      7,170     (216)        134    20,887
   Net income.........................      --         --        --      1,847       --          --     1,847
   Change in unrealized holding gain
     on securities available for 
     sale, net of income taxes........      --         --        --        --        --         (91)      (91)
   Initial public offering costs......      --         --        (8)       --        --          --        (8)
                                       ---------   ------   -------   --------   ------    --------   -------
BALANCE, December 31, 1996............ 2,364,100   $   23   $13,768   $  9,017   $ (216)   $     43   $ 22,635
                                       =========   ======   =======   ========   ======    ========   ========

</TABLE>




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


                                       37

<PAGE>



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

                                                       1996      1995    1994
                                                     -------   -------  -------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income......................................  $ 1,847   $ 1,157  $ 1,191
   Adjustments to reconcile net income to net 
     cash provided by operating activities --
      Provision for loan losses....................      739       168      179
      Depreciation and amortization................      499       377      348
      Amortization of intangible assets............      481       242       96
      Proceeds from loans recovered................      157       207      152
      Change in accrued interest receivable and 
         other assets..............................   (1,866)     (935)     662
      (Gain) loss on sale of bank premises and 
         equipment.................................      (10)       23       --
      (Gain) loss on sale of securities............      (19)       18      (28)
      Gain on sale of Farmers & Merchants Bank 
         of Beach (Note 2).........................       --      (316)      --
      Change in other liabilities..................       (9)    1,676      766
      Originations of loans to be participated.....  (45,238)  (44,231) (16,396)
      Proceeds from participations of loans........   45,238    44,231   16,396
                                                      -------   -------  -------
         Net cash provided by operating activities.    1,819     2,617    3,366
                                                      -------   -------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net change in federal funds sold................   (3,950)   (2,900)     875
   Purchases of investment securities..............  (22,575) (138,385) (20,033)
   Proceeds from sales of investment securities....   48,700    89,143   17,711
   Proceeds from maturities of investment 
      securities...................................    8,727   (26,623)   3,483
   Net increase in loans...........................  (82,664)  (20,272) (26,530)
   Additions to premises, leasehold improvements 
      and equipment................................   (1,438)   (1,973)    (345)
   Proceeds from sale of Farmers & Merchants Bank 
      of Beach (Note 2)............................       --     3,811       --
   Payment for branch acquisition (Note 2).........       --    (5,357)      --
   Loans sold with Farmers & Merchants Bank of 
      Beach (Note 2)...............................       --     9,228       --
   Investments sold with Farmers & Merchants 
      Bank of Beach (Note 2).......................       --     7,014       --
   Proceeds from sale of premises and equipment....       70       112       --
                                                      -------  -------  -------
         Net cash used in investing activities.....   (53,130) (86,202) (24,839)
                                                      -------  -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase (decrease) in demand, savings,
     NOW and money market accounts ................     7,095    8,960   (2,399)
   Net increase in time deposits...................    21,627   11,964   18,195
   Net increase (decrease) in short-term 
     borrowings....................................    10,437   (6,360)   5,109
   Repayments of long-term borrowings..............    (2,604)    (716)    (550)
   Proceeds from long-term borrowings..............     9,865      500    1,486
   Demand, savings, NOW and money market accounts
     acquired through branch acquisition (Note 2)..        --   18,131       --
   Demand, savings, NOW and money market 
     accounts sold with Farmers & Merchants 
     Bank of Beach (Note 2)........................        --  (14,520)      --
   Time deposits acquired through branch 
     acquisition (Note 2)..........................        --   86,639       --
   Time deposits sold with Farmers & Merchants 
     Bank of Beach (Note 2)........................        --  (24,775)      --
   Purchase of treasury stock......................        --       --     (216)
   Proceeds from issuance of stock (Note 1)........        --    9,717       --
   Stock offering costs............................        (8)      --       --
   Dividends paid to minority stockholders.........        --      (92)     (87)
                                                      -------  -------  -------
         Net cash provided by financing activities.    46,412   89,448   21,538
                                                      -------  -------  -------
NET INCREASE (DECREASE) IN CASH AND CASH 
     EQUIVALENTS...................................    (4,899)   5,863       65
CASH AND CASH EQUIVALENTS, beginning of year.......    11,259    5,396    5,331
                                                      -------  -------  -------
CASH AND CASH EQUIVALENTS, end of year.............   $ 6,360  $11,259  $ 5,396
                                                      =======  =======  =======
SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid...................................   $11,347  $ 6,383  $ 4,156
                                                      =======  =======  =======
   Income taxes paid...............................   $   934  $   615  $   309
                                                      =======  =======  =======

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

                                       38

<PAGE>



                         BNCCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 1996 and 1995


1. Background and Significant Accounting Policies:

BNCCORP, Inc. (BNCCORP) is a bank holding company incorporated in Delaware.  The
following is  background  information  and a summary of  significant  accounting
policies  followed  by BNCCORP  and its  subsidiaries  in the  determination  of
financial position, results of operations and cash flows.

Organization

The consolidated  financial  statements  include the accounts of BNCCORP and its
subsidiaries.  All  significant  intercompany  accounts have been  eliminated in
consolidation.  BNCCORP  was  initially  incorporated  under  the name of Linton
Bancshares  and had subsidiary  banks in Linton (First  National Bank of Linton)
and Bismarck (BNC National Bank of Bismarck),  North Dakota.  An affiliated bank
holding  company,  Farmers  &  Merchants  Bancshares,  had its  subsidiary  bank
(Farmers & Merchants Bank of Beach--FMB) in Beach, North Dakota.  These two bank
holding  companies were merged  effective  January 1, 1994. This transaction was
recorded  in a manner  similar  to a  pooling  of  interests  due to the  common
ownership of BNCCORP and Farmers & Merchants Bancshares. In August 1995, the two
BNCCORP  subsidiaries,  BNC National Bank of Bismarck and First National Bank of
Linton, were merged. Also in August 1995, BNC National Bank of Bismarck acquired
seven North Dakota branches from First Bank System,  Inc.  (former  Metropolitan
Federal Bank,  fsb  branches).  In October 1995,  FMB was sold. In January 1996,
BNCCORP was  granted a charter for BNC  National  Bank of  Minnesota  located in
Minneapolis,  Minnesota.  In May 1996,  BNCCORP  acquired  a nonbank  commercial
finance company, BNC Financial Corporation located in St. Cloud,  Minnesota (see
Note 2).

As of December 31, 1996,  BNCCORP's wholly owned  subsidiaries were BNC National
Bank of Bismarck  and Bismarck  Properties,  Inc.  operating  primarily in North
Dakota,  and BNC  National  Bank of  Minnesota  and  BNC  Financial  Corporation
operating primarily in Minnesota.

During 1995,  BNCCORP sold 1,106,000 shares of common stock  (including  106,000
shares sold pursuant to the  underwriters'  overallotment  option) at $10.00 per
share  in an  initial  public  offering.  Net  proceeds  from  the  offering  of
approximately $9,717,000 were received by BNCCORP. A portion of the proceeds was
used in January 1996 to capitalize  BNC National  Bank of Minnesota  (see above)
and to inject  additional  capital into BNC National Bank of Bismarck,  with the
remaining proceeds used for working capital and general corporate  purposes.  In
addition,  20,000  shares of  restricted  stock were  issued to various  company
managers and employees under BNCCORP's stock incentive plan (see Note 15).

Regulatory Environment

BNCCORP and its subsidiary banks are subject to regulations of certain state and
federal agencies,  including periodic examinations by those regulatory agencies.
BNCCORP and its subsidiary banks are also subject to minimum  regulatory capital
requirements.  At December 31,  1996,  capital  levels  exceed  minimum  capital
requirements (see Note 9).

Securities

BNCCORP follows the accounting  prescribed in Statement of Financial  Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities"  (SFAS 115).  SFAS 115  addresses  accounting  and reporting for all
investments  in debt and  equity  securities.  Under SFAS 115,  investments  are
classified into three categories and accounted for as follows:

                                         39

<PAGE>



            Held-to-Maturity

            This category includes debt securities that BNCCORP has the positive
            intent  and  ability to hold to  maturity.  All  securities  in this
            category are recorded at amortized  historical cost.  BNCCORP had no
            securities in the held-to-maturity portfolio at December 31, 1996 or
            1995.

            Trading Securities

            Trading  securities  are  purchased  and  sold  for the  purpose  of
            generating  profits on short-term  differences  in market prices and
            are  recorded at fair value,  with any  unrealized  gains and losses
            being reflected in earnings. BNCCORP holds no securities for trading
            purposes.

            Available-for-Sale

            Available-for-sale   securities  do  not  meet  the   classification
            criteria for held-to-maturity or trading securities and are recorded
            at fair value,  with any unrealized gains and losses being reflected
            as a separate component of stockholders' equity, net of tax effects.

Both  amortization  and  accretion are computed  using the  estimated  effective
interest  method.  Gains or losses on sales of securities  are  recognized  upon
disposal.  The adjusted cost of specific  securities sold is used to compute the
gain or loss on sale.

Premises, Leasehold Improvements and Equipment

Premises,  leasehold  improvements  and  equipment  are  reported  at cost  less
accumulated  depreciation  and  amortization.  Depreciation and amortization for
financial   reporting  purposes  is  charged  to  operating  expense  using  the
straight-line method over the estimated useful lives of the assets.  Approximate
estimated  useful lives are up to 40 years for  buildings and three to ten years
for furniture  and  equipment.  Leasehold  improvements  are amortized  over the
shorter  of the lease  term or the  estimated  useful  life of the  improvement.
Accelerated  methods of depreciation  and  amortization  are used for income tax
purposes.

Other Real Estate Owned

Other  real  estate  owned,  which  is  included  in  other  assets,  represents
properties   acquired  through   foreclosures  or  other  proceedings  or  those
considered in-substance foreclosures, and is stated at the lower of cost or fair
value  at the  date of  acquisition.  Write-downs  to fair  value at the time of
acquisition are charged to the allowance for loan losses;  write-downs and costs
incurred subsequent to acquisition are charged to expense. At December 31, 1996,
BNCCORP had a recorded investment in properties acquired through foreclosures of
$159,000. There were no properties acquired through foreclosures or in-substance
foreclosures recorded at December 31, 1995.

Loans and Allowance for Loan Losses

Loans are  stated at the amount of unpaid  principal  net of  unearned  fees and
costs  and an  allowance  for loan  losses.  The  allowance  for loan  losses is
established  through  a  provision  for loan  losses  charged  to  expense.  The
provision  for loan losses is based upon  BNCCORP's  past loan loss  experience,
current  economic  conditions  and an  evaluation  of the  loan  portfolio.  The
allowance for loan losses is increased by the provision for loan losses  charged
to expense and is reduced by net loan  charge-offs.  Current and future economic
developments or other factors may have a significant  impact on the market value
of real estate and other collateral.  Accordingly, ultimate losses may vary from
current  estimates.  These  estimates  are  reviewed  in  detail  quarterly  and
adjustments, as they become necessary, are reported in the results of operations
in the  periods  in which  they  become  known.  In  management's  opinion,  the
allowance for loan losses is sufficient to adequately provide for potential loan
losses.

                                       40

<PAGE>



Statement of Financial  Accounting  Standards No. 114,  "Accounting by Creditors
for  Impairment  of a Loan" (SFAS 114),  and  Statement of Financial  Accounting
Standards No. 118,  "Accounting  by Creditors for  Impairment of a  Loan--Income
Recognition and Disclosures" (SFAS 118), effective January 1, 1995, modified the
accounting by creditors for impairment of a loan and  in-substance  foreclosure,
among other things. Adoption of these standards has not had a material impact on
BNCCORP's consolidated financial statements.

Loans,  including impaired loans, are generally placed on a nonaccrual basis for
recognition of interest  income when, in the opinion of management,  uncertainty
exists as to the ultimate  collection  of  principal or interest.  At the time a
loan is placed on nonaccrual  status,  accrued but  uncollected  interest income
applicable  to the current  period is reversed  against  interest  income of the
current period.  Accrued but uncollected  interest income applicable to previous
periods is charged  against  the loan loss  reserve  as BNCCORP  provides  for a
reserve  for  accrued  interest.  While  a loan  is  classified  as  nonaccrual,
collections  of principal and interest are  generally  applied as a reduction to
principal outstanding.

Loans may be returned to accrual status when all principal and interest  amounts
contractually  due are  reasonably  assured of  repayment  within an  acceptable
period of time, and there is a sustained period of repayment  performance by the
borrower, in accordance with the contractual terms of principal and interest.

Loan Fee Income

BNCCORP  recognizes  loan fees and  certain  direct  origination  costs over the
estimated  life of the loan,  utilizing a method that results in a constant rate
of return.  Most of the loans  originated  by BNCCORP are  short-term  loans.  A
significant portion of BNCCORP's loan fee income is derived from loans which are
originated and subsequently sold. Such fees are recognized in income at the date
of sale.

Mortgage Servicing Rights and Transfers of Financial Assets

Statement of Financial  Accounting  Standards No. 122,  "Accounting for Mortgage
Servicing Rights" (SFAS 122),  effective January 1, 1996,  requires an entity to
record  an asset for  mortgage  servicing  rights  when it sells  mortgages  and
retains the servicing, and then amortize this asset over the period during which
servicing income is expected to be received.  The capitalized mortgage servicing
rights must be assessed for impairment  based on the current fair value of those
rights and such  impairment  must be recognized  through a valuation  allowance.
Adoption  of  this  standard  has  not  had  a  material   effect  on  BNCCORP's
consolidated financial statements.

Statement of Financial  Accounting  Standards No. 125, "Accounting for Transfers
and Servicing of Financial  Assets and  Extinguishments  of  Liabilities"  (SFAS
125), effective January 1, 1997, supersedes SFAS 122 and establishes  accounting
methods aimed at ensuring that entities  recognize  only assets  controlled  and
liabilities   incurred  and  derecognize  assets  only  when  control  has  been
surrendered and liabilities only when they have been extinguished.  Statement of
Financial  Accounting  Standards  No. 127,  "Deferral of the  Effective  Date of
Certain  Provisions of FASB Statement No. 125" (SFAS 127),  effective January 1,
1997, defers certain  provisions of SFAS 125 until January 1, 1998.  Adoption of
these  standards  is  not  expected  to  have a  material  effect  on  BNCCORP's
consolidated financial statements.

Cost in Excess of Net Assets Acquired

Cost in excess of net assets  acquired  represents the premium paid for deposits
assumed and goodwill. Premiums paid for deposits assumed totaling $4,022,000 are
being amortized over their estimated lives of ten years using the  straight-line
method.  Accumulated amortization was $814,000 as of December 31, 1996. Goodwill
totaling $826,000 represents amounts paid for subsidiaries in excess of the fair
value of  identifiable  assets.  Goodwill is being  amortized over its estimated
useful  life of 15 to 25  years  using  the  straight-line  method.  Accumulated
amortization was $169,000 as of December 31, 1996.


                                         41

<PAGE>



Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of"
(SFAS 121), effective January 1, 1996,  established accounting standards for the
impairment  of  long-lived  assets.  Adoption  of  this  standard  has not had a
material impact on BNCCORP's consolidated financial statements.

Income Taxes

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

Deferred  income taxes are reported for temporary  differences  between items of
income or expense reported for financial  statement  purposes and those reported
for income tax purposes.  The  differences  relate  primarily to  differences in
accounting for loan losses,  depreciation timing  differences,  unrealized gains
and losses on  investment  securities  and leases which are treated as operating
leases for tax purposes and capital leases for financial statement purposes.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks.

Earnings Per Share

Earnings  per common  share are computed by dividing net profits by the weighted
average  number of common  and  common  equivalent  shares of stock  outstanding
during the period. Primary and fully diluted earnings per share are the same.

The  weighted  average  number of common and common  equivalent  shares of stock
utilized in the per share computations was 2,338,720, 1,720,030 and 1,218,909 in
1996, 1995 and 1994, respectively.

Use of Estimates in Financial Statements

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

2. Acquisitions and Divestitures:

In August 1995,  BNCCORP  acquired  seven North Dakota  branches from First Bank
System, Inc. (First Bank--former  Metropolitan Federal Bank, fsb branches).  The
purchase price for the seven branches was approximately $5,357,000. The purchase
was funded with  proceeds  from the sale of common  stock in  BNCCORP's  initial
public offering.  The acquisition was accounted for using the purchase method of
accounting.  One of the seven  branches  was sold in October 1995 along with FMB
(see below). The resulting premiums paid for deposits of $3,497,000 and goodwill
of $112,000 are being amortized over 10 years and 15 years, respectively.

In October 1995,  BNCCORP sold FMB to Community First  Bancshares,  Inc. BNCCORP
received approximately $3.8 million for its 89.6% interest,  resulting in a gain
of  $316,000.  Proceeds  of  approximately  $238,000  were also  received by two
minority  shareholders of FMB who are also officers and directors of BNCCORP. As
part of the  sale,  BNCCORP  purchased  $17.7  million  in loans  which had been
participated to FMB and $655,000 in previously  nonperforming  and  restructured
loans.

                                         42

<PAGE>



The following pro forma  financial  information  has been prepared  assuming the
sale of FMB had been  consummated  at the beginning of the  respective  periods.
Because  there did not exist  sufficient  continuity  of the deposits and assets
acquired in  connection  with the  acquisition  of the First Bank  deposits  and
because  financial  information  related  to such  deposits  and  assets was not
divisible  from the financial  information  of First Bank,  pro forma  financial
information regarding the deposits and assets acquired is not included.  The pro
forma  financial  information  is not  necessarily  indicative of the results of
operations that would have occurred had the transactions been consummated on the
assumed dates.

Pro forma  financial  information for the years ended December 31 (in thousands,
except per share data) is as follows:

                                    1995           1994
                                 ----------     ----------
     Total interest income...... $   14,108     $    9,157
     Total interest expense.....      7,567          3,409
     Net interest income........      6,541          5,748
     Net income.................      1,381            815
                                 ==========     ==========
     Earnings per share......... $     0.80     $     0.67
                                 ==========     ==========


In January 1996, BNCCORP was granted a charter for its de novo BNC National Bank
of  Minnesota,  Minneapolis,  Minnesota,  and provided  initial  capital of $5.0
million  to the  wholly  owned  bank  which is  engaged  in  commercial  banking
activities in the Minneapolis/Saint  Paul area. The capital injection was funded
through  proceeds  from the sale of common  stock in  BNCCORP's  initial  public
offering (July 1995).

In May  1996,  BNCCORP  acquired  a  nonbank  commercial  finance  company,  BNC
Financial  Corporation,  St. Cloud,  Minnesota,  for $85,000.  BNCCORP  provided
initial capital of $1.0 million to the wholly owned subsidiary, which is engaged
primarily in asset-based  commercial  financing.  Goodwill of $66,000  resulting
from the transaction is being amortized over 25 years.

In December 1996, BNCCORP acquired the accounting firm of Gregory K. Cleveland &
Company,  Bismarck,  North Dakota (the Firm). The Firm was owned by an executive
officer/director  of BNCCORP.  The purchase price for the Firm was approximately
$368,000 and was based on the Firm's customer receivables,  prepaids and certain
intangibles.  Goodwill  of  $265,000  resulting  from the  transaction  is being
amortized over 15 years.  Employees of the Firm now staff the newly  established
trust and private banking division at BNC National Bank of Bismarck.

Effective  January 1997,  BNCCORP acquired the stock of the J.D. Meier Insurance
Agency,  Linton, North Dakota (the Agency).  Three executive officers of BNCCORP
owned stock in the Agency.  The purchase  price for the stock was  approximately
$34,000,  and BNCCORP provided additional capital of $75,000 to the wholly owned
subsidiary.  The Agency is  operating as a  subsidiary  of BNC National  Bank of
Bismarck and engages in insurance business.

3. Securities:

BNCCORP  had no  securities  designated  as  held-to-maturity  or trading in its
portfolio at December 31, 1996 or 1995.  In December  1995,  securities  with an
aggregate amortized cost of $1,129,000 and net unrealized gains of $134,000 were
transferred from  held-to-maturity to  available-for-sale in accordance with the
implementation provisions of SFAS 115.


                                         43

<PAGE>



Available-for-Sale Securities

The amortized cost, gross unrealized gains and losses, and estimated fair market
value of  securities  available  for sale were as follows as of  December 31 (in
thousands):

<TABLE>
<CAPTION>

                                                       Gross         Gross       Estimated
                                       Amortized    Unrealized    Unrealized       Market
                                         Cost          Gains        Losses         Value
                                      -----------   -----------   -----------    ----------
              1996
<S>                                   <C>           <C>           <C>            <C>
U.S. Treasury securities............. $    13,814   $        42   $        --    $   13,856
U.S. government agency mortgage-
   backed securities.................       9,555             4            --         9,559
U.S. government agencies securities..       3,633            13           (4)         3,642
Collateralized mortgage obligations..      23,898            --          (43)        23,855
Other securities.....................       7,773            13           (7)         7,779
State and municipal bonds............         759            41            --           800
                                      -----------   -----------   -----------    ----------
                                      $    59,432   $       113   $      (54)    $   59,491
                                      ===========   ===========   ===========    ==========


              1995
U.S. Treasury securities............. $    25,041   $        63   $       (3)    $   25,101
U.S. government agency mortgage-
   backed securities.................       4,798            45            --         4,843
U.S. government agencies securities..       7,513             7            --         7,520
Collateralized mortgage obligations..      44,800             3            --        44,803
Other securities.....................      10,882             7           (4)        10,885
State and municipal bonds............       1,162           102            --         1,264
                                      -----------   -----------   -----------    ----------
                                      $    94,196   $       227   $       (7)    $   94,416
                                      ===========   ===========   ===========    ==========

</TABLE>

Scheduled  maturities  for  securities  available for sale were as follows as of
December 31 (in thousands):


                                       1996                       1995
                             ------------------------   ------------------------
                                           Estimated                  Estimated
                             Amortized      Market      Amortized      Market
                                Cost         Value         Cost         Value
                             ----------   -----------   ----------   -----------
Due in one year or less..... $   11,531   $    11,538   $   14,563   $    14,563
Due after one year 
   through five years.......     15,062        15,117       25,703        25,796
Due after five years 
   through ten years........     18,934        18,971       21,269        21,381
Due after ten years.........     13,905        13,865       32,661        32,676
                             ----------   -----------   ----------   -----------
   Total.................... $   59,432   $    59,491   $   94,196   $    94,416
                             ==========   ===========   ==========   ===========


BNCCORP recognized net gains (losses) on sales of securities  available for sale
of  approximately  $19,000,  $(18,000)  and  $28,000  in 1996,  1995  and  1994,
respectively.

                                         44

<PAGE>



4. Loans:

The  composition  of the loan  portfolio  was as follows as of  December  31 (in
thousands):


                                         1996          1995
                                      ----------    -----------
     Commercial and industrial....... $   94,701    $    41,639
     Agricultural....................     20,673         18,046
     Real estate:
        Mortgage.....................     47,451         36,606
        Construction.................      8,806          5,884
     Consumer........................     18,343          9,580
     Lease financing.................     12,970          8,660
     Other...........................        391            380
                                      ----------    -----------
        Total........................    203,335        120,795
     Less:
        Allowance for loan losses....    (1,594)        (1,048)
        Deferred loan fees and costs.      (338)          (112)
                                      ----------    -----------
                                      $ 201,403     $  119,635
                                      ==========    ===========


Loans on a  nonaccrual  basis,  including  impaired  loans,  were  approximately
$61,000  and $71,000 at December  31, 1996 and 1995,  respectively.  Interest on
those loans  included in income  amounted to $1,000 and $2,000 in 1996 and 1995,
respectively.  Total  interest  income of $12,000  and $13,000 in 1996 and 1995,
respectively, would have been recognized under the original terms of the loans.

The recorded  investment in loans for which  impairment  had been  recognized in
accordance  with SFAS 114 totaled  $4.0 million and $1.5 million at December 31,
1996 and 1995,  respectively.  The  allowance for loan losses on these loans was
$171,000 and $131,000 at December 31, 1996 and 1995, respectively. For the years
ended  December 31, 1996 and 1995, the average  recorded  investment in impaired
loans was  approximately  $3.6 million and $2.1 million,  respectively.  BNCCORP
recognized  $216,000 and $122,000 of interest on impaired  loans,  most of which
was recognized on a cash basis in 1996 and 1995, respectively.

Loans to officers,  directors  and  employees  totaled  $806,000 and $527,000 at
December 31, 1996 and 1995,  respectively,  and loans to other  related  parties
totaled $259,000 and $941,000 at December 31, 1996 and 1995, respectively.

As of December 31, 1996, 66% of BNCCORP's loans were to borrowers located in the
North Dakota market area,  24% were to borrowers in the  Minnesota  market area,
and 10% were to borrowers in other market areas.  Commercial  loan borrowers are
generally small- to medium-sized corporations, partnerships and sole proprietors
in a wide  variety  of  businesses.  Loans to  consumers  are both  secured  and
unsecured. Real estate secured 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 BNCCORP
holds real property as  collateral.  Of the $47.5  million real estate  mortgage
loans as of December  31,  1996,  approximately  $20 million  were loans made to
commercial  customers  where the collateral for the loan is, among other things,
the real estate occupied by the business of the customer.  Accordingly,  certain
loans  categorized  as  real  estate  mortgage  loans  can be  characterized  as
commercial loans which are secured by real estate.


                                         45

<PAGE>



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


                                           1996         1995         1994
                                         ---------    ---------    ---------
Balance, beginning of year.............. $   1,048    $   1,021    $     713
   Provision for loan losses............       739          168          179
   Loans charged off....................     (350)        (248)         (23)
   Loans recovered......................       157          207          152
   Allowance attributable to 
     subsidiary sold....................        --         (100)          --
                                         ---------    ---------    ---------
Balance, end of year.................... $   1,594    $   1,048    $   1,021
                                         =========    =========    =========


5. Premises, Leasehold Improvements and Equipment:

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


                                                     1996           1995
                                                  ----------     -----------
Land and improvements............................ $      508     $       264
Buildings and improvements.......................      3,346           3,364
Leasehold improvements...........................        719             336
Furniture, fixtures and equipment................      3,701           3,047
                                                  ----------     -----------
   Total cost....................................      8,274           7,011
Less accumulated depreciation and amortization...     (1,617)         (1,233)
                                                  ----------     -----------
   Net premises, leasehold improvements and 
     equipment................................... $    6,657     $     5,778
                                                  ==========     ===========


Depreciation and amortization  expense on premises,  leasehold  improvements and
equipment totaled  approximately  $499,000,  $377,000 and $348,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

6. Income Taxes:

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


                                        1996         1995          1994
                                      --------     --------      --------
Current.............................. $   965      $   589       $   564
Deferred income taxes from the 
   following timing differences:
      Provision for loan losses......    (274)         (11)         (105)
      Depreciation...................      87            6            71
      Leases.........................     129          128           118
      Other..........................     240          (71)           31
                                      --------     --------      --------
                                      $ 1,147      $   641       $   679
                                      ========     ========      ========


                                         46

<PAGE>



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):


                                           1996          1995          1994
                                         ---------     ---------     ---------
Tax at 34% statutory rate............... $  1,018      $    611      $    636
Increase (decrease) resulting from:
   State taxes, net of federal benefit..      131            91           116
   Minority interest in consolidated 
     earnings...........................       --            19            20
   Benefit of AMT credit carryforwards..       --           (42)          (42)
   Tax-exempt interest..................      (27)          (43)          (59)
   Other, net...........................       25             5             8
                                         ---------     ---------     ---------
                                         $  1,147      $    641      $    679
                                         =========     =========     =========


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


                                                            1996         1995
                                                          --------     --------
Deferred tax asset:
   Loans, primarily due to differences in 
     accounting for loan losses ........................  $    577     $    333
   Other.................................................      145           41
                                                          --------     --------
         Deferred tax asset..............................      722          374
                                                          --------     --------
Deferred tax liability:
   Unrealized gain on securities available for sale......       16           86
   Leases, primarily due to differences in accounting 
     for lease...........................................      524          385
   Premises and equipment, primarily due to 
     differences in original cost basis and 
     depreciation........................................      451          354
                                                          --------     --------
         Deferred tax liability..........................      991          825
                                                          --------     --------
         Net deferred tax liability...................... $    269     $    451
                                                          ========     ========





                                         47

<PAGE>



7. Notes Payable:

BNCCORP's  notes  payable  consist  of  the  following  as of  December  31  (in
thousands):
                                                              1996       1995
                                                            --------   --------
Federal funds purchased...................................  $  1,437   $     --
Advance from the Federal Home Loan Bank (FHLB), principal 
   due August 1997, interest payable monthly at 6.60%, 
   secured by single-family mortgage loans and
   government agency securities...........................     1,000      1,000
Advances from FHLB, principal due April 1997, interest
   payable monthly at the one-month  LIBOR rate  minus
   .3% (5.59% at  December  31,  1996),  secured by
   single-family mortgage loans and government agency 
   securities.............................................     9,000         --
Notes payable to American National Bank, maturing in 
   2000 with annual paydowns of $550,000 on March 31 
   of each year, interest payable quarterly at the prime
   rate plus .5% (9.25% at December 31, 1995), secured 
   by stock of  subsidiary bank...........................        --      3,354
Notes payable to Firstar Bank Milwaukee, N.A. (Firstar)
   including a term note for $3 million and a revolving
   line of credit up to $7 million, interest payable 
   quarterly at either the prime rate or LIBOR rate 
   plus 2% at BNCCORP's option (7.50% at December 31, 
   1996),  secured by stock of  subsidiary  banks.........     10,000        --
Revolving line of credit with Bank Windsor, principal
   due September 1997, interest payable quarterly at 
   the prime rate plus .75% (9.00% at December 31, 1996)..        615        --
                                                            ---------  --------
      Total...............................................  $  22,052  $  4,354
                                                            =========  ========


The notes payable to American National Bank at December 31, 1995 were refinanced
with Firstar in February 1996.

The Firstar  notes were  amended in February  1997 to include a $3 million  term
note and a $12 million  revolving line of credit,  both of which mature in 1998.
Collateral,  interest  rates  and  timing  of  payments  on those  notes  are as
indicated above.

BNCCORP was in compliance with all debt covenants at December 31, 1996.

8. Stockholders' Equity:

BNCCORP  and its  subsidiary  banks  are  subject  to  certain  minimum  capital
requirements (see Note 9). In addition,  certain  regulatory  restrictions exist
regarding the ability of the  subsidiary  banks to transfer  funds to BNCCORP in
the  form of cash  dividends,  loans  or  advances.  Approval  of the  principal
regulator is required for the banks to pay dividends to BNCCORP in excess of the
subsidiary  banks'  earnings  retained in the  current  year plus  retained  net
profits for the preceding two years.

Effective June 1995, BNCCORP declared a 60-for-1 stock split of BNCCORP's common
stock and  reincorporated  BNCCORP in Delaware,  in connection  with its initial
public  offering.  This  stock  split has been  retroactively  reflected  in the
financial statements.

In connection  with its initial public  offering (see Note 1), BNCCORP agreed to
sell to the  underwriters,  for  nominal  consideration,  a warrant to  purchase
50,000 shares of common stock (the Warrant).  The Warrant became  exercisable at
$12 per share in June 1996 and remains  exercisable  for a period of four years.
No warrants had been exercised as of December 31, 1996.


                                         48

<PAGE>



9. Regulatory Capital:

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

Quantitative  measures established by the regulations to ensure capital adequacy
require BNCCORP and its banks to maintain  minimum amounts and ratios (set forth
in the  tables  that  follow)  of total and Tier I capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined)  to average  assets  (as  defined).  Management  believes  that,  as of
December 31, 1996, BNCCORP and its banks meet all capital adequacy  requirements
to which they are subject.

As of December 31, 1996,  the most recent  notifications  from the Office of the
Comptroller of the Currency (OCC) categorized BNCCORP's subsidiary banks as well
capitalized under the regulatory  framework for prompt corrective  action. To be
categorized  as  well  capitalized,   the  banks  must  maintain  minimum  total
risk-based,  Tier I  risk-based  and Tier I leverage  ratios as set forth in the
table that follows.  There are no  conditions or events since that  notification
that management believes have changed the institutions' categories.

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

                                                                                      To Be Well Capitalized
                                                              For Capital Adequacy   Under Prompt Corrective
                                                Actual                Purposes           Action Provisions
                                         ------------------    -------------------    ------------------
                                           Amount     Ratio      Amount      Ratio     Amount     Ratio
                                         ---------    -----    ---------     -----    ---------   -----
                                                                            greater              greater
                                                                             than                  than
                                                                          or equal to           or equal to
<S>                                      <C>           <C>     <C>           <C>      <C>         <C>
     As of December 31, 1996
Total Capital (to risk weighted assets):
   Consolidated......................... $  20,109       8.8%  $  18,206      8.0%        N/A        N/A
   BNC National Bank of Bismarck........    19,009      10.4      14,644      8.0    $ 18,306      10.0%
   BNC National Bank of Minnesota.......     4,981      12.2       3,255      8.0       4,069      10.0
Tier I Capital (to risk weighted assets):
   Consolidated.........................    18,515       8.1       9,103      4.0         N/A        N/A
   BNC National Bank of Bismarck........    17,759       9.7       7,322      4.0      10,983       6.0
   BNC National Bank of Minnesota.......     4,688      11.5       1,628      4.0       2,441       6.0
Tier I Capital (to average assets):
   Consolidated.........................    18,515       6.7      11,112      4.0         N/A        N/A
   BNC National Bank of Bismarck........    17,759       7.1      10,006      4.0      12,508       5.0
   BNC National Bank of Minnesota.......     4,688      12.9       1,453      4.0       1,817       5.0

     As of December 31, 1995 
Total Capital (to risk weighted assets):
   Consolidated.........................    17,768      12.5      11,375      8.0         N/A        N/A
   BNC National Bank of Bismarck........    14,072      10.1      11,202      8.0      14,003      10.0
Tier I Capital (to risk weighted assets):
   Consolidated.........................    16,720      11.8       5,688      4.0         N/A        N/A
   BNC National Bank of Bismarck........    13,024       9.3       5,601      4.0       8,402       6.0
Tier I Capital (to average assets):
   Consolidated.........................    16,720       7.0       9,497      4.0         N/A        N/A
   BNC National Bank of Bismarck........    13,024       5.7       9,215      4.0      11,519       5.0
</TABLE>


                                       49


<PAGE>

10.Fair Value of Financial Instruments:

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


                                          1996                     1995
                               -----------------------   -----------------------
                                Carrying       Fair       Carrying       Fair
                                 Amount       Value        Amount       Value
                               ----------   ----------   ----------   ----------
Assets:
   Cash, due from banks and 
     federal funds sold....... $   13,260   $   13,260   $   14,209   $   14,209
   Securities available for 
     sale.....................     59,491       59,491       94,416       94,416
   Loans, net.................    201,403      200,669      119,635      119,959
                               ----------   ----------   ----------   ----------
                                  274,154   $  273,420      228,260   $  228,584
                                            ==========                ==========
   Other assets...............     14,404                    12,139
                               ----------                ----------
                               $  288,558                $  240,399
                               ==========                ==========
Liabilities:
   Deposits, noninterest-
     bearing.................. $   22,218   $   22,218   $   16,874   $   16,874
   Deposits, interest-bearing.    217,552      217,684      194,174      194,017
   Notes payable..............     22,052       22,060        4,354        4,358
                               ----------   ----------   ----------   ----------
                                  261,822   $  261,962      215,402   $  215,249
                                            ==========                ==========
   Other liabilities..........      4,101                     4,110
   Stockholders' equity.......     22,635                    20,887
                               ----------                ----------
                               $  288,558                $  240,399
                               ==========                ==========


The  following  methods and  assumptions  were used to  estimate  the above fair
values.

Cash and Cash Equivalents, Noninterest-Bearing Deposits and Demand Deposits

The   carrying   amounts   for   cash   and   cash   equivalents,   as  well  as
noninterest-bearing  deposits,  approximate fair value due to the short maturity
of the instruments.  The fair value of demand deposits, such as NOW, savings and
money market accounts, is equal to the amount payable on demand at the reporting
date.

Securities

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

Loans

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

Interest-Bearing Deposits

Fair values of interest-bearing deposit liabilities are estimated by discounting
future  cash  flow  payment  streams  using  rates at which  comparable  current
deposits with comparable maturities are being issued.



                                         50

<PAGE>



Borrowings

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

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

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

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

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

Financial  instruments  with contract  amounts  representing  credit risk are as
follows as of December 31 (in thousands):

                                               1996           1995
                                            -----------    -----------
     Commitments to extend credit.......... $    59,553    $    28,034
     Standby letters of credit.............       1,048            714
                                            -----------    -----------
                                            $    60,601    $    28,748
                                            ===========    ===========


12.Related-Party Transactions:

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

13.Benefit Plans:

BNCCORP has a 401(k) plan covering all employees of BNCCORP and its subsidiaries
who meet specified age and service requirements. Eligible employees may elect to
defer up to 10% of compensation  each year (15% effective  January 1, 1997), not
to exceed the dollar  limit set by law.  At their  discretion,  BNCCORP  and its
subsidiaries  provide matching  contributions of up to 50% of employee deferrals
up to a  maximum  employer  contribution  of 5% of  compensation.  BNCCORP  made
matching  contributions of $79,000,  $65,000 and $55,000 in 1996, 1995 and 1994,
respectively.  Under the  investment  options  available  under the 401(k) plan,
employees may elect to invest their salary deferrals in BNCCORP stock.

BNCCORP provides no significant postretirement or postemployment benefits.


                                         51

<PAGE>



14.Commitments and Contingencies:

Employment Agreements

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

Leases

BNCCORP has entered into operating lease  agreements for certain  facilities and
equipment used in its operations.  Rent expense for the years ended December 31,
1996, 1995 and 1994, was $331,000, $100,000 and $36,000,  respectively.  Minimum
annual base lease payments for operating  leases with remaining terms of greater
than one year are as follows:

                    1997................. $   227,520
                    1998.................     162,169
                    1999.................     146,072
                    2000.................     137,191
                    2001.................      86,920
                    Thereafter...........      93,840


15.Stock-Based Compensation Plan:

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  (SFAS 123), issued in October 1995 and effective for fiscal years
beginning after December 15, 1995, allows two alternative  methods of accounting
for employee stock options or similar instruments. Under SFAS 123, an entity may
either  implement a fair value based method of  accounting  for stock options or
elect to continue to measure compensation cost under Accounting Principles Board
Opinion No. 25,  "Accounting for Stock Issued to Employees"  (APB 25).  Entities
electing to continue  under APB 25 must  provide  pro forma  disclosures  of net
income and earnings  per share as if the fair value based  method of  accounting
had been applied.

BNCCORP  adopted  SFAS 123 on January 1, 1996 and has  elected  to  continue  to
measure  compensation cost under APB 25 and comply with the pro forma disclosure
requirements  of SFAS 123. A description of BNCCORP's  stock-based  compensation
plan accounted for under APB 25 is presented below.

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

                                         52

<PAGE>



common stock on the date of grant.  As of December 31, 1996,  20,000  restricted
shares and 30,000  options had been awarded under the Stock Plan. The restricted
stock vests in 33 1/3% increments during 1998, 1999 and 2000. All of the options
are  exercisable  at a price  of $10 per  share  and vest in 20%  increments  on
January 18, 1996 and July 18, 1996,  1997,  1998 and 1999. The options expire on
July 18, 2005. No options had been exercised as of December 31, 1996.

Had  compensation  cost for the plan been  determined  consistent with SFAS 123,
BNCCORP's  net  income and  earnings  per share  would have been  reduced to the
following pro forma amounts:


                                         1996               1995
                                      -----------       ------------
     Net income:
        As reported.................. $ 1,847,000       $  1,157,000
        Pro forma....................   1,814,000          1,157,000
     Primary and fully diluted EPS:
        As reported..................        0.79               0.67
        Pro forma....................        0.77               0.67


A summary  of the  status of the Stock Plan at  December  31,  1996 and 1995 and
changes  during  the years then ended is  presented  in the table and  narrative
below:


                                            Weighted                  Weighted
                                            Average                    Average
                                            Exercise                  Exercise
                                 Shares       Price       Shares        Price
                                ---------  ----------   ----------    ---------
Outstanding, beginning of year.. 30,000      $     10           --    $      --
Granted.........................     --            --       30,000           10
                                ---------  ----------   ----------    ---------
Outstanding, end of year........ 30,000      $     10       30,000    $       10
                                =========  ==========   ==========    =========
Exercisable, end of year........ 12,000      $     10    $      --     $     --
                                =========  ==========   ==========    =========
Weighted average fair value of
   options granted..............$      --                $    4.50
                                =========               ==========


The fair value of the option  grant is  estimated on the date of grant using the
Black-Scholes  option  pricing model with the following  assumptions:  risk-free
interest rate of 6.08%;  expected  dividend  yields of 0.0%;  expected  lives of
seven years; and expected volatility of 28.7%.



                                         53

<PAGE>



16.Condensed Financial Information--Parent Company Only:

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


                               PARENT COMPANY ONLY
                   Condensed Statements of Financial Condition
                                As of December 31
                 (In thusands, except share and per share data)


                                                      1996            1995
                                                   -----------     ----------
Assets:
   Cash and short-term investments................ $       257     $    6,074
   Investment in subsidiaries.....................      27,241         16,916
   Loans..........................................         545            546
   Receivable from subsidiaries...................       4,265            277
   Cost in excess of net assets acquired, net.....         232            247
   Other..........................................         574            437
                                                   -----------     ----------
                                                   $   33,114      $  24,497
                                                   ===========     ==========

Liabilities and stockholders' equity:
   Note payable................................... $   10,249      $   3,354
   Accrued expenses and other liabilities.........         185            256
                                                   -----------     ----------
                                                        10,434          3,610
                                                   -----------     ----------
   Preferred stock, $.01 par value, 2,000,000 
      shares authorized;  no shares issued or 
      outstanding.................................         --             --
   Common stock, $.01 par value, 10,000,000 
      shares authorized; 2,364,100 shares 
      issued, 2,338,720 shares outstanding........          23             23
   Capital surplus................................      13,768         13,776
   Retained earnings..............................       9,062          7,170
   Treasury stock.................................        (216)          (216)
   Unrealized gain on securities available for 
      sale........................................          43            134
                                                   -----------     ----------
                                                        22,680         20,887
                                                   -----------     ----------
                                                   $    33,114     $   24,497
                                                   ===========     ==========


                                         54

<PAGE>



                               PARENT COMPANY ONLY
                         Condensed Statements of Income
                         For the Years Ended December 31
                                 (In thousands)


                                               1996          1995        1994
                                            ----------    ----------   ---------
Income:
   Management fee income................... $     927     $     606    $    753
   Consulting income.......................         1            --          18
   Interest................................       210           134          12
   Other...................................       137           319          32
                                            ----------    ----------   ---------
      Total income.........................     1,275         1,059         815
                                            ----------    ----------   ---------
Expenses:
   Interest................................       546           336         278
   Personnel expense.......................       965           987       1,141
   Legal and other professional............       155           103          91
   Depreciation and amortization...........        49            63          48
   Other...................................       367           300         160
                                            ----------    ----------   ---------
      Total expenses.......................     2,082         1,789       1,718
                                            ----------    ----------   ---------
Loss before income tax benefit and equity 
   in undistributed income of 
   subsidiaries............................      (807)         (730)       (903)
Income tax benefit.........................       281           258         344
                                            ----------    ----------   ---------
Loss before equity in undistributed 
   income of subsidiaries..................      (526)         (472)       (559)
Equity in undistributed income of 
   subsidiaries............................     2,418         1,629       1,750
                                            ----------    ----------   ---------
      Net income........................... $   1,892     $   1,157    $  1,191
                                            ==========    ==========   =========



                                         55

<PAGE>



                               PARENT COMPANY ONLY
                       Condensed Statements of Cash Flows
                         For the Years Ended December 31
                                 (In thousands)


                                                  1996       1995        1994
                                                --------   ---------   --------
Cash flows from operating activities:
   Net income................................   $  1,892   $   1,157   $  1,191
   Adjustments to reconcile net income to 
     net cash provided by (used in) 
     operating activities --
      Gain on sale of subsidiary..............        --        (316)        --
      Depreciation and amortization...........        25          27          9
      Amortization of intangible assets.......        24          36         39
      Equity in undistributed income of 
          subsidiaries........................    (2,418)     (1,629)    (1,750)
      Change in prepaid expenses and other 
          receivables.........................    (3,816)       (168)     1,266
      Change in accrued expenses and other 
          liabilities.........................       (71)       (228)       263
      Other...................................      (391)       (142)       (16)
                                                --------   ---------   --------
         Net cash provided by (used in) 
          operating activities................    (4,755)     (1,263)     1,002
                                                --------   ---------   --------
Cash flows from investing activities:
   Net (increase) decrease in loans...........         1        (546)        --
   Increase in investment in subsidiaries.....    (8,700)     (6,796)      (450)
   Sale of investment in subsidiary...........        --       3,811         --
   Sale (purchases) of premises, leasehold 
      improvements and equipment..............        50        (108)       (22)
   Dividends received.........................       700       1,309         --
                                                --------   ---------   --------
         Net cash used in investing 
          activities..........................    (7,949)     (2,330)      (472)
                                                --------   ---------   --------
Cash flows from financing activities:
   Repayments of long-term borrowings.........    (1,004)       (716)      (550)
   Proceeds from long-term borrowings.........     7,899         500        216
   (Costs) proceeds from issuance of stock....        (8)      9,717         --
   Payments to repurchase stock...............        --          --       (216)
                                                --------   ---------   --------
         Net cash provided by (used in) 
          financing activities................     6,887       9,501       (550)
                                                --------   ---------   --------
Net increase (decrease) in cash and cash 
     equivalents..............................    (5,817)      5,908        (20)
Cash and cash equivalents, beginning of year..     6,074         166        186
                                                --------   ---------   --------
Cash and cash equivalents, end of year........  $    257   $   6,074   $    166
                                                ========   =========   ========
Supplemental cash flow information:
   Interest paid..............................  $    524   $     338   $    268
                                                ========   =========   ========
   Income tax payments received from 
     subsidiary banks, net of income taxes 
     paid.....................................  $    441   $      16   $    600
                                                ========   =========   ========


                                         56

<PAGE>



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

None


                                    PART III

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

Information  concerning the Company's  directors and officers called for by this
item will be included in the Company's  definitive  Proxy Statement  prepared in
connection  with the 1997 Annual  Meeting of  Stockholders  and is  incorporated
herein by reference.

Item 10.  Executive Compensation

Information  concerning the compensation of the Company's  executives called for
by this  item will be  included  in the  Company's  definitive  Proxy  Statement
prepared in  connection  with the 1997  Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

Information  concerning  security  ownership  of certain  beneficial  owners and
management called for by this item will be included in the Company's  definitive
Proxy  Statement  prepared  in  connection  with  the  1997  Annual  Meeting  of
Stockholders and is incorporated herein by reference.

Item 12.  Certain Relationships and Transactions

Information concerning certain relationships and related transactions called for
by this  item will be  included  in the  Company's  definitive  Proxy  Statement
prepared in  connection  with the 1997  Annual  Meeting of  Stockholders  and is
incorporated herein by reference.



                                     PART IV


Item 13.    Exhibits and Reports on Form 8-K

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

   (b)Reports on Form 8-K.
      No reports on Form 8-K were filed  during the quarter  ended  December 31,
      1996.


                                         57

<PAGE>


                                   Signatures

Pursuant to the  requirements  of Section 13 or 15(d) of the  Exchange  Act, the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized, on March 26, 1997.

                                          Name of Issuer

                                          By:         /s/ Tracy Scott
                                             -----------------------------------
                                                      Chief Executive Officer


In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the Registrant and in the capacities  indicated,
on March 26, 1997.



                              Chairman of the Board, Chief Executive Officer and
   /s/ Tracy Scott                               Director
----------------------------         (Principal Executive Officer)

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

  /s/ John A. Malmberg                            Director
----------------------------
  /s/ Thomas J. Resch                             Director
----------------------------
  /s/ John A. Hipp, M.D.                          Director
----------------------------
  /s/ Richard M. Johnsen, Jr.                     Director
----------------------------
  /s/ John M. Schaffer                            Director
----------------------------
  /s/ Jerry R. Woodcox                            Director
----------------------------
  /s/ Brad J. Scott                               Director
----------------------------



                                         58

<PAGE>


                                  EXHIBIT INDEX


   Exhibit
     No.                          Exhibit Description

     2.1  Plan of merger of  BNCCORP,  Inc.,  a North  Dakota  corporation  into
          BNCCORP,  INC., a Delaware  corporation,  incorporated by reference to
          Exhibit 2.1 to the  Registrant's  Registration  Statement on Form SB-2
          (Registration No. 33- 92369).

     2.2  Branch Purchase and Assumption  Agreement dated as of January 31, 1995
          between  Metropolitan  Federal Bank, fsb and Bismarck National Bank, a
          national banking association, incorporated by reference to Exhibit 2.2
          to the Registrant's  Registration Statement on Form SB-2 (Registration
          No. 33-92369).

     2.3  Stock  Purchase  Agreement  dated as of June 7, 1995, by and among the
          Company,   Gregory   Cleveland,   Tracy  Scott  and  Community   First
          Bancshares,   Inc.,  incorporated  by  reference  to  Exhibit  2.3  to
          Amendment  No. 1 to the  Registrant's  Registration  Statement on Form
          SB-2 (Registration No. 33-92369).

     2.4  Agreement and Plan of Merger of the First National Bank of Linton with
          and into BNC National Bank dated as of July 28, 1995,  incorporated by
          reference to Exhibit 2.4 to the  Registrant's  Form 10-KSB dated as of
          March 29, 1996.

     2.5  Contract  for Sale of Assets  dated  December  31, 1996 by and between
          Gregory K. Cleveland, P.C. and BNC National Bank.

     2.6  Stock  Purchase  Agreement  dated February 26, 1997 by and between BNC
          National Bank and Shareholders of J.D. Meier Insurance Agency.

     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).


                                      E-1
<PAGE>



     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  Warrant to Subscribe for and Purchase Common Stock of BNCCORP, Inc. by
          and between the Company and Dain Bosworth  Incorporated,  incorporated
          by reference to Exhibit 4.2 to the  Registrant's  Form 10-KSB dated as
          of March 29, 1996.

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

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

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

     10.4 Employment  Agreement between the Company,  Bismarck National Bank and
          Thomas Resch,  incorporated  by reference to Exhibit 10.8 to Amendment
          No.  1  to  the  Registrant's  Registration  Statement  on  Form  SB-2
          (Registration No. 33-92369).

     10.5 Form of Stock Option  Agreement for the Grant of Non- Qualified  Stock
          Options Under the BNCCORP,  INC. 1995 Stock Incentive Plan dated as of
          June 7, 1995  between the Company and each of Tracy J. Scott,  Gregory
          K. Cleveland, Brad J. Scott, John Malmberg, Michael Miller, and Thomas
          Resch,  incorporated by reference to Exhibit 10.5 to the  Registrant's
          Form 10-KSB dated as of March 29, 1996.

     10.6 Term Loan  Agreement  dated  February 19, 1996 by and between  Firstar
          Bank Milwaukee,  N.A. and BNCCORP, Inc.,  incorporated by reference to
          Exhibit  10.6 to the  Registrant's  Form 10-KSB  dated as of March 29,
          1996.


                                       E-2
<PAGE>



     10.7 Revolving  Credit  Agreement  dated  February  19, 1996 by and between
          Firstar  Bank  Milwaukee,  N.A.  and BNCCORP,  Inc.,  incorporated  by
          reference to Exhibit 10.7 to the Registrant's  Form 10-KSB dated as of
          March 29, 1996.

     10.8 Amendment to Term Loan Agreement and Term Note dated February 11, 1997
          by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.

     10.9 Amendment to Revolving  Credit  Agreement  and  Revolving  Credit Note
          dated February 11, 1997 by and between  Firstar Bank  Milwaukee,  N.A.
          and BNCCORP, Inc.

    10.10 Revolving Credit Agreement dated September 27,  1996  by  and  between
          BNC Financial Corporation and Bank Windsor.

     21   Subsidiaries of Company.

     23.1 Consent of Arthur Andersen LLP

     27   Financial Data Schedule

                                      E-3