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, 1997
                                         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. [x]

      The issuer's revenues for its most recent fiscal year: $28,920,000

      The aggregate market value of the voting stock held by  non-affiliates  of
the  Registrant  at March 16, 1998 was $33,259,000.

      The number of shares of the Registrant's common stock outstanding on March
16, 1998 was 2,400,749.

      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, 1997


                                TABLE OF CONTENTS

                                                                            Page

                                     PART I
Item 1. Description of Business............................................... 1
Item 2. Description of Property............................................... 7
Item 3. Legal Proceedings..................................................... 7
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..................................................37
Item 8. Changes In and Disagreements With Accountants on Accounting
        and Financial Disclosure..............................................67

                                    PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act ....................67
Item 10. Executive Compensation...............................................67
Item 11. Security Ownership of Certain Beneficial Owners and Management.......67
Item 12. Certain Relationships and Related Transactions.......................67
Item 13. Exhibits and Reports on Form 8-K.....................................67



<PAGE>



                                     PART I


Item 1.        Description of Business

General

BNCCORP,  Inc.  ("BNCCORP"),  a Delaware  corporation,  is a  multibank  holding
company  registered  under the Bank  Holding  Company  Act of 1956 (the  "BHCA")
headquartered in Bismarck, North Dakota. BNCCORP (together with its consolidated
subsidiaries,  "BNC" or the  "Company")  provides a broad  range of banking  and
financial services to small and mid-size businesses, private banking clients and
consumers  through its 15  facilities  in North  Dakota and  Minnesota.  BNCCORP
operates primarily through its two commercial banking subsidiaries, BNC National
Bank  ("BNC--North  Dakota"),  which is  headquartered  in  Bismarck  and has 12
additional  offices  in  North  Dakota,  and  BNC  National  Bank  of  Minnesota
("BNC--Minnesota,"  together with  BNC--North  Dakota,  the  "Banks"),  which is
located in Minneapolis, Minnesota. In addition, the Company provides asset-based
commercial financing through its non-bank subsidiary,  BNC Financial Corporation
("BNC Financial"), located in St. Cloud, Minnesota.

Growth Strategy

BNCCORP was formed in 1987 with the  objective of acquiring  and  improving  the
performance of strategically located banks in North Dakota. Since that time, the
banking  industry has undergone  rapid change.  Many non-bank  competitors  have
entered into the banking business. The proliferation of non-bank competitors has
resulted in the availablilty of a multitude of financial  products and services.
Technological  advances  have  improved  delivery  systems  and given  customers
immediate access to these products and services.  To remain  competitive in this
rapidly changing environment,  BNCCORP has expanded its objective. The Company's
objective is to build a growing, profitable financial services network.

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

Acquisitions have played an important role in BNC's growth strategy. The Company
has  completed  several  bank and  nonbank  acquisitions.  The  largest of these
acquisitions  was the  Company's  July 1995  acquisition  of seven North  Dakota
branches,  with aggregate deposits of approximately  $104.8 million,  from First
Bank fsb. See Note 2 to the  Consolidated  Financial  Statements  included under
Item 7 of Part II for a summary of mergers and acquisitions  consummated  during
the three year period ended December 31, 1997.

Management  believes  that its  increased  product  and  service  offerings  and
acquisitions  have  generated  significant  growth for the Company.  BNC's total
assets have increased from $118.0 million at December 31, 1992 to $360.1 million
at December  31,  1997.  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. BNC will continue to emphasize  internally-generated  growth.  The Company
will also seek growth  opportunities  through  acquisition of financial services
companies  or de novo  branching  in North  and  South  Dakota,  Minnesota  and,
possibly, Iowa, Nebraska and Wisconsin.



                                        1

<PAGE>



Market Areas

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  Minnesota.   A  substantial   majority  of  the  Company's  total
consolidated net loans are attributable to customers located in the North Dakota
market area, although during 1997, BNC--Minnesota and BNC Financial continued to
experience  significant  loan growth in the Minnesota market area. See Note 4 to
the  Consolidated  Financial  Statements  included  under  Item  7 of  Part  II.
Generally,  each branch draws most of its deposits from its general market area.
The following table presents certain  information about each of BNC's geographic
locations:


                                                         December 31, 1997
                                                   -----------------------------
                                      Year Opened       Total
             Location                 or Acquired     Deposits       Gross Loans
----------------------------------    -----------  ------------    -------------
                                                            (in thousands)
BNC--North Dakota
  Bismarck........................         1990    $     93,806    $     154,312
  Linton..........................         1987          47,065           10,367
  Ellendale.......................         1995          11,209            1,544
  Garrison........................         1995          14,995              543
  Stanley.........................         1995          15,438              319
  Kenmare.........................         1995          18,133              217
  Crosby..........................         1995          18,157               92
  Watford City....................         1995          16,011              169
BNC--Minnesota.....................        1996          28,010           52,342
BNC Financial.....................         1996              --           15,116
BNCCORP (parent company)..........         1987              --              499
                                                   ------------    -------------
        Total.....................                 $    262,824    $     235,520
                                                   ============    =============

Products and Services

Loans. The Company's loans primarily consist of commercial and industrial loans,
agricultural  loans, real estate mortgage loans, real estate construction loans,
consumer  loans and lease  financing.  In  allocating  its assets  among  loans,
investments  and other  earning  assets,  BNC attempts to maximize  return while
managing risk at acceptable levels. BNC's primary lending focus is on commercial
loans and owner-occupied  real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services,  including  commercial  revolving  lines of  credit,  residential  and
commercial real estate mortgage loans,  consumer loans and equipment  financing.
For more information on the lending activities of the Company, see "Management's
Discussion  and  Analysis  or  Plan  of   Operation--Financial   Condition--Loan
Portfolio" included under Item 6 of Part II.

Interest  rates  charged  on loans  may be fixed or  variable  and vary with the
degree of risk, loan term,  underwriting and servicing costs,  loan amount,  and
extent of other  banking  relationships  maintained  with  customers.  Rates are
further subject to competitive pressures, the current interest rate environment,
availability  of funds and  government  regulations.  As of December  31,  1997,
approximately 67 percent of the loans in BNC's portfolio had interest rates that
float with BNC's base rate or some other reference rate.

The Company also offers asset-based  commercial financing through BNC Financial,
the  Company's  non-bank  subsidiary  which was acquired in 1996.  BNC Financial
provides asset-based working capital and term financing to small and mid-size

                                        2

<PAGE>



companies  for  refinancings,   recapitalizations,   acquisitions  and  seasonal
borrowing  through  senior loans  secured by business  assets such as equipment,
accounts receivable,  and inventory.  Revolving credit facilities and term loans
are cross-collateralized. Management of BNC Financial is experienced in, and has
adopted   policies  and  procedures  to  address  the  risks   associated  with,
asset-based  lending.  Asset-based lending often involves higher risk than loans
traditionally extended by banks, but often involves higher returns.

Deposits.  Each of BNC's bank branches  offers the usual and customary  range of
depository products provided by commercial banks,  including  checking,  savings
and money market deposits and  certificates of deposit.  Deposits are insured by
the Federal Deposit Insurance  Corporation  ("FDIC") up to statutory limits. The
Banks also purchase  brokered  deposits 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" included under Item 6 of Part II.

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

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.

Investment  Portfolio.  The purpose of the Company's  investment portfolio is to
provide a source of earnings and manage  liquidity.  Investments  are  centrally
managed in order to aid in compliance with federal laws and  regulations,  which
place certain restrictions on the amounts and types of investments BNC may hold.
BNC  maintains an  investment  grade  portfolio  oriented  toward U.S.  Treasury
securities, U.S. government agencies 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.  See "Management's Discussion
and Analysis or Plan of Operation--Financial  Condition--Investment  Securities"
included under Item 6 of Part II.

Distribution Methods

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



                                        3

<PAGE>



The Year 2000 Issue

Computers are heavily relied upon in the financial  services industry where much
of the business  transacted is date  sensitive  (for example the  calculation of
interest receivable on a bank's loans and investments or interest payable on its
deposits or borrowings). The Year 2000 Issue results from a computer's inability
to process year- date data accurately  beyond the year 1999.  Except in recently
introduced year 2000 compliant programs,  computer programmers have consistently
abbreviated  dates by  eliminating  the first two  digits of the year,  with the
assumption  that these two digits would  always be 19.  Unless  corrected,  this
situation is expected to create widespread  problems on January 1, 2000. On that
date,  some computer  programs may  recognize  the date as January 1, 1900,  and
process data  inaccurately or stop processing  altogether.  Complications  could
also arise before January 1, 2000 when systems  attempt to perform  calculations
into the year 2000. In addition, some software programs use several dates in the
year 1999 to mean something other than the date. As systems process  information
using  these  dates,  they may  produce  erratic  results  or stop  functioning.
Finally,  the algorithm  used in some  computers for  calculating  leap years is
unable to detect  that the year  2000 is a leap  year.  This  would  cause  date
calculations  to be  incorrect  because the  computers  would not  register  the
additional day in the year 2000.

The Company is fully aware of these  problems  and has taken steps to  identify,
modify and test all systems that could be  negatively  affected by the Year 2000
Issue.  BNC has also taken  steps to ensure that its  customers  and others with
whom it exchanges date-dependent information are aware of the potential problems
and are taking  appropriate action to ensure that their systems become year 2000
compliant.    See   "Management's   Discussion   and   Analysis   or   Plan   of
Operation--Results   of   Operations--Noninterest   Expenses--Year  2000  Issue"
included  under Item 6 of Part II for more  detailed  information  regarding the
Company's  status and  estimated  costs  relating  to the Year 2000  Issue.  See
"Management's   Discussion   and   Analysis  or  Plan  of   Operation--Financial
Condition--Loan  Portfolio--Customer  Year 2000 Issues" included under Item 6 of
Part II for a discussion of the potential impact of customer year 2000 readiness
on the Company's credit quality and allowance for loan losses.

Risk Management

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

Competition

The deregulation of the banking  industry,  the increasing  number of state laws
that permit multi-bank  holding  companies,  and the increasing  availability of
nationwide  interstate  banking have  heightened  the level of competition in an
already  intensely  competitive  market.  The North Dakota and Minnesota  market
areas are highly competitive banking environments. Competition is encountered in
seeking  deposits,  obtaining  loan  customers and in providing all of the other
banking  and  financial   products  and  services  offered  by  BNC.   Principal
competitors  include  multi-regional  financial  institutions  such  as  Norwest
Corporation,  U.S. Bancorp and Community First Bankshares, Inc. as well as large
and small  thrifts,  independent  banks,  credit  unions and many  national  and
regional  brokerage  houses.  BNC also  competes with other  non-bank  financial
institutions,

                                        4

<PAGE>



including  retail stores that maintain their own credit  programs and government
agencies that make low cost or guaranteed loans available to certain  borrowers.
Some of these  competitors  have  substantially  greater  resources  and lending
limits than BNC, and may offer certain  services  that BNC does not provide.  In
addition,  some of the non-bank financial institutions that compete with BNC are
not subject to the extensive  federal  regulations  that govern BNC.  Management
believes that many  competitors  have  emphasized  retail  banking and financial
services,  leaving the small and mid-size business market underserved.  This has
allowed BNC to compete effectively by emphasizing customer service, establishing
long-term  customer  relationships  and providing  services meeting the needs of
such businesses and the individuals  associated with them. The banking  business
is highly competitive,  and the future  profitability of the Company will depend
on its ability to continue to compete successfully in its market areas.

Supervision and Regulation

General. BNCCORP and the Banks are extensively regulated under federal and state
laws and  regulations.  These laws and  regulations  are  primarily  intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP.  The following  information  briefly  summarizes  certain
material  statutes  and  regulations  affecting  BNCCORP  and the  Banks  and is
qualified  in  its  entirety  by  reference  to  the  particular  statutory  and
regulatory provisions.  Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
BNCCORP and the Banks.  The Company is unable to predict the nature or extent of
the effects that fiscal or monetary  policies,  economic controls or new federal
or state legislation may have on its business and earnings in the future.

Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is  subject  to  regulation,  supervision  and  examination  by the Board of
Governors of the Federal  Reserve  System  ("FRB").  BNCCORP is required to file
periodic  reports  with the FRB and such other  reports  as the FRB may  require
pursuant to the BHCA. As a nonbank subsidiary,  BNC Financial is also subject to
regulation  by the FRB.  The Banks are  national  banking  associations  and are
subject  to  supervision,  regulation  and  examination  by  the  Office  of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC,  the Banks are also subject to regulation  and  supervision  by the
FDIC.  See  "--Deposit  Insurance."  Additionally,  the Banks are members of the
Federal Reserve System.

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

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

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

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

Loans to Executive  Officers,  Directors  and  Principal  Stockholders.  Certain
limitations and reporting  requirements  are also placed on extensions of credit
by the Banks to principal  stockholders  of BNCCORP and to directors and certain
executive  officers  of the Banks  (and  BNCCORP  and its  nonbank  subsidiaries
provided certain criteria are met) and to "related  interests" of such principal
stockholders,  directors and officers.  In addition,  any director or officer of
BNCCORP or the Banks or principal stockholder of BNCCORP may be

                                        5

<PAGE>



limited in his or her ability to obtain credit from financial  institutions with
which the Banks maintain correspondent relationships.

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

Capital Adequacy.  The capital adequacy of BNCCORP and the Banks is monitored by
the federal  regulatory  agencies using a combination of risk-based and leverage
ratios.  Failure to meet the applicable capital guidelines could subject BNCCORP
or the Banks to supervisory or enforcement  actions. In addition,  BNCCORP could
be required to guarantee a capital restoration plan of one or more of its Banks,
should such Banks become  "undercapitalized" under capital guidelines.  See Note
10 to the Consolidated Financial Statements included under Item 7 of Part II.

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

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

Deposit Insurance.  FDIC-insured depository institutions that are members of the
FDIC's  Bank  Insurance  Fund  ("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 Banks also pay additional  assessments that are
used to pay certain Financing  Corporation  ("FICO")  obligations issued between
1987 and 1989 to resolve failed savings and loan associations.

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

Support of Banks.  Bank  holding  companies  are also  subject to the "source of
strength doctrine" which requires such holding companies to serve as a source of
"financial and managerial" strength for their subsidiary banks.

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

Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Banks are also subject to certain consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not  limited to, the Truth in Lending  Act,  the Truth in Savings  Act,  the
Electronic Funds Transfer Act, the Expedited Funds  Availability  Act, the Equal
Credit  Opportunity  Act and the Fair  Housing Act.  These laws mandate  certain
disclosure  requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits or making loans to such customers.

Changing Regulatory Structure. The FRB, OCC and FDIC have extensive authority to
police  unsafe or  unsound  practices  and  violations  of  applicable  laws and
regulations by depository institutions and their holding

                                        6

<PAGE>



companies.  The agencies'  authority has been expanded by federal legislation in
recent years. In addition,  the North Dakota Department of Banking and Financial
Institutions  and the  Minnesota  Department  of  Commerce  possess  significant
authority to address  violations  of their  respective  state's  banking laws by
banks operating in their respective  states by enforcement and other supervisory
actions.

The laws and regulations affecting banks and bank holding companies have changed
significantly  in recent years,  and there is reason to expect that changes will
continue in the future, although it is difficult to predict the outcome of these
changes.  From time to time,  various bills are  introduced in the United States
Congress with respect to regulation of financial institutions.  Certain of these
proposals,  if adopted,  could significantly  change the regulation of banks and
the  financial  services  industry.  BNC  cannot  predict  whether  any of these
proposals will be adopted or, if adopted, how these proposals would affect BNC.

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

Employees

At December  31,  1997,  BNC had  approximately  148  employees,  including  129
full-time  equivalent  employees.  None  of  BNC's  employees  is  covered  by a
collective  bargaining  agreement and management  believes that its relationship
with its employees is good.

Item 2.        Description of Property

The principal offices of BNCCORP and BNC--North Dakota are located in BNC's main
office building at 322 East Main Avenue, Bismarck, North Dakota. The building is
owned by BNC--North  Dakota.  BNC--North  Dakota also owns branch offices at 219
South 3rd Street and 807 East Century Avenue and an additional  office  building
at 116 North 4th Street in  Bismarck.  It also owns its  banking  facilities  in
Linton, Crosby, Ellendale, Kenmare and Stanley, North Dakota.

BNC--North Dakota's  facilities at 100 West Main Street (Mandan),  500 North 9th
Street (Bismarck), Watford City and Garrison, North Dakota and the land at South
3rd Street (Bismarck) are leased.  The facilities  occupied by BNC--Minnesota at
333 South Seventh Street, Minneapolis,  Minnesota and the facilities housing BNC
Financial at 4150 South 2nd Street, St. Cloud, Minnesota are also leased.

All owned and leased  properties are considered in good operating  condition and
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 15 to the
Consolidated  Financial  Statements  included  under  Item  7  of  part  II  for
additional information concerning lease commitments.

Item 3.        Legal Proceedings

BNC National Bank v. Debra J. Gronlie and Paul Andahl, Civ. No. 97-C-2020 (South
Central Jud. Dist.  Burleigh Co. ND). On July 21, 1997,  BNC--North  Dakota (the
"Bank")  filed suit against a terminated  loan officer and her husband  alleging
misrepresentations,  reliance on  misrepresentations  and  breaches of fiduciary
responsibilities  and conflicts of interest and seeking monetary damages against
the loan officer and equitable relief by way of the imposition of a constructive
trust against the loan officer and her husband.


                                        7

<PAGE>



The  Bank  filed  suit  as a  result  of  irregularities  discovered  during  an
exhaustive  review of the loan  portfolio  of the former  loan  officer  who was
dismissed  during the second  quarter of 1997, and the special $1.9 million loan
loss provision charged to operations during the quarter ended June 30, 1997, all
of which related to her lending activities.

In December 1997,  following  negotiations  with its fidelity bond carrier,  the
carrier made a payment of $762,000 to be applied  against any covered  losses of
the Bank's.  Approximately  $690,000 of this  payment was credited to the Bank's
allowance  for loan losses.  The remaining  $72,000 was credited to  noninterest
income to cover a portion of the costs the Bank has incurred in  resolving  this
matter.  A final settlement of covered losses with the fidelity bond carrier has
not been reached and negotiations  with the carrier are continuing.  While there
can be no  assurances  concerning  the  amount of final  recovery  on the claim,
Company management anticipates that final settlement of the claim will result in
an additional payment by the carrier. See "Management's  Discussion and Analysis
or Plan  of  Operation"  included  under  Item 6 of  Part  II and  Note 4 to the
Consolidated Financial Statements included under Item 7 of Part II.

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

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, 1997.


                                        8

<PAGE>



                                     PART II


Item 5.        Market for Common Equity and Related Stockholder Matters

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

The following  table lists the high and low sales prices of the Common Stock for
the periods  indicated  as reported by the Nasdaq  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 Years Ended December 31,
                        ---------------------------------------------
                                1997                    1996
                        ---------------------   ---------------------
Period                    High         Low        High         Low
                        ---------    --------   ---------   ---------
First Quarter...........$   13.50    $  11.75   $   10.38   $    9.25
Second Quarter..........$   12.75    $  10.50   $   10.25   $    8.00
Third Quarter...........$   17.00    $  11.00   $   11.50   $    9.00
Fourth Quarter..........$   17.00    $  14.50   $   12.50   $   10.50

On March 16,  1998,  there  were 104  record  holders  and  approximately  1,400
beneficial owners of the Company's Common Stock.

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

During  February  1998,  the Company  issued  63,406  shares of Common  Stock to
shareholders  of Lips & Lahr in a private  offering  believed to be exempt under
the  Securities  Act of 1933  and the  regulations  and  rules  thereunder.  The
issuance was in conjunction with the business  combination with Lips & Lahr. See
Note 2 to the Consolidated Financial Statements.

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

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,  1997,  1996 and  1995 are  derived  from the  historical  audited
consolidated  financial  statements  of the Company.  The  Consolidated  Balance
Sheets as of December 31, 1997 and 1996 and the related Consolidated  Statements
of Income,  Stockholders'  Equity and Cash Flows for each of the three  years in
the  period  ended  December  31,  1997 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.


                                        9

<PAGE>



                                       Selected Financial Data


                                             For the Years Ended December 31,
                                           ------------------------------------
                                                1997        1996        1995
                                              --------    ---------   --------
                                        (dollars in thousands except share data)

Income Statement Data:
Gross interest income.......................$   26,541   $  20,957  $  15,283
Gross interest expense......................    13,915      11,107      8,542
                                            ---------- ----------- ----------
Net interest income.........................    12,626       9,850      6,741
Provision for loan losses...................     2,619         739        168
Noninterest income (1)......................     2,443       2,096      1,736
Noninterest expense.........................     9,894       8,213      6,511
Provision for income taxes..................     1,044       1,147        641
                                            ---------- ------------ ---------
Net income..................................$    1,512   $   1,847  $   1,157
                                            ========== =========== ==========
Balance Sheet Data: (at end of period)
Total assets................................$  360,121   $ 288,558  $ 240,399
Investments and federal funds sold..........    94,624      66,391     97,366
Loans.......................................   235,200     202,997    120,683
Allowance for loan losses...................     3,069       1,594      1,048
Total deposits..............................   262,824     239,770    211,048
Short-term borrowings.......................    46,503      11,437      1,000
Long-term borrowings........................    21,812      10,615      3,354
Stockholders' equity........................    24,274      22,635     20,887
Book value per common share outstanding.....$    10.38(2)$    9.68(2) $  8.93(2)
Earnings Performance Data:
Return on average total assets..............      .48%        .71%        .59%
Return on average stockholders' equity......     6.47%       8.53%       8.11%
Net interest margin.........................     4.31%       4.09%       3.71%
Net interest spread.........................     3.85%       3.63%       3.27%
Basic earnings per share....................     $0.65       $0.79       $0.67
Diluted earnings per share..................     $0.64       $0.79       $0.67
Balance Sheet and Other Key Ratios:
Nonperforming assets to total assets........      .42%        .15%        .20%
Nonperforming loans to total loans..........      .64%        .14%        .40%
Net loan charge-offs to average loans.......    (.51)%      (.11)%      (.03)%
Allowance for loan losses to total loans....     1.30%        .78%        .87%
Allowance for loan losses to nonperforming
     loans..................................      205%        555%        218%
Average stockholders' equity to average
     total assets...........................     7.41%       8.34%       8.69%
--------------------

(1) Includes  recognizable loan fees of $1.0 million,  $1.3 million and $559,000
    for the years ended December 31, 1997, 1996 and 1995, respectively.

(2) Based on total common shares outstanding of 2,338,720.

                                       10

<PAGE>



Overview

Net  income for 1997 was $1.5  million,  or basic  earnings  per share of $0.65,
compared with $1.8 million,  or basic  earnings per share of $0.79,  in 1996 and
$1.2  million,  or basic  earnings per share of $0.67,  in 1995.  The  Company's
performance  for 1997 was impacted by a $1.9  million  increase in its loan loss
provision resulting from questionable loan practices by a loan officer dismissed
during 1997. See Item 3 of Part I, "Legal Proceedings."

In addition to the increased  loan loss  provision,  the Company's  1997 results
reflected the following highlights:

o    Net  interest  income grew 28 percent and net interest  margin  improved 22
     basis  points,  to 4.31  percent,  primarily as a result of loan growth and
     improved loan yields.

o    Noninterest income grew 17 percent. The increase was primarily attributable
     to fee income from BNC--North Dakota's Financial Services division.

o    Noninterest  expenses  grew 20 percent due to  increases  in  salaries  and
     benefits,  depreciation  and  amortization  and occupancy  costs related to
     acquisitions in late 1996 and 1997.

Results of Operations

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

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


                                       11

<PAGE>

<TABLE>
<CAPTION>

             Analysis of Average Balances, Interest and Yields/Rates


                                                                    For the Years ended December 31,
                                         -----------------------------------------------------------------------------------------
                                                     1997                           1996                         1995
                                         -----------------------------  ----------------------------  ----------------------------
                                                   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................    $  5,650  $   306     5.42%     $ 2,714    $  145   5.34%    $11,348     $  651   5.74%
   Taxable investments...............      64,778    4,132     6.38%      66,547     4,359   6.55%     52,154      3,213   6.16%
   Tax-exempt investments............       1,196      100     8.36%       1,090        70   6.42%      1,705        134   7.86%
   Loans (1).........................     223,486   22,003     9.85%     171,780    16,383   9.54%    117,773     11,285   9.58%
   Allowance for loan losses........      .(2,298)      --                (1,265)        -             (1,117)        -
                                          -------  -------              --------    ------            -------     ------
     Total interest-earning assets(2)     292,812   26,541     9.06%     240,866    20,957   8.70%    181,863     15,283   8.40%
   Noninterest-earning assets:
     Cash and due from banks.........       6,039                          5,240                        5,290
     Other...........................      16,196                         13,393                       10,095
                                          -------                       --------                      -------
       Total assets..................    $315,047                       $259,499                     $197,248
                                         ========                       ========                     ========

Liabilities and Stockholders' Equity
   Deposits:
     NOW and money market accounts...     $50,582  $ 1,580     3.12%     $38,920    $1,004   2.58%    $38,941     $1,187   3.05%
     Savings.........................       8,904      206     2.31%       8,498       196   2.31%      7,598        217   2.86%
   Certificates of deposit:
     Under $100,000..................     127,092    7,110     5.59%     124,682     7,055   5.66%     93,983      5,456   5.81%
     $100,000 and over...............      41,581    2,386     5.74%      25,499     1,483   5.82%     15,486        942   6.08%
                                          -------  -------              --------    ------            -------     ------
   Total interest-bearing deposits...     228,159   11,282     4.95%     197,599     9,738   4.93%    156,008      7,802   5.00%
   Short-term borrowings:
     Securities and loans sold under
       agreements to repurchase and
       federal funds purchased.......       7,262      413     5.69%       7,340       408   5.56%      3,546        172   4.85%
     FHLB notes payable..............      15,468      881     5.70%       7,192       406   5.65%      3,483        231   6.63%
   Long-term borrowings..............      16,062    1,339     8.34%       7,027       555   7.90%      3,499        337   9.63%
                                          -------  -------              --------    ------            -------     ------
       Total interest-bearing liabilities 266,951   13,915     5.21%     219,158    11,107   5.07%    166,536      8,542   5.13%
Noninterest-bearing demand accounts..      20,357                         15,147                       13,233
                                          -------                       --------                      -------
       Total deposits and interest-bearing
          liabilities................     287,308                        234,305                      179,769
Other noninterest-bearing liabilities       4,392                          3,539                        3,208
                                          -------                       --------                      -------
       Total liabilities.............     291,700                        237,844                      182,977
Stockholders' equity.................      23,347                         21,655                       14,271
                                          -------                       --------                      -------
       Total liabilities and stockholders'
            equity...................    $315,047                       $259,499                     $197,248
                                         ========                       ========                     ========
Net interest income..................              $12,626                          $9,850                        $6,741
                                                   =======                          ======                        ======
Net interest spread..................                         3.85%                          3.63%                         3.27%
                                                             ======                         ======                        ======
Net interest margin..................                         4.31%                          4.09%                         3.71%
                                                             ======                         ======                        ======
Ratio of average interest-earning assets
   to average interest-bearing
   liabilities.......................     109.69%                        109.91%                       109.20%
                                          =======                       ========                      =======
</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.

                                       12

<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,
                                 ----------------------------------------------
                                 1997 Compared to 1996    1996 Compared to 1995
                                 ----------------------   ---------------------
                                 Change Due to            Change Due to
                                 -------------            -------------
                                 Volume   Rate   Total    Volume   Rate   Total
                                 ------- ------ -------  -------- ------- -----
                                                  (in thousands)
                                 ------- ------ -------  -------- ------- -----

Interest-Earning Assets
   Federal funds sold............$  157  $   4  $  161  $ (496) $  (10) $  (506)
   Investments...................  (109)   (88)   (197)    856     226    1,082
   Loans......................... 4,931    689   5,620   5,175     (77)   5,098
                                 ------  -----  ------  ------  ------  -------
      Total increase in interest
          income................. 4,979    605   5,584   5,535     139    5,674
                                 ------  -----  ------  ------  ------  -------
Interest-Bearing Liabilities
   NOW and money market
      accounts.................     301    275     576      (1)   (182)    (183)
   Savings.....................       9      1      10      26     (47)     (21)
   Certificates of Deposit:
      Under $100,000...........     136    (81)     55   1,782    (183)   1,599
      $100,000 and over........     935    (32)    903     609     (68)     541
   Short-term borrowings:
      Securities and loans sold
         under agreements to
         repurchase and federal
         funds purchased.......      (4)     9       5     184      52      236
      FHLB notes payable.......     467      8     475     246     (71)     175
   Long-term borrowings........     714     70     784     340    (122)     218
                                 ------  -----  ------  ------   ------  ------
      Total increase (decrease)
         in interest expense...   2,558    250   2,808   3,186    (621)   2,565
                                 ------  -----  ------  ------   ------  ------
      Increase (decrease) in net
         interest income....... $ 2,421 $  355 $ 2,776 $ 2,349  $  760  $ 3,109
                                 ======  =====  ======  ======   ======  ======

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


                                       13

<PAGE>



                          Net Interest Income Analysis


                                             For the Years Ended
                                                 December 31,          Change
                                              -----------------  --------------_
                                               1997       1996    Amount     %
                                              -------   -------  -------  ------
                                                 (amounts in
                                                   millions)

Total interest income increased.............. $  26.5   $  21.0   $  5.5     26%
   Due to:
     Increase in average earning assets...... $ 292.8   $ 240.9   $ 51.9     22%
     Improved yield on earning assets........   9.06%     8.70%    0.36%      4%
   Driven by:
     Increase in average loans (a)........... $  223.5  $ 171.8   $ 51.7     30%
     Improved yield on loans (b).............    9.85%    9.54%    0.31%      3%
     Mix change in earning asset portfolio --
       Average loans as a percent of total
            interest-earning assets (c)......      76%      71%       5%      7%
Total interest expense increased............. $   13.9  $  11.1   $  2.8     25%
   Due to:
     Increase in average interest-bearing
        liabilities.......................... $  267.0  $ 219.2   $ 47.8     22%
     Increased cost on interest-bearing
        liabilities..........................    5.21%    5.07%    0.14%      3%
   Driven by:
     Increase in average interest-bearing
        deposits(d).......................... $  228.2  $ 197.6   $ 30.6     15%
     Increase in cost of interest-bearing
        deposits (e).........................    4.95%    4.93%    0.02%      0%
     Increase in average borrowings (f)...... $   38.8  $  21.6   $ 17.2     80%
     Increase in cost of borrowings (g)......    6.79%    6.35%    0.44%      7%
     Mix change in interest-bearing liability
     portfolio --
       Average borrowings as a percent of
            total interest-bearing
            liabilities (h)..................      15%      10%       5%     50%

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

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

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

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

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

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

(f)    The Company  relied more heavily on borrowings to fund growth,  including
       increased  Federal  Home Loan Bank  ("FHLB")  borrowings.  Increase  also
       reflects issuance of the Company's 8 5/8 percent  subordinated notes (the
       "Subordinated  Notes")  in May  1997.  See  Note  8 to  the  Consolidated
       Financial Statements included under Item 7.

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

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


                                       14

<PAGE>



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

Year ended  December 31, 1996  compared to year ended  December  31,  1995.  Net
interest  income  increased  $3.2  million,  or 48 percent,  to $9.9  million as
compared to $6.7 million.  Net interest  spread and net interest margin improved
36 and 38 basis points to 3.63 and 4.09  percent,  respectively.  The  following
condensed  information  summarizes  the major  factors  combining to create this
improvement in net interest  income,  spread and margin.  Lettered  explanations
following the summary describe causes of the changes in these major factors:

                          Net Interest Income Analysis


                                             For the Years Ended
                                                December 31,          Change
                                              ----------------   ---------------
                                               1996      1995     Amount     %
                                              -------   ------    ------- ------
                                                 (amounts in
                                                   millions)

Total interest income increased.............. $  21.0   $  15.3   $  5.7    37%
   Due to:
     Increase in average earning assets...... $ 240.9   $ 181.9   $ 59.0    32%
     Improved yield on earning assets........   8.70%     8.40%    0.30%     4%
   Driven by:
     Increase in average loans (a)........... $ 171.8   $ 117.8   $ 54.0    46%
     Improved yield on investments (b).......   6.55%     6.21%    0.34%     5%
     Mix change in earning asset portfolio --
       Average loans as a percent of total
             interest-earning assets (c).....     71%       65%       6%     9%
Total interest expense increased............. $  11.1   $   8.5    $ 2.6    31%
   Due to:
     Increase in average interest-bearing
        liabilities.......................... $ 219.2   $ 166.5   $ 52.7    32%
     Offset by decrease in cost of interest-
        bearing liabilities..................   5.07%     5.13%  (0.06)%   (1)%
   Driven by:
     Increase in average interest-bearing
        deposits (d)......................... $ 197.6   $ 156.0   $ 41.6    27%
     Decrease in cost of interest-bearing
        deposits (e).........................   4.93%     5.00%  (0.07)%   (1)%
     Increase in average borrowings (f)...... $  21.6   $  10.5   $ 11.1   106%
     Decrease in cost of borrowings (g)......   6.35%     7.03%  (0.68)%  (10)%
     Mix change in interest-bearing liability
     portfolio --
       Average time deposits as a percent
          of total interest-bearing
          deposits (h).......................     76%       70%       6%     9%
       Average borrowings as a percent of
          total interest-bearing
          liabilities (i)....................     10%        6%       4%    67%
--------------------

(a)  Loan growth  attributable  to loans made to customers in the  Minnesota and
     North Dakota market areas.

(b)  Higher   average   yields  on  securities   available  for  sale  in  1996,
     particularly   U.S.   government   agencies   securities,   mortgage-backed
     securities and collateralized mortgage obligations.

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

                                       15

<PAGE>




(d)  Deposit increase at BNC--North Dakota due to internal deposit growth during
     1996 and branch  acquisition  in August  1995  ($104.8  million in deposits
     acquired),  offset by deposits sold with Farmers & Merchants  Bank of Beach
     ("FMB") in October  1995 ($39.3  million).  See Note 2 to the  Consolidated
     Financial Statements included under Item 7.

(e)  Rates on savings,  interest-bearing checking and money market deposits were
     reduced  during  1996.  Lower  average  costs  were also  recorded  on time
     deposits due to decreased  renewal rates on time  deposits  acquired in the
     August 1995 branch acquisition. See (d).

(f)  The Company  relied more heavily on  borrowings  to fund growth,  including
     loan growth at BNC Financial.

(g)  Decrease  primarily  attributable  to lower  cost on  long-term  borrowings
     during 1996.

(h)  The majority of the deposits acquired in the August 1995 branch acquisition
     were time deposits causing a mix change in the deposit portfolio.  See (d).
     This mix change reduced the impact of the quite  significant cost decreases
     realized in the various deposit categories.

(i)  Increased  borrowings  during  1996  caused  a  higher  percentage  of  the
     interest-bearing  liabilities  portfolio to be comprised of borrowings with
     higher average costs than interest-bearing  deposits. This also reduced the
     impact of the  significant  cost decreases  realized in the various deposit
     categories.

Although  costs on  interest-bearing  deposits  decreased  7 basis  points,  the
Company's cost on total deposits,  with  noninterest-bearing  deposits included,
decreased  only 3 basis points to 4.58 percent due to a decrease in the ratio of
noninterest-bearing    deposits   to   total    deposits.    See    "--Financial
Condition--Deposits."

Management  cannot  predict,  with any degree of  certainty,  prospects  for net
interest  income in future periods.  Intense  competition for bank customers can
squeeze bank net interest margins. In addition, the monetary policies of the FRB
and other  factors can impact  interest  rates which can  materially  affect the
operating results of commercial banks. See "Supervision and Regulation--Monetary
Policy" included under Item 1 of Part I and  "--Financial  Condition--Liquidity,
Market and Credit  Risk." BNC will continue to focus on expansion of its product
and  service  offerings  in order  to  supplement  earnings  from  core  banking
activities. See "--Noninterest Income."

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 year ended  December  31, 1997 was $2.6
million as compared to $739,000 in 1996 and $168,000 in 1995. The increased loan
loss  provision in 1997 was  attributable  to  questionable  loan practices by a
former  loan  officer  at  BNC--North  Dakota.  See  Item 3 of  Part  I,  "Legal
Proceedings."  The  increase in the loan loss  provision  in 1996 as compared to
1995 was  attributable  to loan growth.  The provision was increased so that the
Company's  allowance  for loan  losses  would  keep  pace with the  increase  in
outstanding loans. Management believes the allowance for loan losses is adequate
to cover  anticipated  losses in the loan  portfolio at December  31, 1997.  See
"--Financial Condition--Loan Portfolio--Allowance for Loan Losses."


                                       16

<PAGE>



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

                               Noninterest Income


                                                        Increase (Decrease)
                                                 -------------------------------
                            For the Years Ended
                                December 31,       1997 - 1996      1996 -1995
                          ---------------------- --------------- ---------------
                            1997    1996   1995     $       %       $       %
                          ------- ------- ------ ------- ------   -----  -------
                                (in thousands)

Loan fees ............... $ 1,018 $ 1,276 $  559 $ (258) (20)%(a) $717   128%(a)
Service charges..........     471     418    401     53    13%      17     4%
Rental income............      56      34     37     22    65%      (3)  (8)%
Net gain (loss) on sales
   of securities (b).....       8      19    (18)   (11) (58)%      37   206%
Other noninterest income.     890     349    757     541  155%(c) (408) (54)%(d)
                         -------- ------- ------- ------          ----
Total noninterest income.$  2,443 $ 2,096 $1,736  $  347   17%    $360    21%
                         ======== ======= ======= ======          =====
--------------------

(a)  The Company  recognized fees on several large  commercial  loans originated
     and sold without  recourse  during 1996. A significant  portion of the loan
     fee income  recognized  by the Company  results  from the  origination  and
     subsequent sale,  without recourse,  of large commercial loans.  Management
     cannot  predict with any degree of certainty the amount of loans which will
     be  originated  and related  loan fees which will be  recognized  in future
     periods.

(b)  For the year ended  December 31, 1997,  proceeds  from sales of  securities
     available for sale were $27.2 million with resultant gross gains and losses
     of $40,000 and $32,000,  respectively.  In 1996, the proceeds from sales of
     securities available for sale were $48.7 million with resultant gross gains
     and losses of $32,000 and $13,000, respectively. In 1995, the proceeds from
     sales of securities  available  for sale were $89.1 million with  resultant
     gross gains and losses of $5,000 and $23,000, respectively.

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

     (i)  Approximately   $242,000  was   attributable   to  the  activities  of
          BNC--North   Dakota's   Financial  Services  division  which  recorded
          $370,000 from commission income on the sale of nondeposit investments,
          trust fee income,  tax  preparation  and other  activities  in 1997 as
          compared to $128,000 in  commission  income on the sale of  nondeposit
          investments in 1996.  Additional  increases in noninterest  income for
          this  division  are  expected  during 1998 due to the recent  business
          combination with Lips & Lahr. See Note 2 to the Consolidated Financial
          Statements included under Item 7.

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

     (iii)$72,000  represents a portion of the payment of $762,000 received from
          the  Company's  fidelity  bond  carrier.  See Item 3 of Part I, "Legal
          Proceedings" and "--Noninterest Expense."

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

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

(d)  The  total  for  1995  included  a  $316,000  gain  on  the  sale  of  FMB.
     Additionally,   commission  income  on  sales  of  nondeposit   investments
     decreased  $135,000 in 1996 as compared to 1995  because of a reduction  in
     staffing in the nondeposit  investment  sales area during 1996. These items
     were  offset by smaller  increases  in other  miscellaneous  fee income and
     income derived from the consulting activities of BNC Financial (acquired in
     May 1996).


                                       17

<PAGE>



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

                               Noninterest Expense


                                                        Increase (Decrease)
                                                 -------------------------------
                           For the Years Ended
                               December 31,        1997 - 1996     1996 - 1995
                         ----------------------- --------------- ---------------
                           1997    1996    1995     $       %       $      %
                         ------- ------- ------- ------ -------- ------ --------
                              (in thousands)

Salaries and employee
   benefits............. $ 5,234 $ 4,311 $ 3,352 $  923   21%(a) $ 959    29%(a)
Depreciation and
   amortization.........   1,217     980     619    237   24%(b)   361    58%(b)
Occupancy...............     888     675     413    213   32%(c)   262    63%(c)
Office supplies,
   telephone and
   postage .............     575     505     521     70   14%(d)   (16)  (3)%
Professional services...     528     360     246    168   47%(e)   114    46%(f)
Marketing and promotion      356     352     424      4    1%      (72) (17)%(g)
FDIC and other
   assessments..........     171     239     296    (68)(28)%(h)  (57)  (19)%(h)
Other...................     925     791     640    134   17%(i)   151    24%(i)
                          ------  ------  ------ -------         ------
Total noninterest
   expense.............. $ 9,894 $ 8,213 $ 6,511 $1,681   20%   $ 1,702   26%
                          ====== ======= ======= ======         =======
Efficiency ratio (j)....  65.66%  68.75%  76.81%      (3.09)%         (8.06)%
--------------------

(a)  Increases  in salaries and  employee  benefits  expense over the three year
     period are attributable primarily to growth in the number of employees. The
     Company's  average  full-time  equivalent  employees  was 124  for  1997 as
     compared  to  105  and 68  for  1996  and  1995,  respectively.  Additional
     increases in this category are expected for 1998 due to the recent business
     combination  with  Lips & Lahr.  See Note 2 to the  Consolidated  Financial
     Statements  included under Item 7 for a summary of mergers and acquisitions
     consummated  during the three year period ended  December  31, 1997.  As of
     March 16, 1998, the Company had 165 full-time equivalent employees.

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


                                            1997      1996     1995
                                           -------  -------  --------
                                                 (in thousands)

Depreciation and amortization on premises,
   leaseholdimprovements and equipment.... $   676  $   499   $   377
Amortization on deferred charges and
   intangible assets......................     541      481       242
                                           -------  -------   -------
      Total............................... $ 1,217  $   980   $   619
                                           =======  =======   =======

     Increases over the three year period for both depreciation and amortization
     are  attributable to growth and  acquisitions.  Total  premises,  leasehold
     improvements and equipment being depreciated/amortized were $10.7, $8.3 and
     $7.0 million as of December 31, 1997,  1996 and 1995,  respectively.  Total
     deferred charges and intangible assets being amortized were $5.8, $5.1, and
     $4.4  million,  respectively,  as of  the  same  dates.  See  Note 2 to the
     Consolidated  Financial  Statements  included under Item 7 for a summary of
     mergers and  acquisitions  consummated  during the three year period  ended
     December 31, 1997.

(c)  Increases in occupancy expenses are also  growth-related.  During 1997, the
     Company  operated 12 facilities for the full year (and one additional for a
     portion  of the  year)  as  compared  to ten for the  full  year  (and  two
     additional  for a portion  of the year) in 1996 and three for the full year
     (and eight additional for a portion of the year) in 1995. As of March 1998,
     the Company is operating 15 facilities.

(d)  Increases in office supplies,  telephone and postage are growth-related and
     can be expected to  increase in future  periods due to the recent  business
     combination  with  Lips & Lahr.  See Note 2 to the  Consolidated  Financial
     Statements included under Item 7.

(e)  This  increase  was  mainly   attributable  to  increased  legal  fees  and
     repossession  and  collection   expenses  incurred  by  BNC--North  Dakota.
     Approximately  $139,000  in legal  fees  and  repossession  and  collection
     expenses incurred during 1997 were directly related to proceedings  against
     the loan officer dismissed during 1997 and resolution of related loans. See
     (i) below  and Item 3 of Part I,  "Legal  Proceedings."  The  Company  also
     incurred  smaller  additional  increases  in other  items in this  category
     including software support fees and other consulting fees.


                                       18

<PAGE>



(f)  Increase was attributable to increased legal fees and increased audit fees.

(g)  Increase  was mainly  attributable  to ad  campaigns  relating  to the 1995
     branch  acquisition  and the  merger of  BNCCORP's  two  subsidiary  banks,
     Bismarck  National Bank and First  National Bank of Linton (and the related
     name change of the surviving  bank, BNC National  Bank).  See Note 2 to the
     Consolidated Financial Statements included under Item 7.

(h)  The  reduction  in 1996 (as  compared  to 1995) was  caused  by the  FDIC's
     reduction in 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  percent  of  insured  deposits.  The  deposits  acquired  by
     BNC--North Dakota in the 1995 branch acquisition are SAIF-insured deposits.
     See Note 2 to the Consolidated  Financial Statements included under Item 7.
     The reduction in this category for 1997 was expected  because the Banks are
     currently being assessed only for interest payable on FICO bonds.

(i)  This category of expenses includes  directors fees,  blanket bond and other
     insurance  expense,   education  and  development  expense,   correspondent
     charges,  travel,  dues,  conventions  and  other  miscellaneous  expenses.
     Increases in each of the two years are primarily growth-related and involve
     many  of the  categories  in  this  classification,  however,  none  of the
     increases in any individual  item was of a material  nature.  Approximately
     $22,000 of  expenses in this  category  for 1997 were  directly  related to
     resolution of matters  involving the loan officer dismissed during 1997. In
     total, the Company incurred  approximately  $161,000 in expenses related to
     this matter  ($124,000  legal,  $15,000  repossession  and  collection  and
     $22,000 other miscellaneous expenses). See (e) above.

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

Year 2000 Issue. As with other entities in the financial services industry,  the
Company recognizes the critical importance of its computer program  applications
and operating  systems in conducting  business,  and is taking steps to mitigate
any  potential  disruption  as a result of Year 2000  Issues.  The  Company  has
developed  a year 2000 plan and  expects to have the  awareness  and  assessment
phases  completed by March 31, 1998, with renovation  occurring the remainder of
1998.  Validation is currently underway and will continue rigorously through the
year 2000, with specific compliance  benchmarks/targets achieved by December 31,
1998. A separate testing/training facility will be completed by May 31, 1998 and
will be  utilized  extensively  for  validation  purposes.  The  Company is also
communicating with vendors,  regulatory  agencies and peers in coordinating year
2000 conversion efforts.

The Company has not incurred  significant costs prior to December 31, 1997 other
than internal  costs to begin  evaluation of the extent of year 2000  compliance
issues and  developing a  remediation  plan.  Total year 2000 project  costs are
estimated to be $200,000 to $400,000 and are expected to be incurred  during the
period beginning  January 1, 1998 and continuing into the year 2000.  Applicable
costs will be expensed as incurred,  unless new software is purchased which will
be capitalized.

The costs of the year 2000  project and the date on which the  Company  plans to
complete  year 2000  phases and  modifications  are based on  management's  best
estimates,  which were derived utilizing  numerous  assumptions of future events
including  the  continued   availability  of  certain  resources,   third  party
modification  plans and other factors.  However,  there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans.

Income Taxes.  The following  table  presents,  for the periods  indicated,  the
Company's income before income taxes, applicable income taxes, and effective tax
rates:


                                         For the Years Ended December 31,
                                   ---------------------------------------------
                                      1997             1996             1995
                                   -----------      -----------     ------------
                                                       (in thousands)
Income before income taxes........ $     2,556      $     2,994     $      1,798
Applicable income taxes...........       1,044            1,147              641
Effective tax rates................      40.8%            38.3%            35.7%

Tax expense for 1997 includes  more expense  related to taxable  income  derived
from BNC--Minnesota.  BNC--Minnesota is subject to higher state tax rates and is
disallowed the state deduction for federal taxes.

The tax  expense for 1995  included a more  significant  benefit for  tax-exempt
income.

                                       19

<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 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,
Market and Credit Risk--Liquidity Risk Management." 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  "--Liquidity,  Market and Credit  Risk--Interest  Rate
Risk Management."

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

                        Investment Portfolio Composition


                                                 December 31,
                           -----------------------------------------------------
                                  1997              1996              1995
                           ----------------- ----------------- -----------------
                                    Estimated         Estimated        Estimated
                                      Fair             Fair             Fair
                          Amortized  Market Amortized Market  Amortized Market
                             Cost    Value    Cost    Value     Cost    Value
                           -------- -------- -------- -------- -------- --------
                                               (in thousands)
Available for Sale:
U.S. Treasury securities...$ 12,489 $ 12,532 $ 13,814 $ 13,856 $ 25,041 $ 25,101
U.S. government agency
   mortgage-backed
   securities..............  32,136   32,236    9,555    9,559    4,798    4,843
U.S. government agencies
   securities..............  20,039   20,006    3,633    3,642    7,513    7,520
Collateralized mortgage
   obligations.............  21,291   21,325   23,898   23,855   44,800   44,803
State and municipal bonds..   1,166    1,289      759      800    1,162    1,264
Equity securities..........   7,236    7,236    7,773    7,779   10,882   10,885
                            -------- -------- -------- -------- -------- ------
Total investments..........$ 94,357 $ 94,624 $ 59,432 $ 59,491 $ 94,196  $94,416
                            ======== ======== ======== ======== ======== =======


                                       20

<PAGE>



The following  table presents  maturities for all securities  available for sale
(other than equity  securities)  and yields for all  securities in the Company's
investment portfolio at December 31, 1997:

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

                                                                  Maturing
                                           After 1 but     After 5 but
                           Within 1 year  within 5 years  within 10 years  After 10 years          Total
                           -------------- --------------  ---------------  ----------------  --------------------
                           Amount  Yield(1)Amount Yield(1)Amount  Yield(1) Amount   Yield(1) Amount   Yield(1)
                           ------  ------ ------- ------  ------  ------   -------  -------  -------  ------
Available for Sale: (2)                              (dollars in thousands)
<S>                        <C>      <C>   <C>      <C>    <C>      <C>    <C>       <C>     <C>       <C>
U.S. Treasury securities...$2,502   6.12% $ 9,987  5.88%  $ --      -- %  $  --       -- %  $12,489   5.93%
U.S. government agency
  mortgage-backed
  securities (3)........... 1,056   6.45%   2,500  6.84%   5,543   6.45%   23,037    7.18%   32,136   7.00%
U.S. government agencies
  securities...............10,429   5.48%   9,610  6.77%      --    -- %       --     -- %   20,039   6.10%
Collateralized mortgage
  obligations (3)..........    --    -- %   1,258  5.70%   5,456   6.11%   14,577    6.42%   21,291   6.30%
State and municipal bonds..    45   7.05%     145  8.43%     628  11.52%      348    5.46%    1,166   9.15%
                           ------  ------ ------- ------  ------  ------  -------  -------  -------  ------
  Total book value of
    investment securities $14,032  5.67%  $23,500  6.35% $11,627  6.56%   $37,962    6.87%  $87,121   6.50%
                           ====== ======  ======= ======  ======  ======  =======  =======  -------  ------
Unrealized holding gain on
  securities available for
  sale....................                                                                      267
Equity securities..........                                                                 $ 7,236   6.89%
                                                                                            -------  ------
Total investment in securities
  available for sale and held to
    maturity..............                                                                  $94,624   6.51%(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, 1997,  BNC had $94.6 million of securities in the  investment
portfolio  as compared to $59.5 and $94.4  million for the years ended  December
31, 1996 and 1995, respectively. During 1997, the Company increased its holdings
in U.S. government agencies securities by $16.4 million. As part of its interest
rate risk  management  strategy,  the Company also  purchased  $18.8  million of
long-term  Government National Mortgage  Association  ("GNMA")  securities.  See
"--Liquidity,  Market  and  Credit  Risk--Interest  Rate Risk  Management."  The
decrease in investment  securities  in 1996 (as compared to 1995)  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 "--Loan Portfolio." Investments accounted for 26, 21 and 39
percent of total assets as of December 31, 1997, 1996 and 1995, respectively.

At December 31, 1997,  BNC held no securities of any single  issuer,  other than
the U.S. Treasury and U.S.  government  agencies  securities,  that exceeded ten
percent  of  stockholders'  equity.  A  significant  portion  of  the  Company's
investment securities portfolio  (approximately 85 percent at December 31, 1997)
is  pledged  as  collateral  for  public  deposits  and  borrowings,   including
borrowings with the FHLB.

Loan  Portfolio.  The Company's  primary source of income is interest  earned on
loans.  The Company's  loan  portfolio has grown  significantly  during the past
three  years as a result of BNC's  strategy  of  increasing  the  amount of high
quality loans  outstanding to increase net interest income.  Net loans increased
$30.7 million, or 15

                                       21

<PAGE>



percent, to $232.1 million at December 31, 1997 as compared to $201.4 million at
December 31, 1996. In 1996, net loans increased $81.8 million, or 68 percent, as
compared to December 31, 1995. The following  table presents the  composition of
the Company's loan portfolio as of the dates indicated:

                                             Loan Portfolio Composition
<TABLE>
<CAPTION>

                                                                        December 31,
                                     1997             1996              1995               1994                1993
                             ------------------ ---------------- ------------------ ------------------- ------------------
                              Amount       %     Amount     %      Amount     %       Amount       %      Amount      %
                             --------  -------- -------  -------  -------- -------- ---------  -------- --------- --------
                                                                     (dollars in thousands)
<S>                          <C>       <C>      <C>      <C>       <C>     <C>      <C>        <C>      <C>        <C>
Commercial and industrial(1) $111,429     48.0  $94,701     47.0   $41,639     34.8 $  39,218      35.9 $  23,011      27.8
Agricultural............       21,064      9.1   20,673     10.3    18,046     15.1    22,144      20.2    16,101      19.5
Real estate-mortgage....       56,875     24.5   47,451     23.6    36,606     30.6    32,805      30.0    31,655      38.2
Real estate-construction       18,215      7.8    8,806      4.4     5,884      4.9     3,992       3.6     4,462       5.4
Consumer................       18,726      8.0   18,734      9.3     9,960      8.3     9,331       8.5     4,937       6.0
Lease financing.........        9,211      4.0   12,970      6.4     8,660      7.2     3,076       2.8     3,324       4.0
                             -------- --------  -------  -------  -------- -------- --------- --------- ---------  --------
Total face amount of loans    235,520    101.4  203,335    101.0   120,795    100.9   110,566     101.0    83,490     100.9
Deferred loan fees and costs     (320)    (0.1)    (338)    (0.2)     (112)    (0.1)      (95)     (0.1)        --        --
                             -------- --------  -------  -------  -------- -------- --------- --------- ---------  --------
Loans...................      235,200    101.3  202,997    100.8   120,683    100.8   110,471     100.9    83,490     100.9
Less allowance for loan
   losses...............       (3,069)    (1.3)  (1,594)    (0.8)   (1,048)    (0.8)   (1,021)     (0.9)     (713)     (0.9)
                             -------- --------  -------  -------  -------- -------- --------- --------- ---------  --------
Net loans...............     $232,131    100.0  $201,403   100.0  $119,635    100.0 $109,450      100.0 $ 82,777     100.00
                             ======== ========  =======  =======  ======== ======== ========= ========= =========  ========
</TABLE>
--------------------

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

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


                      Change in Loan Portfolio Composition

                                               Increase (Decrease)
                                 -----------------------------------------------
                                      1997 - 1996             1996 - 1995
                                 --------------------   -----------------------
                                     $          %            $           %
                                 --------- ----------   ----------  -----------
                                              (dollars in thousands)

Commercial and industrial........$ 16,728     18% (a)   $  53,062      127% (a)
Agricultural.....................     391      2%           2,627       15%
Real estate--mortgage............   9,424     20% (b)      10,845       30% (b)
Real estate--construction........   9,409    107% (c)       2,922       50%
Consumer.........................      (8)     0%           8,774       88% (d)
Lease financing..................  (3,759)  (29)%           4,310       50%
                                  -------               ---------
Total face amount of loans.......  32,185     16%          82,540       68%
Deferred loan fees and costs.....      18      5%            (226)   (202)%
                                  -------               ---------
Loans............................  32,203     16%          82,314       68%
Allowance for loan losses........  (1,475)  (93)%            (546)    (52)%
                                  -------               ---------
Net Loans........................ $30,728     15%       $  81,768       68%
                                  =======               =========

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

                                       22

<PAGE>



(a) Commercial and industrial - Increases are  attributable  to commercial  loan
    volume  generated  out of both the North Dakota and  Minnesota  market areas
    during 1996 and primarily the Minnesota market area during 1997.

(b) Real  estate--mortgage - Increases are attributable to loan volume generated
    out of both the North  Dakota and  Minnesota  market  areas  during 1996 and
    primarily the North Dakota market area during 1997.

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

(d) Consumer - Increase is attributable to consumer loan volume generated out of
    both the North Dakota and Minnesota market areas during 1996.

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

Credit Policy and Approval Procedures.  BNC follows a uniform credit policy that
sets forth  underwriting  and loan  administration  criteria.  The loan  policy,
including  lending  guidelines  for the various  types of credit  offered by the
Company,  is  established by the Board of Directors (the "Board") based upon the
recommendations  of senior lending management and the executive credit committee
(comprised  of  BNCCORP's  President,   Executive  Vice  President  for  Banking
Operations,  Chief Credit Officer,  and/or other officers as deemed  appropriate
(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.

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. The following table summarizes the current levels of lending authority
at each of the Banks and BNC Financial:

                            Lending Authority Limits


                                       BNC--North
                                         Dakota     BNC--Minnesota BNC Financial
                                       ----------   -------------  -------------
                                                     (in thousands)

Individual officers (maximums)........ $      100     $       300             --
Senior lenders........................        500             500     $      750
Combination of two senior lenders.....      1,000              --             --
BNCCORP's Executive Vice President
  for Banking Operations..............         --           1,000             --
BNCCORP's Chief Credit Officer........      2,000           2,000          1,000
BNC Financial's internal loan
       committee......................         --              --          1,500
Executive Loan Committee (approves
  credits exceeding)..................      2,000           2,000          1,500

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.


                                       23

<PAGE>



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


                            Loan Participations Sold

                                                  December 31,
                             ---------------------------------------------------
                                1997       1996       1995      1994      1993
                             ---------  ---------  --------- --------- ---------
                                                 (in thousands)

BNC--North Dakota........... $  55,500  $  54,100  $  35,000 $  23,400 $  10,600
BNC--Minnesota..............    10,300      3,200         --        --        --
                             ---------  ---------  --------- --------- ---------
  Total....................  $  65,800  $  57,300  $  35,000 $  23,400 $  10,600
                             =========  =========  ========= ========= =========

The Banks  generally  retain the right to service the loans as well as the right
to receive a portion of the interest  income on the loans.  The vast majority of
the loans sold by the Banks are  commercial  lines of credit for which  balances
and related payment streams cannot be reasonably estimated in order to determine
the fair value of the servicing rights and/or future interest income retained by
the Banks. See Note 1 to the Consolidated  Financial  Statements  included under
Item 7. Management cannot reliably predict BNC's ability to continue to generate
or sell loan participations or the terms of any such sales.

Concentrations   of   Credit.    The   Company's   credit   policies   emphasize
diversification  of risk among industries,  geographic areas and borrowers.  For
purposes of the  analysis of  concentrations  of credit as of December 31, 1997,
total  outstanding  loans  as  well as all  outstanding  loan  commitments  were
included.  As of December 31, 1997, the Company  identified one concentration of
loans  exceeding  ten percent of total loans and loan  commitments  outstanding.
This concentration was in the construction industry and represented 15.7 percent
of total loans and loan commitments  outstanding.  Loans and commitments in this
category were  extended to 109 customers who are located in Minnesota,  Iowa and
North and South Dakota and who can be generally categorized as indicated below:


                                                               Percent of total
                                                                   outstanding
                                               Number of         loans and loan
                                               Customers          commitments
                                            ---------------     ----------------
General building contractors...............              52                 8.2%
Heavy construction, excluding building.....              21                 5.1%
Special trade contractors..................              36                 2.4%
                                            ---------------     ----------------
     Total.................................             109                15.7%
                                            ===============     ================

The  contractors are involved in various  aspects of the  construction  industry
including  highway  and street  construction,  water/sewer  drilling,  plumbing,
heating and air  conditioning,  commercial  painting,  electrical,  concrete and
excavating and foundation  contractors.  Loans in this category are secured,  in
many cases, by construction equipment.

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

                                       24

<PAGE>



Loan  Maturities.  The following  table sets forth the  remaining  maturities of
loans in each major category of BNC's portfolio as of December 31, 1997.  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. $ 47,648 $ 15,927 $ 43,114 $  1,717 $  3,023 $111,429
Agricultural...............  10,772    2,323    2,158    1,467    4,344   21,064
Real estate-mortgage.......   5,708    6,792    8,466   13,348   22,561   56,875
Real estate-construction...   7,005      147    1,782    2,443    6,838   18,215
Consumer...................  10,204    6,940      964      609        9   18,726
Lease financing............   2,618    6,538       --       55       --    9,211
                           -------- -------- -------- -------  -------- --------
Total face amount of loans.$ 83,955 $ 38,667 $ 56,484 $ 19,639 $ 36,775 $235,520
                           ======== ======== ======== ======== ======== ========
--------------------

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

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



                                       25

<PAGE>



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

                              Nonperforming Assets


                                                     December 31,
                                       1997      1996    1995     1994     1993
                                      -------  -------- -------  ------- -------
                                                 (dollars in thousands)
Nonperforming loans:
    Loans 90 days or more delinquent
       and still accruing interest....$ 1,016  $   129  $   290  $    39 $    87
    Nonaccrual loans (1) (2)..........    376       22       71      248   1,338
    Restructured loans (1) (2)........    104      136      119      257     188
                                      -------  -------  -------  -------  ------
       Total nonperforming loans......  1,496      287      480      544   1,613
Real estate acquired by foreclosure...     --      159       --      100     193
                                      -------  -------  -------  -------  ------
    Total nonperforming assets........$ 1,496  $   446  $   480  $   644 $ 1,806
                                      =======  =======  =======  ======= =======
Allowance for loan losses.............$ 3,069  $ 1,594  $ 1,048  $ 1,021 $   713
                                      =======  =======  =======  ======= =======
Ratio of total nonperforming
   loans to total loans...............   .64%     .14%     .40%     .49%   1.93%
Ratio of total nonperforming
   assets to total assets.............   .42%     .15%     .20%     .44%   1.47%
--------------------

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

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

The  increases  in the  Company's  nonperforming  loans at December 31, 1997 are
largely  attributable  to the lending  activities of the loan officer  dismissed
during 1997. See Item 3 of Part I, "Legal Proceedings."

Loans 90 days or more delinquent and still accruing  interest include loans over
90 days past due which management  believes,  based on its specific  analysis of
the 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  include  loans on which  the  accrual  of  interest  has been
discontinued.  Accrual of interest is  discontinued  when  management  believes,
after considering economic and business conditions and collection efforts,  that
the  borrower's  financial  condition is such that the collection of interest is
doubtful.  A delinquent  loan is generally  placed on nonaccrual  status when it
becomes  90 days or more past due unless  the loan is well-  secured  and in the
process of collection.  When a loan is placed on nonaccrual status,  accrued but
uncollected  interest  income  applicable  to the  current  reporting  period is
reversed against interest income of the current period.  Accrued but uncollected
interest income applicable to previous  reporting periods is charged against the
allowance for 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 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.


                                       26

<PAGE>



Other real estate owned represents  properties  acquired through, or in lieu of,
loan  foreclosure.  Such  properties are included in other assets in the balance
sheets.  They are  initially  recorded at fair value at the date of  acquisition
establishing  a new  cost  basis.  Write-downs  to  fair  value  at the  time of
acquisition  are charged to the  allowance for loan losses.  After  foreclosure,
valuations  are  periodically  performed  by  management  and the real estate is
carried  at the  lower of  carrying  amount  or fair  value  less  cost to sell.
Write-downs,  revenues and  expenses  incurred  subsequent  to  foreclosure  are
charged to operations as  recognized / incurred.  There were no such  properties
held at  December  31,  1997 or  1995.  At  December  31,  1996,  the  Company's
investment in such  properties was $159,000.  That property was sold during 1997
and  resulted in a gain of  $49,000.  See  "Results  of  Operations--Noninterest
Income."

Potential  Problem Loans. In accordance with accounting  standards,  the Company
identifies loans considered impaired and the valuation allowance attributable to
these  loans.  Impaired  loans  generally  include  loans  on  which  management
believes,  based on current  information  and events,  it is  probable  that the
Company will not be able to collect all amounts due in accordance with the terms
of the loan agreement and which are analyzed for a specific  reserve  allowance.
BNC generally  considers all loans  risk-graded 6 (Substandard) and 7 (Doubtful)
as well as nonaccrual  and  restructured  loans as impaired.  Impaired  loans at
December 31, 1997, not including the past due, nonaccrual and restructured loans
reported above,  totaled $11.2 million. A significant portion of these loans are
not in default but may have  characteristics  such as recent  adverse  operating
cash flows or general risk  characteristics  that the loan  officer  feels might
jeopardize the future timely collection of principal and interest payments.  The
ultimate  resolution  of  these  credits  is  subject  to  changes  in  economic
conditions and other factors.  These loans are closely  monitored to ensure that
the Company's position as creditor is protected to the fullest extent possible.

Customer Year 2000 Issues.  The Company is aware that it could expect  increases
in  problem  loans  and  credit  losses  in  future  years  if  some  borrowers,
particularly  businesses,  fail to bring their computer  systems into compliance
with year 2000 requirements.  See "Description of Business--The Year 2000 Issue"
included  under  Item 1 of  Part I.  BNC has  communicated  with  its  customers
regarding the importance of the Year 2000 Issue. The Company is also including a
year 2000 assessment as part of its credit granting and renewal  procedures.  At
the present time, however,  the Company cannot reasonably  establish whether its
customers  will be ready and, as a result,  cannot  rule out a material  adverse
impact on the Company.

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."  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.  Customer  readiness  for the  year  2000 is an
additional  consideration  in the  analysis  of the  adequacy  of the  Company's
allowance for loan losses.  See  "--Customer  Year 2000 Issues."  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. 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

                                       27

<PAGE>



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:

                      Analysis of Allowance for Loan Losses


                                           For the Years ended December 31,
                                    --------------------------------------------
                                      1997     1996      1995     1994     1993
                                    -------- --------  -------- -------- -------
                                                (dollars in thousands)
Balance of allowance for loan losses
 at beginning period of.............$  1,594 $  1,048  $  1,021  $   713 $1,088
                                    -------- --------  --------  ------- -------
Charge-offs:
    Commercial and industrial.......   1,319      104       114       22    641
    Agricultural....................      --       22       130       --     --
    Real estate-mortgage............      24       --        --       --     --
    Real estate-construction........      --       --        --       --     --
    Consumer........................     107        6         4        1     17
    Lease financing.................     471      218        --       --     --
                                    --------  -------  --------  ------- -------
       Total charge-offs............   1,921      350       248       23    658
                                    --------  -------  --------  ------- -------
Recoveries:
    Commercial and industrial.......     744        5       116      147    192
    Agricultural....................      --      146        84       --     --
    Real estate-mortgage............       9        6         3       --     --
    Real estate-construction........      --       --        --       --     --
    Consumer........................      24       --         4        5      2
    Lease financing.................      --       --        --       --     --
                                    --------  -------  --------  ------- -------
       Total recoveries.............     777      157       207      152    194
                                    --------  -------  --------  ------- -------
Net (charge-offs) recoveries........  (1,144)    (193)      (41)     129   (464)
Provision for loan losses charged
   to operations....................   2,619      739       168      179     89
Allowance attributable to FMB.......      --       --      (100)(a)   --     --
                                    --------  -------  ---------  -------  -----
Balance of allowance for loan
   losses at end of period......... $  3,069 $  1,594 $  1,048  $   1,021 $  713
                                    ========  =======  =======   ========  =====
Ratio of net (charge-offs)
   recoveries to average
   loans...........................   (.51%)   (.11%)    (.03%)      .13% (.62%)
                                    ========  =======  ========  ======== ======
Average gross loans
   outstanding during the
   period.......................... $223,486 $ 171,780 $117,773  $98,749 $75,171
                                    ======== ========= ========  ======== ======
Ratio of allowance for loan
   losses to total loans...........    1.30%      .78%     .87%      .92%   .85%
                                    ======== ========= ========  ======== ======
Ratio of allowance for loan
   losses to nonperforming
   loans...........................   205.00%  555.00%  218.00%   188.00% 44.00%
                                    ======== ========= ========  ======== ======
--------------------

(a) 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
    Bankshares, Inc.

The  increases  in the  Company's  provision  for loan losses,  charge-offs  and
recoveries  for the year ended December 31, 1997 are primarily  attributable  to
the activities of the loan officer  dismissed during 1997. See Item 3 of Part I,
"Legal   Proceedings."  A  special  $1.9  million  provision  for  loan  losses,
approximately  $1.7 million in loan  charge-offs and a recovery of approximately
$690,000  included  in the 1997 data above  relate  exclusively  to the  lending
activities of the dismissed officer.



                                       28

<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, for the periods indicated,  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,
                       -------------------------------------------------------------------------------------------------------------
                                1997                  1996                 1995                   1994                  1993
                       -------------------- ---------------------- -------------------- ---------------------- ---------------------
                                 Loans in              Loans in             Loans in                Loans in             Loans in
                                category as            category as          category as            category as           category as
                                     a                     a                     a                    a                       a
                         Amount  percentage    Amount  percentage    Amount  percentage   Amount   percentage   Amount   percentage
                           of    of total        of     of total       of     of total      of      of total      of      of total
                       allowance gross loans allowance gross loans allowance gross loans allowance gross loans allowance gross loans
                        -------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
                                                        (dollars in thousands)

<S>                     <C>      <C>         <C>       <C>         <C>       <C>         <C>        <C>        <C>        <C>
Commercial and industrial$ 1,078       47%   $    721        47%   $   355         31%    $    265       35%    $     96       28%
Agricultural......           139        9%        176        10%       318         15%         395       20%         357       19%
Real estate-mortgage         444       24%        306        24%       213         30%         267       30%         169       38%
Real estate-construction     311        8%         57         4%        41          5%          24        4%          33        5%
Consumer..........           174        8%         97         9%        58          8%          52        8%          30        6%
Leasing...........           136        4%         63         6%        41          4%          --        --          --        --
Unallocated.......           787        0%        174         0%        22          7%          18        3%          28        4%
                        -------- ---------   --------  ---------  --------   ---------    --------  --------    -------- ---------
Total.............      $  3,069      100%   $  1,594       100%  $  1,048        100%    $  1,021      100%    $    713      100%
                        ======== =========   ========  =========  ========   =========    ========  ========    ======== =========
</TABLE>

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



                                       29

<PAGE>



The following table sets forth, for the periods  indicated,  the distribution of
BNC's average deposit  account  balances and average cost of funds rates on each
category of deposits.  See "Results of  Operations--Net  Interest Income" for an
explanation of changes in deposit volume and costs during the periods presented:

                                        Average Deposits and Deposit Costs
<TABLE>
<CAPTION>

                                                            For the Years Ended December 31,
                            -------------------------------------------------------------------------------------------------
                                         1997                             1996                             1995
                            -------------------------------   -----------------------------   -------------------------------
                                        Percent     Wgtd.                Percent    Wgtd.                 Percent     Wgtd.
                             Average      of         Avg.      Average      of       Avg.      Average       of        Avg.
                             Balance   Deposits      Rate      Balance   Deposits    Rate      Balance    Deposits     Rate
                            ---------  ---------   --------   ---------  --------  --------   ----------  --------   --------
                                                                 (dollars in thousands)

<S>                        <C>         <C>         <C>        <C>         <C>      <C>       <C>          <C>         <C>
Interest-bearing demand
   deposits...............   $50,582     20.36%      3.12%   $  38,920    18.29%     2.58%   $   38,941    23.01%      3.05%
Savings deposits...........    8,904      3.58%      2.31%       8,498     3.99%     2.31%        7,598     4.49%      2.86%
Time deposits ("CDs"):
CDs under $100,000  .......  127,092     51.14%      5.59%     124,682    58.61%     5.66%       93,983    55.53%      5.81%
CDs $100,000 and over......   41,581     16.73%      5.74%      25,499    11.99%     5.82%       15,486     9.15%      6.08%
                           ---------  ---------              ---------  --------             ----------  --------
Total time deposits........  168,673     67.87%      5.63%     150,181    70.60%     5.69%      109,469    64.68%      5.84%
                           ---------  ---------              ---------  --------             ----------  --------
Total interest-bearing
   deposit.................  228,159     91.81%      4.95%     197,599    92.88%     4.93%      156,008    92.18%      5.00%
Noninterest-bearing demand
   deposits................   20,357      8.19%         --      15,147     7.12%        --       13,233     7.82%         --
                           ---------  ---------              ---------  --------             ----------  --------
Total deposits.............$ 248,516     100.0%      4.54%   $ 212,746    100.0%     4.58%   $  169,241    100.0%      4.61%
                           =========  =========              =========  ========             ==========  ========
</TABLE>

In recent years, earning asset growth has outpaced core deposit growth resulting
in the use of  brokered  and out of market  certificates  of  deposit  and other
borrowed  funds.  See  "--Borrowed  Funds."  This  trend has been  common in the
banking  industry because of the  proliferation of non-bank  competitors and the
multitude of financial and  investment  products  available to customers.  As of
December 31, 1997, BNC held a total of $7.5 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,  1997.  See Note 10 to the  Consolidated  Financial  Statements
included under Item 7.

Time  deposits in  denominations  of $100,000 and more totaled  $36.3 million at
December  31, 1997 as compared to $39.7 and $16.6  million at December  31, 1996
and 1995, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 1997:

                                 Time Deposits of $100,000 and Over
                                           (in thousands)

Maturing in:
3 months or less...........................$     17,720
Over 3 months through 6 months.............       5,687
Over 6 months through 12 months............       6,837
Over 12 months.............................       6,090
                                           ------------
    Total..................................$     36,334
                                           ============

From time to time the company may use off-balance-sheet instruments, principally
interest rate swaps, to adjust the interest rate sensitivity of on-balance-sheet
items, including deposits.  During 1997, the Company purchased two such swaps to
adjust the interest rate  sensitivity of $10 million of two year fixed rate time
deposits. The terms of the contracts were as follows:


                                       30

<PAGE>



                               Interest Rate Swaps

                                                   Variable
 Notional                         Fixed-Rate       Rate Paid          Variable
 Amount      Term    Maturity     Received     (as of 9/30/97) (1)   Rate Index
---------- ------- ------------ -------------- ------------------- -------------
$5 million 2 years   3/10/99        6.25%             5.72%        3-Month Libor
$5 million 2 years   4/28/99        6.95%             5.72%        3-Month Libor
--------------------

(1) The swaps were sold in October and November 1997. Gains recognized upon sale
    of the swaps are being amortized as a reduction of interest expense over the
    remaining lives of the original swap contracts. See "--Liquidity, Market and
    Credit  Risk--Interest  Rate Risk Management" and Note 1 to the Consolidated
    Financial  Statements  included under Item 7 for further discussion relating
    to the use of  interest  rate swaps and the  Company's  accounting  policies
    relating to such instruments.

Borrowed Funds. BNC uses short-term  borrowings to support its asset base. These
borrowings  include federal funds purchased and U.S.  Treasury tax and loan note
option  accounts,  securities  sold under  agreements  to  repurchase,  and FHLB
borrowings.  At December 31, 1997,  short-term borrowings were $46.5 million, or
14 percent of total  liabilities as compared to $11.4  million,  or 4 percent of
total liabilities,  at December 31, 1996 and $1.0 million, or 1 percent of total
liabilities,  at December 31,  1995.  See Note 8 to the  Consolidated  Financial
Statements  included  under Item 7 for a listing of  borrowings  outstanding  at
December 31, 1997 and 1996, including interest rates and terms.

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

                              Short-Term Borrowings


                                                   1997      1996    1995
                                                 --------  ------- --------
                                                    (dollars in thousands)

Short-term borrowings outstanding at period end   $46,503  $11,437  $ 1,000
Weighted average interest rate at period end ..     5.77%    5.60%    6.69%
Maximum month-end balance during the period ...   $46,503  $23,416  $34,648
Average borrowings outstanding for the period .   $22,730  $14,532  $ 7,029
Weighted average interest rate for the period .     5.69%    5.60%    5.74%


As of December 31, 1997, the Company's  outstanding long-term debt totaled $21.8
million  and  included  a $3.0  million  term loan and $4.4  million  on a $12.0
million revolving line of credit from Firstar Bank Milwaukee,  N.A. ("Firstar"),
the Subordinated Notes ($15.0 million less unamortized discount of $705,000) and
an $82,000 capital lease.  BNC was in compliance with all related debt covenants
at December 31, 1997. See Notes 1 and 8 to the Consolidated Financial Statements
included under Item 7 for more details regarding the Company's borrowings,  debt
covenants  and the use of  interest  rate  swaps to  adjust  the  interest  rate
sensitivity  of  long-term  debt.  See  also  "--Liquidity,  Market  and  Credit
Risk--Interest Rate Risk Management."

The Company's increased usage of long-term borrowings ($21.8 million at December
31, 1997 as compared  to $10.6 and $3.4  million at December  31, 1996 and 1995,
respectively)  has been  primarily  for the purpose of funding  the  asset-based
lending at BNC Financial. As of December 31, 1997, BNC Financial had outstanding
loans of $15.1  million.  Management  anticipates  loan growth at BNC  Financial
could approximate $15 to $20 million during 1998.

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

                                       31

<PAGE>



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 10 to the Consolidated  Financial Statements included under Item 7 includes
a  summary  of the  risk-based  and  leverage  capital  ratios  of BNC  and  its
subsidiary  banks as of December  31, 1997 and 1996.  As of each of those dates,
BNCCORP and the Banks exceeded capital adequacy  requirements and the Banks were
considered "well capitalized" under prompt corrective action provisions.

During 1997, the Company completed the remodeling of its Centennial Plaza office
building at 116 North 4th Street and  construction  on a branch  office in north
Bismarck.  There are no major capital  expenditures  for  additional  facilities
currently planned for 1998.

Liquidity, Market and Credit Risk

The  Company's  business  activities  generate,  in  addition  to  other  risks,
significant   liquidity,   market  and  credit  risks.  Liquidity  risk  is  the
possibility of being unable to meet all present and future financial obligations
in a timely manner.  Market risk arises from changes in interest rates, exchange
rates,  commodity  prices and equity prices and represents the possibility  that
changes in future  market  rates or prices  will have a  negative  impact on the
Company's  earnings or value.  The Company's  principal  market risk is interest
rate risk. Credit risk is the possibility of loss from the failure of a customer
to perform according to the terms of a contract.  BNC is a party to transactions
involving  financial  instruments  that  create  risks  that  may or may  not be
reflected on a traditional  balance sheet.  These  financial  instruments can be
subdivided into three categories:

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

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

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

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

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

The  Consolidated  Statements  of  Cash  Flows  in  the  Consolidated  Financial
Statements  included  under  Item 7  present  data on cash and cash  equivalents
provided  by and used in  operating,  investing  and  financing  activities.  In
addition to liquidity  from core deposit  growth,  together with  repayments and
maturities  of loans and  investments,  BNC utilizes  brokered  deposits,  sells
securities under agreements to repurchase and borrows  overnight  federal funds.
BNC--North  Dakota  is a  member  of  the  FHLB,  which  affords  the  Bank  the
opportunity  to borrow funds in terms  ranging  from  overnight to ten years and
beyond. Borrowings from the FHLB are collateralized by the Bank's mortgage loans
and  various   securities   from  the  Company's   investment   portfolio.   See
"--Investment  Securities" and Note 8 to the Consolidated  Financial  Statements
included under Item 7. The Company has also obtained funding,  primarily for the
purpose  of  funding  asset-based  loans  at BNC  Financial,  through  long-term
borrowings and the issuance of its Subordinated  Notes.  See "--Borrowed  Funds"
and Note 8 to the Consolidated Financial Statements included under Item 7.

                                       32

<PAGE>



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

                        Major Sources and Uses of Funds


                                               For the Years Ended December 31,
                                              ----------------------------------
                                                1997         1996        1995
                                              --------    ---------  -----------
                                                       (in thousands)
Proceeds from sales and maturities
   of investment securities...................$ 39,226    $  57,553  $   62,763
Net increase in deposits......................  23,054       28,722      20,924
Increase (decrease) in short-term borrowings..  35,066       10,437      (6,360)
Net change in long-term borrowings............  11,151        7,261        (216)
Deposits acquired in branch acquisition (1)...      --           --     104,770
Proceeds from issuance of stock (2)...........      --           --       9,717
Purchases of  investment securities........... (74,121)      22,575)   (138,385)
Net increase in loans......................... (34,124)     (82,664)    (20,272)
Deposits sold with FMB (1)....................      --           --     (39,295)

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

(1) See Note 2 to the Consolidated Financial Statements included under Item 7.

(2) See Note 9 to the Consolidated Financial Statements included under Item 7.

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.  Management  believes  that  its  prudent  management
policies  and  guidelines  will  ensure  adequate  levels of  liquidity  to fund
anticipated needs of on- and off-balance-sheet items. In addition, a contingency
funding plan identifies  actions to be taken in response to an adverse liquidity
event.

Interest  Rate Risk  Management.  Interest  rate risk  arises  from  changes  in
interest rates.  The Company has risk  management  policies to monitor and limit
exposure to interest rate risk.  To date the Company has not  conducted  trading
activities  as a means of managing  interest  rate risk.  BNC's  asset/liability
management  process,  conducted  under the  auspices of the Risk  Committee,  is
utilized to manage the Company's interest rate risk. The measurement of interest
rate risk  associated  with financial  instruments  is meaningful  only when all
related and offsetting on- and  off-balance-sheet  transactions  are aggregated,
and the resulting net positions are identified.

Movements in interest rates can create  fluctuations in the Company's income and
economic  value due to an  imbalance  in the  repricing  or  maturity  of asset,
liability  and  off-balance-sheet  positions.  Interest  rate risk  exposure  is
actively  managed  with the goal of  minimizing  the  impact  of  interest  rate
volatility on current earnings and on the market value of equity.

In general,  the assets and  liabilities  generated  through  ordinary  business
activities  do  not  naturally  create  offsetting  positions  with  respect  to
repricing or maturity  characteristics.  Access to the derivatives market can be
an important  element in maintaining  the Company's  interest rate risk position
within  policy  guidelines.  Using  off-balance-sheet  instruments,  principally
interest rate swaps, the interest rate sensitivity of specific on- balance-sheet

                                       33

<PAGE>

transactions, as well as pools of assets or liabilities, is adjusted to maintain
the desired interest rate risk profile.  See  "--Deposits,"  "--Borrowings"  and
Notes 1 and 8 to the Consolidated Financial Statements included under Item 7 for
a summary of interest  rate swaps  entered into during 1997 and for  information
relating to the Company's  accounting  policies  pertaining to such instruments.
The Company had no interest rate swaps outstanding as of December 31, 1997.

In  general,  swaps used to adjust the  interest  rate  sensitivity  of specific
transactions  would not need to be replaced at maturity since the  corresponding
asset or liability will mature along with the swap. However, swaps against asset
and  liability  pools would have an impact on the overall risk  position as they
mature and might need to be  reissued to maintain  the same  interest  rate risk
profile.  Such swaps could  create  modest  earnings  sensitivity  to changes in
interest rates.

The  Company  uses a variety of  measurement  tools to monitor  and  control the
overall  interest  rate  risk  exposure  of both  the on- and  off-balance-sheet
positions,  including  interest rate swaps. For each measurement tool, the level
of  interest  rate  risk  created  by  the  assets,   liabilities,   equity  and
off-balance-sheet  positions  are a  function  primarily  of  their  contractual
interest rate repricing  dates and  contractual  maturity  (including  principal
amortization) dates.

Static gap analysis is one of the tools used for interest rate risk measurement.
The net  differences  between  the  amount of  assets,  liabilities,  equity and
off-balance-sheet  instruments  repricing within a cumulative calendar period is
typically referred to as the "rate sensitivity  position" or "gap position." The
following  table  sets  forth the  Company's  rate  sensitivity  position  as of
December  31,  1997.  Assets and  liabilities  are  classified  by the  earliest
possible repricing date or maturity, whichever occurs first:

                                       Interest Sensitivity Gap Analysis

<TABLE>
<CAPTION>
                                            Estimated maturity or repricing at December 31, 1997
                                                 0-3       4-12     1-5     Over
                                                months    months   years  5 Years   Total
                                              --------- --------- ------- -------- --------
                                                                (dollars in thousands)
<S>                                           <C>       <C>       <C>     <C>      <C>
Interest-earning assets:
    Cash equivalents .........................$  2,231  $     --  $    -- $     -- $  2,231
    Investment securities (1) ................  28,937     8,385   44,888   12,414   94,624
    Fixed rate loans (2) .....................   8,694     9,946   38,666   19,638   76,944
    Floating rate loans (2) .................. 147,067     5,900    5,499      110  158,576
                                              --------  --------- ------- -------- --------
       Total interest-earning assets .........$186,929  $ 24,231  $89,053 $ 32,162 $332,375
                                              ========  ========= ======= ======== ========
Interest-bearing liabilities:
    NOW and money market accounts ............$ 66,040  $     --  $    -- $     -- $ 66,040
    Savings ..................................   9,590        --       --       --    9,590
    Time deposits under $100,000 .............  29,958    63,241   30,703    1,163  125,065
    Time deposits $100,000 and over ..........  17,720    12,524    5,985      105   36,334
    Borrowings ...............................  53,950        36       34   14,295   68,315
                                              --------  --------  ------- -------- --------
       Total interest-bearing liabilities ....$177,258  $ 75,801  $36,722 $ 15,563 $305,344
                                              ========  ========  ======= ======== ========
Interest rate gap ............................$  9,671  $(51,570) $52,331 $ 16,599 $ 27,031
                                              ========  ========  ======= ======== ========
Cumulative interest rate gap at
   December 31, 1997..........................$  9,671  $(41,899) $10,432 $ 27,031
                                              ========  ========= ======= ========
Cumulative interest rate gap to total assets .   2.69%   (11.63)%   2.90%    7.51%
</TABLE>
--------------------

(1) Investment  securities are generally reported in the timeframe  representing
    the  earliest  of  repricing  date,  call  date (for  callable  securities),
    estimated  life  or  maturity  date.   Estimated  lives  of  mortgage-backed
    securities and collateralized mortgage obligations are

                                       34

<PAGE>



    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.

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.

The  Company's  rate  sensitivity  position 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.

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

The Company  performs an earnings  simulation  analysis to identify more dynamic
interest rate risk exposures,  including embedded option positions. The earnings
simulation analysis,  which is generally run monthly,  estimates the effect that
specific  interest  rate changes  would have on 12 months of pretax net interest
income.  This exercise includes  management  assumptions  regarding the level of
interest rate or balance  changes on  indeterminate  maturity  deposit  products
(savings,  NOW,  money market and demand  deposits)  for a given level of market
rate changes.  These  assumptions  have been developed  through a combination of
historical analysis and future expected pricing behavior. Interest rate caps and
floors  are  included  to the extent  that they are  exercised  in the  12-month
simulation  period.   Additionally,   changes  in  prepayment  behavior  of  the
residential  mortgage and  mortgage-backed  securities  portfolios  in each rate
environment  are captured  using  industry  estimates of  prepayment  speeds for
various coupon segments of the portfolio.  Finally, the impact of planned growth
and anticipated new business activities is factored into the simulation model.



                                       35

<PAGE>



The  Company's  general  policy is to limit the  change in annual  net  interest
income to ten percent for each 100 basis point increase or decrease in rates. As
of  December  31,  1997,  the  Company  had  the  following  estimated  earnings
sensitivity profile:


                                                     Total Change in
                                             -----------------------------------
Amount/Frequency of Interest Rate Change     Interest Rates  Net Interest Income
-------------------------------------------- --------------  ------------------
+50 basis points each quarter beginning
   January 1, 1998.........................            +200              +6.34%
+25 basis points April 1 and July 1, 1998..             +50              +1.86%
0..........................................               0                 --
-25 basis points April 1 and July 1, 1998..             -50              -1.86%
-50 basis points each quarter beginning
   January 1, 1998.........................            -200              -6.76%

Since there are  limitations  inherent in any  methodology  used to estimate the
exposure to changes in market interest  rates,  this analysis is not intended to
be a forecast of the actual effect of changes in market  interest  rates such as
those  indicated  above on the Company.  Further,  this analysis is based on the
Company's  assets  and  liabilities  as  of  December  31,  1997  (with  forward
adjustments for planned growth and anticipated business activities) and does not
contemplate  any actions the Company  might  undertake in response to changes in
market interest rates.

Forward Looking Statements

Statements  included  in  Item  6,  "Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations,"  which are not  historical in
nature are  intended  to be,  and are  hereby  identified  as  "forward  looking
statements"  for  purposes  of the safe  harbor  provided  by Section 21E of the
Securities  Exchange Act of 1934, as amended.  The Company cautions readers that
forward looking statements,  including without limitation, those relating to the
Company's  future business  prospects,  revenues,  working  capital,  liquidity,
capital needs,  interest costs,  income and the  anticipated  impact of the Year
2000 Issue,  are  subject to certain  risks and  uncertainties  that could cause
actual results to differ  materially from those indicated in the forward looking
statements due to several important factors.  These factors include, but are not
limited to: risks associated with the Company's acquisition  strategy;  risks of
loans  and  investments,  including  dependence  on local  economic  conditions;
competition  for the  Company's  customers  from other  providers  of  financial
services;  possible  adverse  effects  of changes in  interest  rates;  risks of
unanticipated  consequences  related to the impact of the Year 2000 Issue on the
Company or its  customers;  and other risks which are  difficult  to predict and
many of which are beyond the control of the Company.

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.


                                       36

<PAGE>



Recent Accounting Pronouncements

Notes 1, 16 and 17 to the Consolidated  Financial Statements included under Item
7 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..................................... 38
Consolidated Balance Sheets -December 31, 1997 and 1996...................... 39
Consolidated Statements of Income - the years ended
   December 31, 1997, 1996 and 1995.......................................... 40
Consolidated Statements of Stockholders' Equity - the periods
   ended December 31, 1997, 1996 and 1995.................................... 41
Consolidated Statements of Cash Flows - the years ended
   December 31, 1997, 1996 and 1995.......................................... 42
Notes to Consolidated Financial Statements................................... 43


                                       37

<PAGE>






                      REPORT OF INDEPENDENT PUBLIC ACCOUNTS



To BNCCORP, Inc.:

We have audited the accompanying consolidated balance sheets of BNCCORP, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the  three  years in the  period  ended  December  31,  1997.  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,  1997  and  1996,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

                                                   ARTHUR ANDERSEN LLP


Minneapolis, Minnesota,
   February 18, 1998

                                       38

<PAGE>



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


                              ASSETS                       1997          1996
                                                      -------------  -----------
CASH AND DUE FROM BANKS.............................. $     13,058   $    5,495
INTEREST-BEARING DEPOSITS WITH BANKS.................        2,231          865
FEDERAL FUNDS SOLD...................................           --        6,900
SECURITIES AVAILABLE FOR SALE (Note 3)...............       94,624       59,491
LOANS AND LEASES, net of allowance for loan losses
    of $3,069 in 1997 and $1,594 in 1996 (Note 4)....      232,131      201,403
PREMISES, LEASEHOLD IMPROVEMENTS AND
    EQUIPMENT, net (Note 5)..........................        8,500        6,657
ACCRUED INTEREST RECEIVABLE..........................        2,865        2,442
OTHER ASSETS.........................................        2,461        1,226
DEFERRED CHARGES AND INTANGIBLE ASSETS, net (Note 6).        4,251        4,079
                                                      -------------  -----------
                                                      $    360,121   $  288,558
                                                      =============  ===========
                 LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
    Noninterest-bearing.............................. $     25,795   $   22,218
    Interest-bearing--
        Savings, NOW and money market................       75,630       52,483
        Time deposits $100,000 and over..............       36,334       39,725
        Other time deposits..........................      125,065      125,344
NOTES PAYABLE (Note 8)...............................       68,315       22,052
OTHER LIABILITIES....................................        4,708        4,101
                                                      -------------  -----------
           Total liabilities.........................      335,847      265,923
                                                      -------------  -----------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 15)
STOCKHOLDERS' EQUITY (Note 9):
    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       13,768
    Retained earnings................................       10,529        9,017
    Treasury stock (25,380 shares)...................         (216)        (216)
    Unrealized holding gain on securities available
       for sale, net of income tax effects of
       $97 and $16 (Note 3)..........................          170           43
                                                      -------------  -----------
           Total stockholders' equity................       24,274       22,635
                                                      -------------  -----------
                                                      $    360,121    $ 288,558
                                                      =============  ===========
        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       39

<PAGE>



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

                                                  1997        1996       1995
                                               ----------   --------   ---------
INTEREST INCOME:
   Interest on loans.......................... $  22,003    $16,383    $ 11,285
   Interest on investment securities--
    Taxable...................................     3,714      3,739       2,919
    Tax-exempt................................        71         94          18
    Dividends.................................       446        576         276
   Other......................................       307        165         785
                                              ----------   --------   ---------
           Total interest income..............    26,541     20,957      15,283
                                              ----------   --------   ---------
INTEREST EXPENSE:
   Deposits...................................    11,282      9,738       7,802
   Notes payable..............................     2,633      1,369         740
                                              ----------   --------   ---------
           Total interest expense.............    13,915     11,107       8,542
                                              ----------   --------   ---------
           Net interest income................    12,626      9,850       6,741
PROVISION FOR LOAN LOSSES (Note 4)............     2,619        739         168
                                              ----------   --------   ---------
NET INTEREST INCOME AFTER PROVISION FOR
    LOAN LOSSES...............................    10,007      9,111       6,573
                                              ----------   --------   ---------
NONINTEREST INCOME:
   Fees on loans..............................     1,018      1,276         559
   Service charges............................       471        418         401
   Rental income..............................        56         34          37
   Net gain (loss) on sales of securities.....         8         19         (18)
   Other......................................       890        349         757
                                              ----------   --------   ---------
           Total noninterest income...........     2,443      2,096       1,736
                                              ----------   --------   ---------
NONINTEREST EXPENSE:
   Salaries and employee benefits.............     5,234      4,311       3,352
   Depreciation and amortization..............     1,217        980         619
   Occupancy..................................       888        675         413
   Office supplies, telephone and postage.....       575        505         521
   Professional services......................       528        360         246
   Marketing and promotion....................       356        352         424
   FDIC and other assessments.................       171        239         296
   Other......................................       925        791         640
                                              ----------   --------   ---------
           Total noninterest expense..........     9,894      8,213       6,511
                                              ----------   --------   ---------
INCOME BEFORE TAXES...........................     2,556      2,994       1,798
INCOME TAXES (Note 7).........................     1,044      1,147         641
                                              ----------   --------   ---------
NET INCOME....................................$   1,512    $ 1,847    $  1,157
                                              ==========   ========   =========
BASIC EARNINGS PER COMMON SHARE (Note 17).....$    0.65    $  0.79    $   0.67
                                              ==========   ========   =========
DILUTED EARNINGS PER COMMON SHARE (Note 17)...$    0.64    $  0.79    $   0.67
                                              ==========   ========   =========

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

                                       40

<PAGE>









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

<TABLE>
<CAPTION>

                                                                                        Unrealized
                                                                                        Gain (Loss)
                                       Common Stock                                     on Securities
                                    -----------------    Capital   Retained  Treasury   Available
                                       Shares  Amount    Surplus    Earnings   Stock    for Sale,   NetTotal
                                    ------------------   --------   -------   -------   ----------  --------
<S>                                 <C>        <C>     <C>          <C>       <C>       <C>         <C>
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
   Net income.......................        --      --         --     1,512        --           --     1,512
   Change in unrealized holding gain
    on securities available for sale,
    net of income taxes.............        --      --         --        --        --          127       127
                                    ---------- -------   --------   -------   -------   ----------  --------
BALANCE, December 31, 1997.......... 2,364,100 $   23    $13,768    $10,529   $  (216)  $     170   $24,274
                                    ========== =======   ========   =======   =======   ==========  ========
</TABLE>




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


                                       41

<PAGE>



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

                                                        1997     1996      1995
                                                     -------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net Income...................................... $ 1,512  $  1,847  $ 1,157
    Adjustments to reconcile net income to net
      cash provided by operating activities--
        Provision for loan losses...................   2,619       739      168
        Depreciation and amortization...............     676       499      377
        Amortization of intangible assets...........     531       481      242
        Net premium amortization (discount
           accretion) on securities.................    (131)     (110)    (243)
        Proceeds from loans recovered...............     777       157      207
        Change in accrued interest receivable and
           other assets, net........................  (2,371)   (1,866)    (935)
        (Gain) loss on sale of bank premises and
           equipment................................      (2)      (10)      23
        Net realized (gains) losses on sales of
           securities...............................      (8)      (19)      18
        Provision (benefit) for deferred taxes......    (367)     (182)      52
        Change in other liabilities, net............     893       157    1,624
        Gain on sale of Farmers & Merchants Bank
           of Beach (Note 2)........................      --        --     (316)
        Originations of loans to be participated.....(58,305)  (45,238) (44,231)
        Proceeds from participations of loans.......  58,305    45,238   44,231
                                                     -------- --------- --------
           Net cash provided by operating activities.  4,129     1,693    2,374
                                                     -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Net change in federal funds sold.................  6,900    (3,950)  (2,900)
    Purchases of investment securities...............(74,121)  (22,575)(138,385)
    Proceeds from sales of investment securities..... 27,198    48,700   89,143
    Proceeds from maturities of investment securities 12,137     8,853  (26,380)
    Net increase in loans............................(34,124)  (82,664) (20,272)
    Additions to premises, leasehold improvements
       and equipment................................. (2,598)   (1,438)  (1,973)
    Proceeds from sale of premises and equipment.....     81        70      112
    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
                                                     -------- --------- --------
           Net cash used in investing activities.....(64,527)  (53,004) (85,959)
                                                     -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in demand, savings, NOW and money
       market accounts............................... 26,724     7,095    8,960
    Net increase (decrease) in time deposits......... (3,670)   21,627   11,964
    Net increase (decrease) in short-term borrowings  35,066    10,437   (6,360)
    Repayments of long-term borrowings...............(23,293)   (1,954)    (716)
    Proceeds from long-term borrowings............... 34,444     9,215      500
    Amortization of discount on subordinated notes...     46        --       --
    Amortization of deferred charges.................     10        --       --
    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)
    Proceeds from issuance of stock (Note 9)........      --        --    9,717
    Stock offering costs............................      --        (8)      --
    Dividends paid to minority stockholders.........      --        --      (92)
                                                     -------- --------- --------
           Net cash provided by financing activities. 69,327    46,412   89,448
                                                     -------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.  8,929   (4,899)    5,863
CASH AND CASH EQUIVALENTS, beginning of year.........  6,360    11,259    5,396
                                                     -------- --------- --------
CASH AND CASH EQUIVALENTS, end of year...............$15,289  $  6,360  $11,259
                                                     ======== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
    Interest paid....................................$13,657  $ 11,347  $ 6,383
                                                      ======= ========= ========
    Income taxes paid................................$ 1,659  $    934  $   615
                                                     ======== ========= ========
        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       42

<PAGE>



                         BNCCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 1997 and 1996


1.  Nature of Activities and Significant Accounting Policies

The  following  is a  summary  of  the  nature  of  activities  and  significant
accounting  and  financial   reporting   policies  followed  by  BNCCORP,   Inc.
("BNCCORP") and its  subsidiaries  in preparing and presenting its  consolidated
financial statements.

Nature of Activities.  BNCCORP is a registered bank holding company incorporated
under the laws of  Delaware.  It is the  parent  company  of BNC  National  Bank
("BNC--North  Dakota"),  BNC  National  Bank  of  Minnesota   ("BNC--Minnesota")
(collectively,  "the Banks"), and BNC Financial Corporation ("BNC Financial"), a
commercial  finance  company.  Through these  wholly-owned  subsidiaries,  which
operate out of twelve locations in North Dakota and Minnesota,  BNCCORP provides
a broad range of banking and financial services to small and mid-size businesses
and individuals.  An additional  wholly-owned  subsidiary,  Bismarck Properties,
Inc., is inactive.

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

Cash and Cash  Equivalents.  For purposes of  presentation  in the  consolidated
statements of cash flows, cash and cash equivalents are defined as those amounts
included in the  consolidated  balance sheet  captions "cash and due from banks"
and "interest-bearing  deposits with banks" and include all cash on hand as well
as  interest-bearing   and   noninterest-bearing   amounts  due  from  financial
institutions.

Securities.  Investments are classified into three  categories and accounted for
as follows:

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

    Held-to-Maturity.   Held-to-maturity  securities  are  securities  that  the
    Company  has the  positive  intent  and  ability  to hold to  maturity.  All
    securities in this category are reported at  historical  cost,  adjusted for
    premiums and  discounts  that are  recognized  in interest  income using the
    effective interest method over the period to maturity.

    Available-for-Sale.  All other  securities  not  classified  as  trading  or
    held-to-maturity  are classified as  available-for-sale.  Available-for-sale
    securities are reported at fair value with any unrealized  holding gains and
    losses,  net  of  tax  effects,  reflected  as a net  amount  in a  separate
    component  of  stockholders'  equity.  Gains  and  losses  on  the  sale  of
    available-for-sale  securities  are  determined  using the adjusted  cost of
    specific  securities  sold and are  included  in net gain (loss) on sales of
    securities in the consolidated  statements of income. Premiums and discounts
    are recognized in interest  income using the effective  interest method over
    the period to sale or maturity.

Declines in the fair value of individual held-to-maturity and available-for-sale
securities  below  their  cost that are other  than  temporary  could  result in
write-downs of the individual  securities to their fair value. Such write-downs,
should they occur, would be included in earnings as realized losses.  There were
no such write-downs during 1997, 1996 or 1995.

                                       43

<PAGE>



Loans Receivable.  Loans receivable are stated at the amount of unpaid principal
net of unearned fees and costs and an allowance for loan losses.

Loans are generally  placed on a nonaccrual  status for  recognition of interest
income when, in the opinion of management, uncertainty exists as to the ultimate
collection of principal or interest.  At the time a loan is placed on nonaccrual
status,  accrued  but  uncollected  interest  income  applicable  to the current
reporting  period is reversed  against  interest  income of the current  period.
Accrued but uncollected interest income applicable to previous reporting periods
is charged  against the loan loss reserve as the Company  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.

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

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

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

Loan Fee Income. The Company 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. A significant  portion of the Company's loan fee income
is  derived  from  loans  which  are  originated  and  subsequently  sold  on  a
non-recourse basis. Such fees are recognized in income at the time of sale.

Mortgage  Servicing  and  Transfers of  Financial  Assets.  The Company  adopted
Statement of Financial  Accounting  Standards No. 125, "Accounting for Transfers
and Servicing of Financial  Assets and  Extinguishments  of  Liabilities  ("SFAS
125") on January 1, 1997. SFAS 125 superseded  Statement of Financial Accounting
Standards No. 122,  "Accounting for Mortgage  Servicing  Rights" and established
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.  The
Company  also  adopted  Statement of  Financial  Accounting  Standards  No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
("SFAS 127"), on January 1, 1997. SFAS 127 deferred  certain  provisions of SFAS
125 until January 1, 1998.

The Banks regularly sell loans to others on a non-recourse basis. Sold loans are
not included in the accompanying  balance sheets. The Banks generally retain the
right to service the loans as well as the right to

                                       44

<PAGE>



receive a portion of the interest  income on the loans. At December 31, 1997 and
1996,  the Banks were  servicing  loans for the benefit of others with aggregate
unpaid  principal  balances of $65.8 and $57.3 million,  respectively.  The vast
majority of the loans sold by the Banks are commercial lines of credit for which
balances and related payment streams cannot be reasonably  estimated in order to
determine the fair value of the servicing  rights and/or future  interest income
retained by the banks.

Premises, Leasehold Improvements and Equipment. Premises, leasehold improvements
and  equipment  are  reported  at  cost  less   accumulated   depreciation   and
amortization.  Depreciation and amortization for financial reporting purposes is
charged to operating expense using the  straight-line  method over the estimated
useful  lives of the  assets.  Estimated  useful  lives  are up to 40 years  for
buildings  and  three  to ten  years  for  furniture  and  equipment.  Leasehold
improvements  are amortized  over the shorter of the lease term or the estimated
useful  life  of  the  improvement.  Accelerated  methods  of  depreciation  and
amortization  are used for income tax  purposes.  Maintenance  and  repairs  are
charged to operations when incurred.  Betterments and renewals are  capitalized.
When  premises,  leasehold  improvements  or  equipment  are  sold or  otherwise
disposed of, the asset account and related accumulated  depreciation account are
relieved,  and any gain or loss is included in  operations.  See  "Impairment of
Long-Lived Assets."

Other Real Estate Owned. Real estate properties acquired through, or in lieu of,
loan  foreclosure  are  included  in other  assets in the  balance  sheet.  Such
properties  are  initially  recorded  at fair  value at the date of  acquisition
establishing  a new  cost  basis.  Write-downs  to  fair  value  at the  time of
acquisition  are charged to the  allowance for loan losses.  After  foreclosure,
valuations  are  periodically  performed  by  management  and the real estate is
carried  at the  lower of  carrying  amount  or fair  value  less  cost to sell.
Write-downs,  revenues and  expenses  incurred  subsequent  to  foreclosure  are
charged to operations as  recognized / incurred.  There were no such  properties
held at December 31, 1997.  At December 31, 1996,  the  Company's  investment in
such properties was $159,000.

Deferred Charges and Intangible  Assets.  Deferred charges and intangible assets
includes  premiums paid for deposits  assumed,  goodwill,  debt offering  costs,
organization  costs and other  miscellaneous  intangibles.  Deposit premiums are
being amortized over their estimated lives of ten years using the  straight-line
method.  Goodwill  represents the aggregate  excess of the cost of  subsidiaries
acquired over the fair value of their net assets at dates of acquisition  and is
being  amortized  over its  estimated  useful  life of 15 to 25 years  using the
straight-line method. Debt offering costs represent legal,  accounting and other
fees and expenses  associated  with the issuance of the  Company's 8 5/8 percent
subordinated  notes (see Note 8). These costs are being  amortized over the term
of the notes  using the  effective  interest  rate  method.  Organization  costs
represent  incorporation,  legal,  accounting and other similar fees  associated
with  establishment  of  BNCCORP  or its  subsidiaries.  Such  costs  are  being
amortized  over  five  years  using  the  straight-line  method.  The  Company's
intangible assets are monitored to assess recoverability and determine if events
and  circumstances  require  adjustment to the recorded  amounts or amortization
periods. See "Impairment of Long-Lived Assets."

Impairment  of Long-Lived  Assets.  The Company  adopted  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") on January 1,
1996. SFAS 121 establishes standards for recognizing and measuring impairment of
long-lived  assets  including  property  and  equipment,   certain  identifiable
intangibles  and  goodwill.  Assets  subject to the  provisions  of SFAS 121 are
reviewed for impairment and, if such  impairment is identified,  written down to
their fair value.  Identified  impairment  losses are charged to operations.  No
such impairment losses were recognized during 1997 or 1996.

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

                                       45

<PAGE>



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

    Cash and Cash Equivalents, Noninterest-Bearing Deposits and Demand Deposits.
    The   carrying   amounts  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 the Company's  securities  equals the quoted
     market price.

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

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

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

Derivative Financial  Instruments--Interest  Rate Swaps. The Company enters into
interest  rate  swaps as part of its  interest  rate  risk  management  program.
Interest rate swaps involve the contractual  exchange of fixed and floating rate
interest payment obligations based on a notional principal amount. Interest rate
swaps  subject the Company to market risk  associated  with  changes in interest
rates, as well as the risk of default by a counterparty  to the agreements.  The
Company  does  not  conduct  trading  activities  or hold  derivative  financial
instruments for speculative purposes.

Pursuant to the accrual method of accounting, each amount paid or received under
an interest rate swap contract that is used in the interest rate risk management
process is  recognized  in  earnings  during the period to which the  payment or
receipt  relates as an adjustment to interest income or expense over the life of
the related asset or liability. Interest rate swap contracts result in gains and
losses  subsequent to the date of the contract,  due to interest rate movements.
The Company does not recognize changes in the market value of these contracts as
gains or losses in the period of change because the contracts  qualify as hedges
of interest rate risk exposures  (i.e.,  the designated  hedged items expose the
Company to interest rate risk, and the contracts reduce the risk of exposure and
are designated as hedges of the applicable  items).  Gains or losses  associated
with the  termination of interest rate swap  contracts for identified  positions
(hedges) are deferred and amortized  over the original life of the hedge,  as an
adjustment  to the yield of the hedged  asset or  liability,  if the hedged item
remains  outstanding.  If the  hedged  item is no longer  outstanding,  gains or
losses  resulting  from the  termination  of a swap contract would be recognized
into income in the period of termination.  Unamortized  deferred gains or losses
are included in the balance sheet as deferred income or deferred charges.

The Company had no interest rate swap contracts outstanding at December 31, 1997
or 1996. At December 31, 1997,  deferred  gains of $423,000  resulting  from the
sale of interest  rate swap  contracts  during 1997 were included in the balance
sheet and were being  amortized  as a  reduction  of interest  expense  over the
original lives of the swap contracts.

Trust Fees.  Trust fees are recorded on an accrual basis.


                                       46

<PAGE>



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.

Earnings Per Common Share. The Company adopted Statement of Financial Accounting
Standards No. 128,  "Earnings Per Share" ("SFAS 128") during the fourth  quarter
of 1997.  SFAS 128  supersedes  Accounting  Principals  Board  Opinion  No.  15,
"Earnings per Share" ("APB 15") and replaces  primary and fully diluted earnings
per share  ("EPS")  under APB 15 with basic and  diluted  EPS.  For  comparative
purposes,  EPS for the  years  ended  December  31,  1996  and  1995  have  been
recalculated in accordance with the provisions of SFAS 128 (see Note 17).

Recently Issued Accounting Standards. The Company adopted Statement of Financial
Accounting Standards No. 129 "Disclosure of Information About Capital Structure"
("SFAS 129") during the fourth quarter of 1997.  SFAS 129 summarizes  disclosure
requirements pertaining to an entity's capital structure.  Because SFAS 129 is a
compilation of several previously issued standards and pronouncements,  adoption
of this  standard has not had a material  affect on the  Company's  consolidated
financial statements.

Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income" ("SFAS 130"),  effective for fiscal years  beginning  after December 15,
1997,  requires  that  changes in the amounts of items  which  bypass the income
statement and are only reported with a balance in stockholders'  equity be shown
in a financial statement.  While SFAS 130 does not require a specific format for
the  financial  statement,  it does  require that an amount  representing  total
comprehensive  income be reported and that prior period financial  statements be
reclassified  for comparative  purposes.  The Company adopted SFAS 130 effective
January 1, 1998 and plans to include  comprehensive  income  disclosures  in its
financial  statements for the quarter ended March 31, 1998. Financial statements
will include,  as a  comprehensive  income  component,  changes in the amount of
unrealized  holding gains and losses on securities  available for sale.  The new
reporting  requirement  will not  impact  net  income or  earnings  per share as
currently calculated and presented.

Statement of Accounting  Standards No. 131,  "Disclosures  About  Segments of an
Enterprise and Related Information",  effective for fiscal years beginning after
December 15, 1997,  supersedes  Statement of Financial  Accounting Standards No.
14, "Financial  Reporting for Segments of a Business  Enterprise",  and requires
that companies  disclose  segment data based on how management  makes  decisions
about  allocating  resources to segments and measuring  their  performance.  The
Company expects to include the required segment  disclosures  beginning with its
annual financial  statements for the year ending December 31, 1998.  Adoption of
the standard will require additional  disclosures in the Company's  consolidated
financial  statements,  however,  it will not have an effect on consolidated net
income or stockholders' equity.

Regulatory Environment.  BNCCORP and its subsidiaries are subject to regulations
of certain state and federal agencies,  including periodic examinations by those
regulatory  agencies.  BNCCORP  and its  subsidiary  banks are also  subject  to
minimum  regulatory capital  requirements.  At December 31, 1997, capital levels
exceed minimum capital requirements (see Note 10).

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

                                       47

<PAGE>



Use of Estimates.  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:

The following mergers and acquisitions  were consummated  during the three years
ended December 31, 1997:

In August 1995,  BNC--North  Dakota  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  $5.4
million.  The purchase was funded with proceeds from the sale of common stock in
BNCCORP's initial public offering (July 1995). The acquisition was accounted for
using the purchase  method of accounting.  One of the seven branches was sold in
October 1995 along with Farmers & Merchants  Bank of Beach  ("FMB") (see below).
The resulting  premiums paid for deposits of $3.5 million and acquisition  costs
of $112,000 are being amortized over 10 and 15 years, respectively.

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

The following pro forma  financial  information  has been prepared  assuming the
sale of FMB had been  consummated  at the  beginning of the  respective  period.
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 year  ended  December  31,  1995 (in
thousands, except per share data) is as follows:

Total interest income...............  $       14,108
Total interest expense..............           7,567
Net interest income.................           6,541
Net income..........................           1,381
                                      ==============
Basic earnings per common share.....  $         0.80
                                      ==============
Diluted earnings per common share...  $         0.80
                                      ==============

In January 1996,  BNCCORP was granted a charter for its de novo  BNC--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/St.  Paul area. The capital  injection was funded  through  proceeds
from the sale of common stock in BNCCORP's initial public offering.


                                       48

<PAGE>



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

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

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

In August  1997,  BNC--North  Dakota  purchased a management  agreement  between
Preferred  Investment  Services,  Inc., and Preferred Pension Investors I-87, an
Illinois Partnership (the "Agreement"). An executive officer/director of BNCCORP
owned  stock  in  Preferred  Investment  Services,  Inc.  Under  the  Agreement,
BNC--North Dakota, through its trust and private banking division,  will provide
administrative  management  services for pension assets.  The purchase price was
$394,000,  or 4.71  percent  of total  assets  under  management  at the time of
purchase. Goodwill of $394,000 resulting from the transaction is being amortized
over 15 years.

On December 19, 1997, the Company and Lips & Lahr,  Inc.  ("Lips & Lahr") agreed
in principle  that all of the  outstanding  common stock of Lips & Lahr would be
acquired by the Company in a business combination  accounted for as a pooling of
interests.  The  transaction  was finalized on January 1, 1998,  and in February
1998,  stockholders  of Lips & Lahr received  63,406 shares of BNCCORP's  common
stock.  Operations of Lips & Lahr, which engages in the insurance business, were
merged into J.D.  Meier,  the wholly owned  insurance  subsidiary  of BNC--North
Dakota,  and the name of the  combined  agency was  subsequently  changed to BNC
Insurance, Inc. Under the provisions of the agreement and plan of merger related
to the business  combination,  former stockholders of Lips & Lahr have the right
to receive additional shares of BNCCORP common stock on the first anniversary of
the  initial  share  distribution  date  based on a  formula  relating  to final
resolution  of  contingencies  pending  at  the  consummation  date.  Historical
financial  information  presented in future  reports will be restated to include
Lips & Lahr.

The following  summarized  operating data gives effect to the acquisition had it
occurred on January 1, 1995:


                                                 Year ended December 31,
                                       -----------------------------------------
                                           1997          1996            1995
                                       ------------  ------------   ------------
                                                        (In thousands)
Total revenues:
    BNCCORP, Inc. and subsidiaries.... $     28,984  $     23,053   $     17,019
    Lips & Lahr.......................        1,682         1,644          1,667
                                       ------------  ------------   ------------
                                       $     30,666  $     24,697   $     18,686
                                       ============  ============   ============
Net income (loss):
    BNCCORP, Inc. and subsidiaries.... $      1,512  $      1,847   $      1,157
    Lips & Lahr.......................        (802)          (15)             85
                                       ------------  ------------   ------------
                                       $        710  $      1,832   $      1,242
                                       ============  ============   ============
Basic earnings per common share....... $       0.30  $       0.78   $       0.72
                                       ============  ============   ============
Diluted earnings per common share..... $       0.30  $       0.78   $       0.72
                                       ============  ============   ============

                                       49

<PAGE>

3.  Debt and Equity Securities:

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets  according  to  management's   intent.  The  Company  had  no  securities
designated as trading in its portfolio at December 31, 1997 or 1996.

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


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


                 1996
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
State and municipal bonds..............       759        41        --        800
Equity securities......................     7,773        13        (7)     7,779
                                        ---------  --------  --------   --------
                                        $  59,432  $    113  $    (54)  $ 59,491
                                        =========  ========  ========    =======

There were no held-to-maturity  securities in the Company's investment portfolio
at December 31, 1997 or 1996.

The Company  recognized net gains (losses) on sales of securities  available for
sale of  approximately  $8,000,  $19,000 and  $(18,000) in 1997,  1996 and 1995,
respectively.



                                       50

<PAGE>



The scheduled  contractual  maturities  of securities  available for sale (other
than equity securities) at December 31, 1997, were as follows:


                                                Available-for-Sale
                                                    Securities
                                           -----------------------------
                                                             Estimated
                                            Amortized         Market
                                               Cost            Value
                                           ------------    -------------
Due in one year or less................... $     14,032    $      14,022
Due after one year through five years.....       23,500           23,538
Due after five years through ten years....       11,627           11,785
Due after ten years.......................       37,962           38,043
                                           ------------    -------------
    Total................................. $     87,121    $      87,388
                                           ============    =============

Securities,  carried at  approximately  $80.1 and $35.2  million at December 31,
1997 and 1996, respectively,  were pledged as collateral for public deposits and
borrowings, including borrowings with the Federal Home Loan Bank ("FHLB").

4.  Loans and Leases:

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


                                           1997              1996
                                       -------------     ------------
Commercial and industrial............. $    111,429      $    94,701
Agricultural..........................       21,064           20,673
Real estate:
   Mortgage...........................       56,875           47,451
   Construction.......................       18,215            8,806
Consumer..............................       18,173           18,343
Lease financing.......................        9,211           12,970
Other.................................          553              391
                                       ------------     ------------
    Total.............................      235,520          203,335
Less:
   Allowance for loan losses..........       (3,069)          (1,594)
   Deferred loan fees and costs.......         (320)            (338)
                                       -------------     ------------
        Net loans and leases.......... $    232,131      $   201,403
                                       =============     ============

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


                                  1997              1996
                                ---------         ---------
North Dakota...................     52%               66%
Minnesota......................     38                24
Other..........................     10                10
                                ---------         ---------
        Totals.................    100%              100%
                                =========         =========

                                       51

<PAGE>

Commercial  loan  borrowers  are generally  small- and  mid-sized  corporations,
partnerships  and sole  proprietors  in a wide variety of  businesses.  Loans to
consumers  are both  secured  and  unsecured.  Real  estate  loans  are fixed or
variable rate and include both  amortizing and revolving  line-of-credit  loans.
Real estate  mortgage loans include various types of loans for which the Company
holds real  property as  collateral.  Of the $56.9 and $47.5 million real estate
mortgages as of December 31, 1997 and 1996, respectively,  approximately $31 and
$20 million,  respectively,  were loans made to commercial  customers  where the
collateral for the loan is, among other things,  the real estate occupied by the
business of the customer. Accordingly,  certain loans categorized as real estate
mortgage  loans can be  characterized  as commercial  loans which are secured by
real estate. Single- and multi-family  residential mortgage loans totaling $14.7
and $1.5  million at December 31, 1997 and 1996,  respectively,  were pledged as
collateral for FHLB borrowings.

The  Company's  credit  policies   emphasize   diversification   of  risk  among
industries,  geographic  areas and borrowers.  The only  concentration  of loans
exceeding 10 percent of total loans at December 31, 1997 is construction  loans.
Loans  within  this  category  are   diversified   across   different  types  of
contractors,  geographically  disbursed and secured by many  different  types of
collateral.

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


                                                  1997              1996
                                                ---------         ---------
Loans to officers, directors and employees..... $   1,114         $    806
Loans to other related parties.................       310              259
                                                ---------         ---------
    Total loans to officers, directors and
    employees and other related parties........ $   1,424         $  1,065
                                                =========         =========

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


                                              1997                 1996
                                      -------------------- ---------------------
                                       Recorded  Valuation Recorded   Valuation
                                      Investment Allowance Investment Allowance
                                      ---------- --------- ---------- ----------
Impaired loans --
    Valuation allowance required....  $   12,544 $     762 $    3,323 $      171
    No valuation allowance required.         116        --        686         --
                                      ---------- --------- ---------- ----------
        Total impaired loans........  $   12,660 $     762 $    4,009 $      171
                                      ========== ========= ========== ==========

Impaired loans generally  include loans on which management  believes,  based on
current information and events, it is probable that the Company will not be able
to collect  all  amounts  (i.e.,  contractual  principal  and  interest)  due in
accordance  with the terms of the loan  agreement  and which are  analyzed for a
specific  reserve   allowance.   The  Company  generally   considers  all  loans
risk-graded  6  (Substandard)  and  7  (Doubtful)  as  well  as  nonaccrual  and
restructured loans as impaired loans.

The valuation  allowance on impaired loans is included in the allowance for loan
losses noted above.


                                       52

<PAGE>



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


                                                    1997     1996      1995
                                                 --------- -------- --------
Average recorded investment in impaired loans... $  7,308  $  3,555 $  2,061
                                                 ========= ======== ========
Interest income recognized on impaired loans.... $    747  $    216 $    122
                                                 ========= ======== ========
Average recorded investment in impaired loans
    as a percentage of average total loans......     3.3%      2.1%     1.8%
                                                 ========= ======== ========

Nonaccrual and Restructured Loans. As of December 31, 1997 and 1996, the Company
had $376,000 and $22,000,  respectively,  of  nonaccrual  loans and $104,000 and
$136,000,  respectively,  of  restructured  loans  (included  as impaired  loans
above).  The following  table indicates the effect on income if interest on such
loans outstanding at year-end had been recognized at original  contractual rates
during the year ended December 31 (in thousands):

                                                   1997       1996       1995
                                                 --------   -------   --------
Interest income that would have been recorded... $     56   $    18   $     69
                                                 ========   =======   ========
Interest income recorded........................ $     26   $     6   $     46
                                                 ========   =======   ========
Effect on interest income....................... $     30   $    12   $     23
                                                 ========   =======   ========

As of December 31, 1997, the Company had no commitments to lend additional funds
to  borrowers  with  loans  whose  terms have been  modified  in  troubled  debt
restructurings.

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


                                                   1997        1996        1995
                                                 --------   ---------   --------
Balance, beginning of year...................... $  1,594    $  1,048   $ 1,021
    Provision for loan losses...................    2,619         739       168
    Loans charged off...........................   (1,921)       (350)     (248)
    Loans recovered.............................      777         157       207
    Allowance attributable to subsidiary sold...       --          --      (100)
                                                 --------    --------   --------

Balance, end of year............................ $  3,069    $  1,594   $ 1,048
                                                 ========    ========   ========

The increases in the Company's provision for loan losses,  loans charged off and
loans  recovered  for the year ended  December  31,  1997  relate  primarily  to
questionable  loan  practices  by a former loan  officer at  BNC--North  Dakota.
During  a  routine  audit  of  the  subsidiary's  loan  portfolio,  the  Company
discovered  lending  practices  conducted in violation of normal Company policy.
After conducting a review of the affected loans, the Company terminated the loan
officer involved and recorded a special $1.9 million  provision for loan losses.
Approximately  $1.7  million  in  loans  related  to  the  dismissed   officer's
activities  were charged off during 1997.  On July 21, 1997,  the Company  filed
suit   against  the   terminated   loan   officer   and  her  husband   alleging
misrepresentations,  reliance on  misrepresentations  and  breaches of fiduciary
responsibilities and conflicts of

                                       53

<PAGE>



interest and seeking  monetary  damages  against the loan officer and  equitable
relief by way of the imposition of a constructive trust against the loan officer
and her husband.

In December 1997,  following  negotiations  with its fidelity bond carrier,  the
carrier made a payment of $762,000 to be applied  against any covered  losses of
the  Company.  Approximately  $690,000  of  this  payment  was  credited  to the
Company's  allowance for loan losses.  A final settlement of covered losses with
the fidelity bond carrier has not been reached and negotiations with the carrier
are continuing.  While there can be no assurances concerning the amount of final
recovery on the claim,  Company management  anticipates that final settlement of
the claim will result in an additional payment by the carrier.

5.  Premises, Leasehold Improvements and Equipment:

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


                                                             1997        1996
                                                           ---------  ----------
Land and improvements..................................... $     508  $     508
Buildings and improvements................................     4,888      3,346
Leasehold improvements....................................       760        719
Furniture, fixtures and equipment.........................     4,628      3,701
                                                           ---------  ----------
    Total cost............................................    10,784      8,274
Less accumulated depreciation and amortization............    (2,284)    (1,617)
                                                           ---------  ----------
    Net premises, leasehold improvements and equipment.... $   8,500  $   6,657
                                                           =========  ==========

Depreciation and amortization  expense on premises,  leasehold  improvements and
equipment totaled approximately  $676,000,  $499,000, and $377,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

6.  Deferred Charges and Intangible Assets:

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


                                                             1997        1996
                                                           --------    --------
Premiums paid for deposits assumed........................ $  4,022    $  4,022
Goodwill..................................................    1,182         826
Debt offering costs.......................................      161          --
Organization costs and other miscellaneous intangibles....      477         282
                                                           --------    --------
    Total costs...........................................    5,842       5,130
Less accumulated amortization ............................   (1,591)     (1,051)
                                                           --------    --------
    Net deferred charges and intangible assets............ $  4,251    $  4,079
                                                           ========    ========

Amortization  expense charged to operations was $541,000,  $481,000 and $242,000
for the years ended December 31, 1997, 1996 and 1995, respectively.


                                       54

<PAGE>



7.  Income Taxes:

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


                                             1997          1996           1995
                                          ---------    ----------      ---------
Current...................................$   1,411     $   1,329      $   589
Deferred income taxes from the following
    timing differences:
        Provision for loan losses........      (570)         (274)         (11)
        Depreciation.....................        42            87            6
        Leases...........................        18           129          128
        Other............................       143          (124)         (71)
                                          ---------     ----------     ---------
                                          $   1,044     $   1,147      $    641
                                          =========     =========      =========

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):


                                                      1997       1996      1995
                                                     -------   -------   -------
Tax at 34% statutory rate........................... $   869   $ 1,018   $ 611
Increase (decrease) resulting from:.................
    State taxes (net of federal benefit)............     169       131      91
    Minority interest in consolidated earnings......      --        --      19
    Benefit of AMT credit carryforwards.............      --        --     (42)
    Tax-exempt interest.............................     (20)      (27)    (43)
    Other, net......................................      26        25       5
                                                     -------   --------   ------
                                                     $ 1,044   $ 1,147    $ 641
                                                     =======   ========   ======

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


                                                         1997            1996
                                                      ---------       ---------
Deferred tax asset:
    Loans, primarily due to differences in
       accounting for loan losses..................... $  1,207       $     577
    Other.............................................      106             145
                                                       --------        --------
           Deferred tax asset.........................    1,313             722
                                                       --------        --------
Deferred tax liability:
    Unrealized gain on securities available for sale..       97              16
    Leases, primarily due to differences in accounting
       for leases.....................................      542             524
    Premises and equipment, primarily due to
       differences in original cost basis and depreciation  493             451
           Other..........................................   83               0
                                                       --------        --------
           Deferred tax liability...................      1,215             991
                                                       --------        --------
           Net deferred tax asset (liability)..........$     98       $    (269)
                                                       ========        =========


                                       55

<PAGE>



8.  Notes Payable:

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



                                                            1997          1996
                                                         ---------     ---------
BNCCORP:
Notes payable to Firstar Bank Milwaukee, N.A.
    ("Firstar") including a term note for$3 million
    and a revolving line of credit up to $12 million,
    interest payable quarterly at either the prime
    rate or 90 day LIBOR rate plus 2.00% at BNCCORP's
    option (7.88% and 7.50% at December 31, 1997 and
    1996, respectively), secured by stock of subsidiary
    banks................................................  $7,435     $  10,000
8 5/8% subordinated notes, due May 31, 2004, interest
    payable monthly (plus unamortized discount of $705
    at December 31, 1997--effective rate approximately
    9.64%), unsecured(see below).........................  14,295            --
                                                         --------      --------
               Total BNCCORP.............................  21,730        10,000
Subsidiaries:
Federal funds purchased and U. S. Treasury tax and
   loan note option accounts.............................   5,504         1,437
Floating rate advances from FHLB, callable quarterly,
    principal due October 1998 and July 1998, interest
    payable monthly at the one-month LIBOR rate
    minus .16% and .09%(5.81% and 5.88% at December 31,
    1997 and 5.59% at December 31, 1996), secured by
    mortgage loans and government agency securities......  25,000         9,000
Fixed rate advances from FHLB, callable quarterly,
    principal due July 2000, interest payable
    monthly at 5.51% and 5.54%, secured by mortgage
    loans and government agency..........................
    securities...........................................  15,000         1,000
Other....................................................   1,081           615
                                                        ---------     ---------
               Total.................................... $ 68,315     $  22,052
                                                        =========     =========


There were no notes  payable to  officers,  directors  or  employees or to other
affiliates at December 31, 1997 and 1996.

In January 1998,  BNC--North  Dakota  borrowed an additional $4.0 million in the
form of fixed  rate  advances  from FHLB.  The  borrowings,  which are  callable
quarterly,  mature in January 2008 and bear interest,  payable monthly,  at 4.75
and 4.79 percent.

The Firstar notes were renewed in February 1998 and mature in 1999.  Collateral,
interest rates and timing of payments on the notes are as indicated above.

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

                                       56

<PAGE>



BNCCORP.  A discount of $750,000 is being amortized to interest expense over the
term of the  Notes  using the  effective  interest  rate  method.  Related  debt
offering costs of $161,000 have been deferred and are being amortized.  See Note
1, "Deferred Charges and Intangible Assets" and Note 6.

BNCCORP's loan agreements and the indenture  pursuant to which the  Subordinated
Notes were issued contain  covenants  which,  among other  matters,  restrict or
limit the ability of BNCCORP and its subsidiaries,  under certain circumstances,
to pay  cash  dividends,  redeem  or  repurchase  stock  or make  other  capital
distributions, incur indebtedness, allow liens or other encumbrances on property
owned or  acquired,  or  guarantee  obligations  of  others  (other  than in the
ordinary course of banking  business).  BNCCORP and its  subsidiaries  must also
maintain  certain  ratios  regarding  capital,  nonperforming  loans,  loan loss
reserve coverage,  and other matters. At December 31, 1997 and 1996, BNCCORP and
its subsidiaries were in compliance with all material debt covenants.

The Company manages interest rate risk associated with its borrowings as part of
its overall  interest rate risk  management  program.  Accordingly,  the Company
entered  into an interest  rate swap  agreement  during  1997 which  effectively
converted its fixed rate Subordinated Notes into  variable-rate  borrowings (the
"Swap  Agreement").  No premium was paid or received in connection with the Swap
Agreement.  Under the Swap  Agreement,  the  Company  received  a fixed  rate of
interest  of 6.6650  percent on the  notional  amount of $15  million and paid a
variable rate based on 3-month LIBOR. The swap was sold on October 30, 1997. The
resulting gain of $372,000 was deferred and is being amortized as a reduction of
interest  expense over the  remaining  life of the original  swap  contract.  At
December 31, 1997, the Company had no outstanding interest rate swaps.

9.  Stockholders' Equity:

BNCCORP  and its  subsidiary  banks  are  subject  to  certain  minimum  capital
requirements (see Note 10). 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 in July 1995. The stock split has been  retroactively  reflected
in the financial statements.

In its initial public  offering,  BNCCORP sold 1,106,000  shares of common stock
(including  106,000  shares sold pursuant to the  underwriters'  over  allotment
option) at $10.00 per share.  Net proceeds  from the  offering of  approximately
$9.7  million  were  received by BNCCORP.  A portion of the proceeds was used in
January 1996 to capitalize  BNC--Minnesota and to inject additional capital into
BNC--North Dakota,  with 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 16).

Also in connection with its initial public  offering,  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, 1997.

In  February  1998,  63,406  shares  of  BNCCORP  common  stock  were  issued in
connection with the business combination with Lips & Lahr (see Note 2).




                                       57

<PAGE>



10. 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, 1997, BNCCORP and its banks meet all capital adequacy  requirements
to which they are subject.

As of December 31, 1997,  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 or             than or
                                                                       equal to            equal to
<S>                                     <C>          <C>     <C>       <C>       <C>       <C>
        As of December 31, 1997
Total Capital (to risk-weighted assets):
    Consolidated....................... $ 32,849     12.2  % $ 21,551     8.0  %      N/A     N/A
    BNC--North Dakota...................  21,535     10.8      16,014     8.0    $ 20,017    10.0%
    BNC--Minnesota......................   5,742     10.2       4,482     8.0       5,603    10.0
Tier I Capital (to risk-weighted assets):
    Consolidated.......................   19,853      7.4      10,776     4.0         N/A     N/A
    BNC--North Dakota...................  19,168      9.6       8,007     4.0      12,010     6.0
    BNC--Minnesota......................   5,191      9.3       2,241     4.0       3,362     6.0
Tier I Capital (to average assets):
    Consolidated.......................   19,853      5.9      13,380     4.0         N/A     N/A
    BNC--North Dakota...................  19,168      6.8      11,238     4.0      14,047     5.0
    BNC--Minnesota......................   5,191      9.4       2,200     4.0       2,750     5.0
        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--North Dakota...................  19,009     10.4      14,644     8.0      18,306    10.0
    BNC--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--North Dakota...................  17,759      9.7       7,322     4.0      10,983     6.0
    BNC--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--North Dakota...................  17,759      7.1      10,006     4.0      12,508     5.0
    BNC--Minnesota......................   4,688     12.9       1,453     4.0       1,817     5.0
</TABLE>

                                       58

<PAGE>

11. Fair Value of Financial Instruments:

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

                                              1997                  1996
                                      --------------------  -------------------
                                       Carrying    Fair     Carrying     Fair
                                        Amount     Value      Amount     Value
                                      ---------  ---------  --------- ---------
Assets:
    Cash, due from banks and federal
        funds sold....................$  15,289  $  15,289  $  13,260 $  13,260
    Securities available for sale.....   94,624     94,624     59,491    59,491
    Loans, net........................  232,131    232,329    201,403   200,669
                                      ---------  ---------  --------- ---------
                                        342,044  $ 342,185    274,154 $ 273,420
                                                 =========            =========
    Other assets......................   18,077                14,404
                                      ---------             ---------
                                      $ 360,121             $ 288,558
                                      =========             =========
Liabilities:..........................
    Deposits, noninterest-bearing.....$  25,795  $  25,795  $  22,218 $  22,218
    Deposits, interest-bearing........  237,029    237,493    217,552   217,684
    Notes payable.....................   68,315     68,833     22,052    22,060
                                      ---------  ---------  --------- ---------
                                        331,139  $ 332,121    261,822 $ 261,962
                                                 =========            =========
    Other liabilities................     4,708                 4,101
    Stockholders' equity.............    24,274                22,635
                                      ---------             ---------
                                      $ 360,121             $ 288,558
                                      =========             =========

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

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

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

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

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

                                                   1997              1996
                                               -------------     -------------
Commitments to extend credit.................. $      52,168     $      59,553
Letters of credit.............................         1,418             1,048
                                               -------------     -------------
                                               $      53,586     $      60,601
                                               =============     =============


                                       59

<PAGE>



13. Related-Party Transactions:

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

14. Benefit Plans:

BNCCORP has a 401(k) plan covering all employees of BNCCORP and its subsidiaries
who meet specified age and service requirements. Eligible employees may elect to
defer up to 15 percent of compensation each year (10 percent prior to 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  percent of
employee  deferrals  up to a  maximum  employer  contribution  of 5  percent  of
compensation.  The Company made matching contributions of $112,000, $79,000, and
$65,000  in 1997,  1996 and 1995,  respectively.  Under the  investment  options
available  under the 401(k)  plan,  employees  may elect to invest  their salary
deferrals in BNCCORP stock.

15. Commitments and Contingencies:

Employment  Agreements.  The  Company  has entered  into  three-year  employment
agreements with its chief executive officer, chief operating officer,  executive
vice  president  and  the  chief  executive  officer  of   BNC--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.  The Company has entered into  operating  lease  agreements  for certain
facilities  and  equipment  used in its  operations.  Rent expense for the years
ended December 31, 1997,  1996 and 1995, was $318,000,  $331,000,  and $100,000,
respectively.  Minimum  annual base lease  payments  for  operating  leases with
remaining terms of greater than one year are as follows:


1998...................... $    364,205
1999......................      353,320
2000......................      335,968
2001......................      272,891
2002......................      201,892
Thereafter................      327,491

Legal  Proceedings.  The Company has filed suit against a former loan officer at
BNC--North Dakota and her husband. See Note 4, "Loans and  Leases--Allowance for
Loan  Losses." The Company is currently not a party to any  additional  material
legal proceedings. Periodically, and in the ordinary course of business, various
claims and  lawsuits  which are  incidental  to the  Company's  business  may be
brought against or by the Company, such as claims to enforce liens, condemnation
proceedings on properties in which the Company holds security interests,  claims
involving  the making and  servicing  of real  property  loans and other  issues
incidental to the Company's business.


                                       60

<PAGE>



16. Stock-Based Compensation:

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  ("SFAS 123"), was adopted by the Company on January 1, 1996. SFAS
123 allows two  alternative  methods of accounting for employee stock options or
similar instruments. 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.

The Company 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 the Company.  The Stock Plan,  which
is  administered  by the  compensation  committee of the board of directors (the
"Committee"),  provides for an  authorization  of 250,000 shares of common stock
for issuance  thereunder.  Under the Stock Plan, the Company may grant employees
incentive stock options,  nonqualified  stock options,  restricted stock,  stock
awards or any combination thereof. The Committee  establishes the exercise price
of any stock  options  granted  under the Stock Plan  provided that the exercise
price may not be less than the fair market  value of a share of common  stock on
the date of grant. As of December 31, 1997,  20,000 restricted shares and 30,000
options had been awarded under the Stock Plan. The restricted  stock vests in 33
1/3  percent  increments  during  1998,  1999 and 2000.  All of the  options are
exercisable at a price of $10 per share and vest/vested in 20 percent increments
on January 18, 1996 and July 18, 1996,  1997,  1998 and 1999. The options expire
on July 18, 2005. 2,074 unexercised stock options were forfeited during 1997 and
none of the remaining 27,926  outstanding stock options had been exercised as of
December 31, 1997.

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:


                                            1997                  1996
                                       --------------        ---------------
Net Income:
    As Reported....................... $    1,512,000        $     1,847,000
    Pro Forma.........................      1,496,000              1,814,000
Basic EPS:
    As Reported.......................           0.65                   0.79
    Pro Forma.........................           0.63                   0.77
Diluted EPS:
    As reported.......................           0.64                   0.79
    Pro Forma.........................           0.63                   0.77


                                       61

<PAGE>



A summary  of the  status of the Stock Plan at  December  31,  1997 and 1996 and
changes  during  the years then ended is  presented  in the table and  narrative
below:


                                           1997                 1996
                                   -------------------  ----------------------
                                   Options    Weighted   Options    Weighted
                                     to       Average      to        Average
                                   Purchase   Exercise   Purchase   Exercise
                                   Shares      Price     Shares      Price
                                   ---------  --------  ---------  ----------
Outstanding, beginning of year....    30,000  $     10     30,000  $       10
Forfeited.........................     2,074        10         --          --
                                   ---------  --------  ---------  ----------
Outstanding, end of year..........    27,926  $     10     30,000  $       10
                                   =========  ========  =========  ==========
Exercisable, end of year..........    16,756  $     10  $  12,000  $       10
                                   =========  ========  =========  ==========
Weighted average fair value of
    options forfeited............. $    4.50                       $       --
                                   =========                       ==========


The fair  value of option  grants is  estimated  on the date of grant  using the
Black-Scholes  option  pricing  model.  The following  assumptions  were used in
calculating  the fair  value of the stock  options  granted  in 1995:  risk-free
interest rate of 6.08 percent; expected dividend yields of 0.0 percent; expected
lives of seven years; and expected volatility of 28.7 percent.

The Company  issued  142,200  stock  options to its  managers  and  employees in
January 1998. These options are exercisable at a price of $17 per share and vest
in 20 percent  increments on January 2, 1999,  2000,  2001,  2002 and 2003.  The
options expire on January 2, 2008.

17.  Earnings Per Common Share:

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




                                                  Net
                                                Income       Shares    Per-Share
                                              Numerator)  (Denominator)  Amount
                                              -----------  ---------- ----------
                    1997
        Basic earnings per share:
Income available to common stockholders...... $ 1,512,000   2,338,720  $    0.65
                                                                       =========
Effect of dilutive shares
    Options..................................                   5,831
    Warrants.................................                   4,791
                                                            ---------
         Diluted earnings per share:
Income available to common stockholders...... $ 1,512,000   2,349,342  $    0.64
                                              ===========   =========  =========


                                       62

<PAGE>




                                                 Net
                                                Income        Shares   Per-Share
                                              (Numerator)(Denominator)   Amount
                                              -----------  --------- -----------
                    1996
          Basic earnings per share:
Income available to common stockholders...... $ 1,847,000  2,338,720  $    0.79
                                                                      ==========
Effect of dilutive shares
    Options..................................                   1,027
    Warrants.................................                      --
                                                           ----------
         Diluted earnings per share:
Income available to common stockholders...... $ 1,847,000  2,339,747  $    0.79
                                              ===========  ========== ==========


                    1995
          Basic earnings per share:
Income available to common stockholders...... $ 1,157,000  1,720,030  $    0.67
                                                                      ==========
Effect of dilutive shares
    Options..................................                    426
    Warrants.................................                     --
                                                           ---------
         Diluted earnings per share:
Income available to common stockholders...... $ 1,157,000  1,720,456  $    0.67
                                              ===========  =========  ==========

Warrants  to  purchase  50,000  shares  of common  stock at $12 per  share  were
outstanding during 1996 and the second half of 1995 but were not included in the
computation  of diluted EPS for those periods  because the exercise price of the
warrants was greater than the average  market price of the common shares for the
period.  The  warrants,  which  expire on July 18,  2000,  were  included in the
computation  of diluted  EPS for 1997 and were still  outstanding  at the end of
1997 (see Note 9).

The following  transactions  occurred after December 31, 1997,  which,  had they
taken place during fiscal 1997,  would have changed the number of shares used in
the EPS  computations:  (1) 63,406 shares of BNCCORP common stock were issued in
the business combination of BNCCORP and Lips & Lahr (see Note 2); (2) options to
purchase  142,200  shares of common  stock were issued to Company  managers  and
employees  under  BNCCORP's  Stock  Incentive  Plan (see Note 16); and (3) 1,377
shares  of  nonvested  restricted  stock  were  retired  due to  termination  of
employment of the awardee.

Earnings  per share  amounts  for the years 1996 and 1995 have been  restated to
give  effect to the  application  of SFAS 128 which was  adopted by the  Company
during  the  fourth  quarter  of 1997.  Because  of the  number of common  stock
equivalents  outstanding  and the average market prices of the common shares for
those  periods,  however,  basic and  diluted  EPS  under  SFAS 128 are equal to
primary and fully diluted EPS as previously reported.



                                       63

<PAGE>



18. Condensed Financial Information--Parent Company Only:

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

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

                                                             1997        1996
                                                         -----------  ---------
Assets:
    Cash and short-term investments...................... $    1,068  $     257
    Investment in subsidiaries...........................     29,973     27,241
    Loans................................................        499        545
    Receivable from subsidiaries.........................     14,248      4,265
    Deferred changes and intangible assets, net..........        407        232
    Other................................................        699        574
                                                          ----------  ---------
                                                          $   46,894  $  33,114
                                                          ==========  =========
Liabilities and stockholders' equity:
    Notes payable........................................ $   21,979  $  10,249
    Accrued expenses and other liabilities...............        641        185
                                                          ----------  ---------
                                                              22,620     10,434
                                                          ----------  ---------
    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     13,768
    Retained earnings....................................     10,529      9,062
    Treasury stock (25,380 shares).......................       (216)      (216)
    Unrealized holding gain on securities available
      for sale...........................................        170         43
                                                          ----------  ---------
                                                              24,274     22,680
                                                          ----------  ---------
                                                          $   46,894  $  33,114
                                                          ==========  =========




                                       64

<PAGE>







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


                                                    1997       1996     1995
                                                 ---------   -------  --------
Income:
    Management fee income........................$     965   $   927   $   606
    Interest.....................................      847       210       134
    Other........................................        9       138       319
                                                 ---------   -------   -------
        Total income.............................    1,821     1,275     1,059
                                                 ---------   -------   -------
Expenses:
    Interest.....................................    1,348       546       336
    Personnel expense............................      849       965       987
    Legal and other professional.................      103       155       103
    Depreciation and amortization................       58        49        63
    Other........................................      370       367       300
                                                 ---------   -------   -------
        Total expenses...........................    2,728     2,082     1,789
                                                 ---------   -------   -------
Loss before income tax benefit and equity in
    undistributed income of subsidiaries.........     (907)     (807)     (730)
Income tax benefit...............................      282       281       258
                                                 ---------   -------   -------
Loss before equity in undistributed income of
   subsidiaries..................................     (625)     (526)     (472)
Equity in undistributed income of subsidiaries...    2,092     2,418     1,629
                                                 ---------   -------   --------
        Net income...............................$   1,467   $ 1,892   $ 1,157
                                                 =========   =======   ========



                                       65

<PAGE>



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


                                                       1997      1996     1995
                                                     --------  -------  -------
Cash flows from operating activities:
    Net income.......................................$  1,467  $ 1,892  $ 1,157
    Adjustments to reconcile net income to net
        cash used in operating activities --
        Gain on sale of subsidiary....................     --       --     (316)
        Depreciation and amortization.................     20       25       27
        Amortization of intangible assets.............     28       24       36
        Equity in undistributed income of
           subsidiaries............................... (2,092)  (2,418)  (1,629)
        Change in prepaid expenses and other
           receivables................................(10,174)  (3,816)    (168)
        Change in accrued expenses and other
           liabilities................................    456      (71)    (228)
        Other.........................................     63     (391)    (142)
                                                      -------  -------   ------
           Net cash used in operating activities......(10,232)  (4,755)  (1,263)
                                                      -------  -------   ------
Cash flows from investing activities:
    Net increase (decrease) in loans..................    (46)       1     (546)
    Increase in investment in subsidiaries ...........   (640)  (8,700)  (6,796)
    Sale of investment in subsidiary..................     --       --    3,811
    Sale (purchases) of premises, leasehold
        improvements and equipment....................    (12)      50     (108)
    Dividends received................................     --      700     1,309
                                                      -------   ------   ------
           Net cash used in investing activities......   (698)  (7,949)  (2,330)
                                                      -------   ------   ------
Cash flows from financing activities:
    Repayments of long-term borrowings................(21,190)  (1,004)    (716)
    Proceeds from long-term borrowings................ 32,875    7,899      500
    Amortization of discount on subordinated notes....     46       --       --
    Amortization of deferred charges..................     10       --       --
    (Costs) proceeds from issuance of stock...........     --       (8)   9,717
                                                      -------   ------    -----
           Net cash provided by financing activities.. 11,741    6,887    9,501
                                                      -------   ------    -----
Net increase (decrease) in cash and cash equivalents..    811   (5,817)   5,908
Cash and cash equivalents, beginning of year..........    257    6,074      166
                                                      -------   ------    -----

Cash and cash equivalents, end of year................$ 1,068   $  257   $ 6,074
                                                      =======   ======   ======

Supplemental cash flow information:
    Interest paid.....................................$ 1,262   $  524   $   338
                                                      =======   ======   ======
    Income tax payments received from subsidiary
        banks, net of income taxes paid...............$   322   $  441   $    16
                                                      =======   ======   =======


                                       66

<PAGE>



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

None


                                              PART III

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

Information  concerning the Company's  directors and officers called for by this
item will be included in the Company's  definitive  Proxy Statement  prepared in
connection  with the 1998 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 1998  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  1998  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 1998  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,
1997.


                                       67

<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 25, 1998.

                                                   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 25, 1998.




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

                               President, Chief Operating 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
----------------------------



                                       68

<PAGE>



                                  EXHIBIT INDEX



 Exhibit
   No.                                     Exhibit Description
========== =====================================================================
       2.1 Plan of merger of BNCCORP,  Inc.,  a North  Dakota  corporation  into
           BNCCORP,  INC., a Delaware corporation,  incorporated by reference to
           Exhibit 2.1 to the Registrant's  Registration  Statement on Form SB-2
           (Registration No. 33-92369).
       2.2 Branch Purchase and Assumption Agreement dated as of January 31, 1995
           between  Metropolitan Federal Bank, fsb and Bismarck National Bank, a
           national  banking  association,  incorporated by reference to Exhibit
           2.2  to  the  Registrant's   Registration   Statement  on  Form  SB-2
           (Registration No. 33-92369).
       2.3 Stock Purchase  Agreement  dated as of June 7, 1995, by and among the
           Company,   Gregory   Cleveland,   Tracy  Scott  and  Community  First
           Bankshares,  Inc.,  incorporated  by  reference  to  Exhibit  2.3  to
           Amendment No. 1 to the  Registrant's  Registration  Statement on Form
           SB-2 (Registration No. 33-92369).
       2.4 Agreement  and Plan of Merger of the  First  National  Bank of Linton
           with  and  into  BNC  National  Bank  dated  as  of  July  28,  1995,
           incorporated  by  reference to Exhibit 2.4 to the  Registrant's  Form
           10-KSB dated as of March 29, 1996.
       2.5 Contract  for Sale of Assets  dated  December 31, 1996 by and between
           Gregory K.  Cleveland,  P.C. and BNC National Bank,  incorporated  by
           reference to Exhibit 2.5 to the Registrant's  Form 10-KSB dated as of
           March 26, 1997.
       2.6 Stock Purchase  Agreement  dated February 26, 1997 by and between BNC
           National  Bank  and  Shareholders  of J.D.  Meier  Insurance  Agency,
           incorporated  by  reference to Exhibit 2.6 to the  Registrant's  Form
           10-KSB dated as of March 26, 1997.
       2.7 Amended and Restated Agreement and Plan of Merger dated December 19,
           1997 among BNCCORP, Inc., J.D. Meier Insurance Agency, Inc. and Lips
           & Lahr, Inc., William Wade, Dale Ely, Laif Olson, Richard Lahr and
           David Clausnitzer.
       3.1 Certificate  of  Incorporation   of  the  Company,   incorporated  by
           reference to Exhibit 3.1 to the Registrant's  Registration  Statement
           on Form SB-2 (Registration No. 33- 92369).
       3.2 Bylaws of the  Company,  incorporated  by reference to Exhibit 3.2 to
           the Registrant's  Registration  Statement on Form SB-2  (Registration
           No. 33-92369).
       4.1 Specimen of Common Stock Certificate, incorporated by reference to
           Exhibit 4 to Amendment No. 1 to the Registrant's Registration
           Statement on Form SB-2 (Registration No. 33-92369).
       4.2 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.


                                              E - 1


<PAGE>



 Exhibit
   No.                                     Exhibit Description
========== =====================================================================
       4.3 Form of Indenture  by and between  BNCCORP,  Inc.  and Firstar  Trust
           Company, as Trustee,  incorporated by reference to Exhibit 4.1 to the
           Registrant's  Registration  Statement on Form SB-2  (Registration No.
           333-26703).
      10.1 Form of  Indemnity  Agreement  by and between the Company and each of
           the Company's Directors, incorporated by reference to Exhibit 10.1 to
           the Registrant's  Registration  Statement on Form SB-2  (Registration
           No. 33-92369).
      10.2 Form of Employment Agreement between the Company and each of Tracy J.
           Scott,  Gregory K.  Cleveland,  and Brad J.  Scott,  incorporated  by
           reference to Exhibit 10.2 to the Registrant's  Registration Statement
           on Form SB-2 (Registration No. 33- 92369).
      10.3 Form of BNCCORP, INC. Stock Incentive Plan, incorporated by reference
           to Exhibit 10.3 to the  Registrant's  Registration  Statement on Form
           SB-2 (Registration No. 33-92369).
      10.4 Employment Agreement between the Company, Bismarck National Bank and
           Thomas Resch, incorporated by reference to Exhibit 10.8 to Amendment
           No. 1 to the Registrant's Registration Statement on Form SB-2
           (Registration No. 33-92369) as amended by Amendment dated
           June 1, 1996.
      10.5 Form of Stock Option Agreement for the Grant of  Non-Qualified  Stock
           Options Under the BNCCORP, INC. 1995 Stock Incentive Plan dated as of
           June 7,  1995,  incorporated  by  reference  to  Exhibit  10.5 to the
           Registrant's Form 10-KSB dated as of March 29, 1996.
      10.6 Term Loan Agreement  dated  February 19, 1996 by and between  Firstar
           Bank Milwaukee,  N.A. and BNCCORP, Inc., incorporated by reference to
           Exhibit  10.6 to the  Registrant's  Form 10-KSB dated as of March 29,
           1996.
      10.7 Revolving  Credit  Agreement  dated  February 19, 1996 by and between
           Firstar  Bank  Milwaukee,  N.A. and BNCCORP,  Inc.,  incorporated  by
           reference to Exhibit 10.7 to the Registrant's Form 10-KSB dated as of
           March 29, 1996.
      10.8 Amendment  to Term Loan  Agreement  and Term Note dated  February 11,
           1997 by and between Firstar Bank Milwaukee,  N.A. and BNCCORP,  Inc.,
           incorporated  by reference to Exhibit 10.8 to the  Registrant's  Form
           10-KSB dated as of March 26, 1997.
      10.9 Amendment to Revolving  Credit  Agreement and  Revolving  Credit Note
           dated February 11, 1997 by and between Firstar Bank  Milwaukee,  N.A.
           and BNCCORP,  Inc.,  incorporated by reference to Exhibit 10.9 to the
           Registrant's Form 10-KSB dated March 26, 1997.


                                              E - 2


<PAGE>


 Exhibit
   No.                                     Exhibit Description
========== =====================================================================
     10.10 Revolving  Credit  Agreement  dated September 27, 1996 by and between
           BNC Financial Corporation and Bank Windsor, incorporated by reference
           to Exhibit  10.10 to the  Registrant's  Form  10-KSB  dated March 26,
           1997.
     10.11 Second  Amendment to Term Loan Agreement and Term Note dated July 16,
           1997 by and between Firstar Bank Milwaukee,  N.A. and BNCCORP,  Inc.,
           incorporated by reference to Exhibit 10.11 to the  Registrant's  Form
           10-QSB dated August 13, 1997.
     10.12 Second  Amendment to Revolving  Credit Agreement and Revolving Credit
           Note dated July 16, 1997 by and between Firstar Bank Milwaukee,  N.A.
           and BNCCORP, Inc.,  incorporated by reference to Exhibit 10.12 to the
           Registrant's Form 10-QSB dated August 13, 1997.
     10.13 Third Amendment to Term Loan Agreement and Term Note dated February
           19,1998 by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.
     10.14 Third Amendment to Revolving Credit Agreement and Revolving Credit
           Note dated February 19, 1998 by and between Firstar Bank Milwaukee,
           N.A. and BNCCORP, Inc.
     10.15 Form of Stock Option Agreement for the Grant of Incentive Stock
           Options Under the BNCCORP, Inc. 1995 Stock Incentive Plan dated as of
           January 2, 1998.
     10.16 Contract  of Sale dated as of August 29,  1997,  by and  between  BNC
           National Bank and Preferred Investment Services, Inc.
     10.17 Assignment  Agreement  dated as of August 29,  1997,  by and  between
           Preferred Investment Services, Inc. and BNC National Bank.
        21 Subsidiaries of Company.
      23.1 Consent of Arthur Andersen LLP
        27 Financial Data Schedule





                                              E - 3