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

                                    FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 for the fiscal year ended December 31, 2003

                                       or

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934
                           Commission File No. 0-26290

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

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

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

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

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

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

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

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

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

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

     The aggregate market value of the voting and non-voting  common equity held
by non-affiliates of the Registrant, computed by reference to the price at which
the common equity was last sold, as of the last business day of the Registrant's
most recently completed second fiscal quarter was $21,069,000.

     The  number of shares  of the  Registrant's  common  stock  outstanding  on
March 16, 2004 was 2,764,684.

     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  2004 annual meeting of stockholders  are incorporated by
reference into Part III hereof.

<PAGE>


                                  BNCCORP, INC.

                           ANNUAL REPORT ON FORM 10-K
                     FOR FISCAL YEAR ENDED DECEMBER 31, 2003

                                TABLE OF CONTENTS
                                                                            Page

                                     PART I
Item 1.    Business.......................................................     3
Item 2.    Properties.....................................................    16
Item 3.    Legal Proceedings..............................................    16
Item 4.    Submission of Matters to a
                Vote of Security Holders..................................    17

                                     PART II
Item 5.    Market for the Registrant's Common Equity
                and Related Stockholder Matters............................   17
Item 6.    Selected Financial Data.........................................   18
Item 7.    Management's Discussion and Analysis of
                Financial Condition and Results of Operations..............   20
Item 7A.   Quantitative and Qualitative Disclosures about
                Market Risk................................................   57
Item 8.    Financial Statements and Supplementary Data.....................   61
Item 9A.   Controls and Procedures.........................................  112

                                    PART III
Item 10.   Directors and Executive Officers of the Registrant..............  113
Item 11.   Executive Compensation..........................................  114
Item 12.   Security Ownership of Certain Beneficial Owners
                and Management.............................................  114
Item 13.   Certain Relationships and Related Transactions..................  114
Item 14.   Principal Accounting Fees and Services..........................  114

                                     PART IV
Item 16.   Exhibits, Financial Statement Schedules and
                Reports on Form 8-K........................................  114


<PAGE>


                                     PART I

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

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

Item 1. Business

General

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

Acquisitions,  de novo branches and mergers have played an important role in our
strategy.  During the three years ended December 31, 2003, we completed  several
such transactions.  See Note 2 to the Consolidated Financial Statements included
under Item 8 of Part II for further  information  related to these transactions.
We will  continue  to  emphasize  internally  generated  growth by  focusing  on
increasing our market share within the  communities  we serve.  We may also seek
growth opportunities through select acquisitions of financial services companies
that we believe  complement our businesses.  We may also generate growth through
de novo  branching  in markets  such as Arizona,  Minnesota,  North  Dakota and,
possibly, other states.

At December 31,  2003,  we had total  assets of $621.5  million,  total loans of
$283.6 million and total deposits of $395.9 million.

Mission Statement

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

Operating Strategy

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

o    Emphasize  individualized,  high-level  customer  service.

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

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

o    Centralize administrative and support functions.

Strategic Vision

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

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

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

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

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

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

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

Banking  segment.  BNC National Bank operates 16 banking branch offices in three
states.  Known for its business banking services such as business  financing and
commercial  mortgages,  corporate  cash  management and merchant  programs,  our
banking  division  also  offers a full range of  consumer  lending  and  deposit
options.  The Bank is  differentiated  by its service  culture of "high personal
touch," supported by effective technology. Among the innovative services offered
are online, bill pay and telephone banking operations,  and products such as the
"Sweep/Repo"  account,  the  "Wealthbuilder"  family of  variable-rate  interest
checking and money market deposit products and the BNC cash back debit card.

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

Each of our bank  branches  offers the usual and  customary  range of depository
products provided by commercial  banks,  including  checking,  savings and money
market  deposits  and  certificates  of deposit.  During  2003,  we continued to
increase  core  deposits   largely   through  the  continuing   success  of  our
Wealthbuilder  interest  checking and money market deposit  accounts  introduced
during 1999.  These are  competitively  priced floating rate accounts with rates
variable at our  discretion.  The Bank's deposits are not received from a single
depositor or group of affiliated depositors,  the loss of any one of which would
have a material  adverse  effect on our  business.  Rates paid on deposits  vary
among  the  categories  of  deposits  due to  different  terms,  the size of the
individual  deposit,  the  nature  of  other  banking   relationships  with  the
depositor,  the current  interest rate environment and rates paid by competitors
on similar deposits.

The  Bank  also  accepts  brokered  deposits  and  obtains  direct  non-brokered
certificates  of deposit  through  national  deposit  networks  when  management
believes such  transactions  are beneficial to the Bank. Our core deposit growth
during 2003 allowed us to reduce  brokered and national  market  certificates of
deposit by $27.2 million during the year ended December 31, 2003.  Additionally,
through the Certificate of Deposit Account  Registry  ServiceSM  (CDARSSM),  the
Bank can now place large  customer  deposits  into smaller  denomination  (fully
FDIC-insured)  certificates of deposit at multiple  institutions.  This provides
the Bank's large deposit  customers with FDIC insurance on their entire balances
and the  convenience  of  managing  their  certificates  of deposit  investments
through a single bank relationship. This service was made available beginning in
2003.  For  more  information  on  our  deposit  activities,  see  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Financial Condition - Deposits" included under Item 7 of Part II.

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

Insurance  segment.  Milne Scali and BNC  Insurance  are  independent  insurance
agencies  representing  many of the nation's  leading  insurance  carriers.  Our
insurance  operations  were greatly  expanded in 2002 through the acquisition of
Milne Scali, one of the largest  independent  insurance  agencies in the Arizona
market.  On December  31,  2003,  we also  acquired  certain  assets and assumed
certain  liabilities  of The  Insurance  Alliance of the Southwest  ("IASW"),  a
Tucson-based  insurance agency. The acquisition included the staff and owners of
IASW. The insurance  segment has become an important and significant part of our
business.

Milne Scali began as an independently  owned and operated  commercial  insurance
brokerage  serving  the  needs  of  local,  regional  and  national  businesses.
Combining  the  talents of  experienced  insurance  professionals,  Milne  Scali
provides  solutions for every business  insurance  need. Its agents and customer
service  representatives  have  more than  1,000  years of  insurance  knowledge
amongst them -  experience  that Milne Scali feels  benefits its  customers on a
daily basis. Many of Milne Scali's representatives began their careers at large,
national  brokerage  firms  and  insurance  companies  such  as  Fireman's  Fund
Insurance Co., C.T.  Bowring  (Brokers,  Lloyd's of London),  Wausau  Insurance,
Aetna  Insurance  Co.,  Arkwright  Mutual,  Alexander  &  Alexander,   Travelers
Insurance  Company,  Marsh USA Risk & Insurance  Services,  Inc.  and The Willis
Group.  From these  backgrounds,  Milne Scali's  representatives  have developed
skills that serve its clients well. At the same time,  Milne Scali has added the
extra benefits of an  entrepreneurial  business  dedicated to providing the best
solution at the best possible price.

Milne Scali's clients range from large,  established  companies with hundreds of
millions in sales to emerging  businesses  with growing needs. It serves clients
in nearly  every  industry  including  construction,  real  estate  development,
manufacturing,  distribution and wholesale, professionals, government, financial
institutions, retail and service industries. Milne Scali's ability to serve each
client is enhanced by its ability to draw upon the varied needs arising from its
diverse  client  base.  One contact can handle all  customer  insurance  needs -
business and personal. Milne Scali's agents and customer service representatives
make it  their  job to be  familiar  with  its  customers'  business  and  their
families, always looking for better ways to serve the customers' diverse needs.

Milne Scali was founded  primarily to specialize in  commercial  insurance.  The
intent  was to be  different  in two very  specific  practices  from  its  major
competitors. First, its employee culture and environment is structured to foster
creativity  and  entrepreneurial  work  ethics  enabling  associates  to  create
opportunities  for  themselves  and thereby grow with Milne Scali.  Second,  the
negotiating  character  of Milne  Scali's  brokers and agents is  structured  to
foster threefold  relationships to benefit its clients.  Those relationships are
built with (1) the client (and its personnel),  (2) the insurance companies (and
their  personnel),  and (3) the Milne Scali staff. All three  relationships  are
focused on  protecting  the clients'  assets and thereby  designed to help Milne
Scali grow.
<PAGE>

From  inception,  Milne  Scali's  intent  was  to be  different  in  its  client
relationship  focus. As  entrepreneurs,  Milne Scali takes an active  partnering
role with its clients.  Much like its clients,  Milne Scali  manages its company
while at the same time working with its client  needs.  The dual role of partner
and  broker  allows  Milne  Scali to  better  understand  the  internal  working
operations of its clients and businesses. It is Milne Scali's pledge to find the
best  possible  coverage  for  customer  needs,  no  matter  how  difficult  the
challenge.

Since  inception,  Milne  Scali's  creativity  and  entrepreneurial  spirit have
produced  dramatic  results as it rapidly  became the second  largest  privately
owned Phoenix-based  insurance broker. Milne Scali can provide the full range of
services  from  the  self-insured   multinational   client  to  the  local  sole
proprietor.  Milne  Scali  provides  an  extremely  wide array of  products  and
expertise, including but not limited to:

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

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

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

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

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

Milne  Scali  starts by  examining  customer  current  programs  and  policies -
analyzing  the  classifications,  the  coverage  and the  price.  Its  years  of
experience and knowledge of the insurance  industry and of its competitors helps
Milne  Scali to  identify  and solve  problems  customers  may have never  known
existed - until it was too late.  Milne Scali's  objective is to reduce customer
cost of risk. Its clients think of Milne Scali as problem  solvers,  not problem
finders.  Every  one of Milne  Scali's  professionals  is  committed  to  making
customer  lives easier rather than  complicating  it with endless  forms.  Milne
Scali is committed to enhancing  customer  progress by producing bonds and proof
of coverage when customers need them. It prides itself on delivering the fastest
response in the industry to customer insurance needs without sacrificing quality
or   value.   Above   all,   the   difference   Milne   Scali   offers   is  the
relationship-driven  service that always puts customer needs first.  Milne Scali
knows that care and attention  bring its clients back year after year.  Care and
attention, along with problem solving, is the Milne Scali difference.

BNC Insurance also has a long history of providing  insurance brokerage services
as the genesis of the company had its roots back in the late 1800's. What is now
BNC Insurance is the culmination of multiple insurance agency  beginnings;  some
of them with what are today some of the largest  financial  institutions  in the
country.  BNC Insurance  also  provides a wide range of commercial  and personal
lines of insurance and can look to Milne Scali to assist in providing  expertise
and insurance coverage and risk management products and services beyond what was
available to customers prior to our acquisition of Milne Scali.

The insurance segment will typically have its strongest performance in the first
quarter of each fiscal year as contingency  payments from insurance carriers are
generally received during that quarter. Our insurance segment has offices in the
following  major  cities:  Phoenix,   Tucson,   Minneapolis  and  Bismarck.  The
Minneapolis  office was opened  during  2003 and the  Tucson  office  (IASW) was
acquired on December 31, 2003.
<PAGE>

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

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

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

Attractive     Markets.     We    operate    in    three    distinct    markets:
Tempe-Phoenix-Scottsdale and Tucson, Arizona;  Minneapolis-St.  Paul, Minnesota;
and   Bismarck-Mandan,   North  Dakota  and  surrounding   communities  (Crosby,
Ellendale,  Garrison,  Kenmare,  Linton,  Stanley and Watford City). While these
areas have very  different  fundamentals,  each enjoys a solid economic base and
what we believe are  compelling  long-term  growth  dynamics.  To ensure that we
maintain a sharp focus on each market area, we recently added a market president
in each of our major markets: Arizona, Minnesota and North Dakota.

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

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

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

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

As of December  31, 2003,  31 percent of our loans were to borrowers  located in
North  Dakota,  29  percent  to  borrowers  located  in  Arizona,  28 percent to
borrowers  located in Minnesota,  8 percent to borrowers located in South Dakota
and the  remainder to borrowers in various  other  states.  Other than  brokered
certificates of deposit and direct non-brokered certificates of deposit obtained
through  national  deposit  networks,  each  banking  branch  draws  most of its
deposits from its general market area.
<PAGE>

The following table presents total deposits and net loans outstanding at each of
our locations as of December 31, 2003 (in thousands):
<TABLE>
<CAPTION>
                                                   Total         Net Loans
                     Location                    Deposits        Outstanding(1)
------------------------------------------    --------------    ---------------
<S>                                                <C>                <C>
  Bismarck, ND..........................           $122,669           $103,004
  Crosby, ND............................             16,604                250
  Ellendale, ND.........................             10,437                450
  Garrison, ND..........................             15,185                506
  Kenmare, ND...........................             10,981                133
  Linton, ND............................             42,794              8,958
  Minneapolis, MN.......................             39,955             81,090
  Phoenix, AZ...........................             15,582             65,659
  Scottsdale, AZ........................             39,716             11,734
  Stanley, ND...........................             16,943                819
  Tempe, AZ.............................             23,396             11,376
  Watford City, ND......................             10,196                 84
  Brokered deposits.....................             18,579                 --
  National market deposits..............             12,905                 --
                                              --------------    ---------------
     Total .............................           $395,942           $284,063
                                              ==============    ===============
<FN>
------------------
(1) Before allowance for credit losses, unearned income and net unamortized
  deferred fees and costs.
</FN>
</TABLE>


Strengthening  Financial Performance.  In 2003, we demonstrated the value of our
financial  management  strategies.  The results of our efforts to diversify  our
sources of revenue,  and in  particular  the  decision  to expand our  insurance
business   through  the  Milne  Scali   acquisition,   drove  an  88.5   percent
year-over-year increase in earnings.

Determined   Management   Team.  We  believe  our   financial  and   operational
accomplishments  during  2003  are,  in  large  measure,  a  reflection  of  our
determination to enhance  shareholder  value. The determination to invest in the
future continued to contribute to a highly profitable  insurance agency business
and the creation of a growing presence in the Arizona and Minnesota markets.  We
believe  a  determined  focus on  achieving  excellence  in  business  - through
superior service, a consistent vision and prudent financial  management - should
continue to yield positive results in the years to come.

Regional Community Banking Philosophy

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

Distribution methods

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

Risk Management

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

Competition

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

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

Supervision and Regulation

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

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

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

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

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

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

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

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

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

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

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

Prompt  Corrective  Action and Other  Enforcement  Mechanisms.  Federal  banking
agencies possess broad powers to take corrective and other supervisory action to
resolve  the  problems of insured  depository  institutions,  including  but not
limited to those  institutions  that fall below one or more  prescribed  minimum
capital ratios. Each Federal banking agency has promulgated regulations defining
the following five categories in which an insured depository institution will be
placed, based on its capital ratios: well capitalized;  adequately  capitalized;
undercapitalized;     significantly     undercapitalized;     and     critically
undercapitalized.  At December 31, 2003,  the Bank exceeded the required  ratios
for classification as well capitalized.

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

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

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

Dividend  Restrictions.  Dividends  from bank  subsidiaries  often  constitute a
principal  source of income to a bank  holding  company.  Federal  rules limit a
bank's ability to pay dividends to its parent bank holding  company in excess of
amounts  generally  equal to the bank's net profits  from the current  year plus
retained net profits for the  preceding two years or if the payment would result
in  the  bank  being  considered  "undercapitalized"  under  regulatory  capital
guidelines. Bank regulatory agencies also have authority to prohibit a bank from
engaging in activities  that, in the opinion of the applicable  bank  regulatory
authority, constitute unsafe or unsound practices in conducting its business. It
is possible,  depending upon the financial condition of the bank in question and
other factors,  that the applicable bank regulatory  authority could assert that
the payment of dividends or other payments might, under some  circumstances,  be
such an unsafe or unsound  practice.  At December 31, 2003  approximately  $12.3
million of  retained  earnings  were  available  for Bank  dividend  declaration
without prior regulatory approval.

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

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

All  FDIC-insured  depository  institutions  must pay an  annual  assessment  to
provide  funds for the  payment of  interest  on bonds  issued by the  Financing
Corporation,  a Federal corporation chartered under the authority of the Federal
Housing  Finance  Board.  The bonds,  commonly  referred to as FICO bonds,  were
issued to capitalize  the Federal  Savings and Loan Insurance  Corporation.  The
FDIC  established the FICO assessment  rates effective for the fourth quarter of
2003 at  approximately  $0.00385  per  $100 of  assessable  deposits.  The  FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the  FDIC's   insurance  funds  and  do  not  vary  depending  on  a  depository
institution's capitalization or supervisory evaluations.

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

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

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

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

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

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

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

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

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

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

Employees

At December 31, 2003, we had 302 employees,  including 291 full-time  equivalent
employees.  None  of  our  employees  is  covered  by  a  collective  bargaining
agreement.  We consider our relationships with our employees to be satisfactory.
Approximate  employees  by  segment  were as follows as of  December  31,  2003:
banking, 163; insurance, 129; and brokerage/trust/financial, 10.

Factors That May Affect Future Results of Operations

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

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

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

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

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

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

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

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

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

Item 2.  Properties

The principal offices of BNCCORP are located at 322 East Main Avenue,  Bismarck,
North Dakota.  The Bank owns the building.  The principal  office of the Bank is
located at 2425 East Camelback Road, Phoenix,  Arizona, which it is leasing. The
Bank owns branch offices at 219 South 3rd Street and 801 East Century Avenue and
an additional office building at 116 North 4th Street in Bismarck. The Bank also
owns a branch office at 17045 North Scottsdale  Road,  Scottsdale,  Arizona.  It
also owns its banking facilities in Crosby, Ellendale,  Kenmare, Linton, Stanley
and Watford City,  North Dakota.  During 2003,  the Bank purchased a facility in
Golden Valley,  Minnesota.  The facility will be an additional  branch office of
the Bank and is expected to commence  operations  during 2004. In February 2004,
the Bank also  purchased  properties  at 6501 East  Grant and 6515 East Grant in
Tucson,  Arizona.  We anticipate  construction  of a banking branch at 6515 East
Grant to  commence  during  late  2004 or early  2005  and the 6501  East  Grant
property is expected to be occupied by insurance personnel,  primarily personnel
from IASW.

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

Milne Scali  occupies  four  locations in Arizona:  1750 East  Glendale  Avenue,
Phoenix,  660 South Mill Avenue,  Tempe,  2400 East Highway 89A,  Cottonwood and
6751 East Camino  Principal,  Tucson.  The Bank owns the property in Phoenix and
the remaining three facilities are presently leased.

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


Item 3.  Legal Proceedings

BNCCORP,  Inc. v. Kenneth Hilton Johnson, No. 309299 on the Docket of the United
States District Court for the Northern  District of Illinois,  Eastern Division.
In December  2003, we filed suit against  Kenneth  Hilton  Johnson under Section
16(b) of the Exchange Act, as amended.  Mr. Johnson is the  beneficial  owner of
more than 10 percent of our common stock. We seek to recover at least $98,179.45
plus  interest in profits  made by Mr.  Johnson in  connection  with  profitable
purchase and sales  transactions  of our common stock within the same six- month
period. As of March 9, 2004, Mr. Johnson had not filed an answer to the lawsuit.
On  December  31,  2003,  Mr.  Johnson's  attorney  tendered a check to us in an
apparent  attempt to settle  the suit.  We have  requested,  as a  condition  of
dismissal,  an affidavit from Mr. Johnson or his broker(s) stating that the Form
4's filed as exhibits to our complaint  reflect all of Mr.  Johnson's  trades in
our common stock during the period  covered by the complaint and that the amount
tendered  to us  reflects  the sum of all of the  shortswing  profits  that  Mr.
Johnson owes to the Company under Section 16(b), as of the date of any dismissal
of the  lawsuit.  As of  March  9,  2004,  we had  not  received  the  requested
affidavit. If we actually receive this affidavit, we will consider accepting the
amount tendered in settlement and dismissal of the lawsuit.  Otherwise,  we will
recover the full amount due to us by Mr. Johnson under Section 16(b).

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


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

No matters were submitted to a vote of security holders during the quarter ended
December 31, 2003.
<PAGE>
                                     PART II

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

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

The following  table lists the high and low sales prices of our Common Stock for
the periods indicated as reported by the Nasdaq Stock Market. The quotes reflect
the high and low  closing  sales  prices for our  Common  Stock as  reported  by
Nasdaq.
<TABLE>
<CAPTION>
                                 2003                        2002
                       -------------------------   ---------------------------
    Period                 High          Low           High            Low
                       -----------   -----------   ------------    -----------
   <S>                    <C>           <C>           <C>           <C>
   First Quarter......    $11.10        $7.00         $8.90         $7.28
   Second Quarter.....     13.49        10.64          8.60          7.47
   Third Quarter......     15.25        12.23          7.75          5.49
   Fourth Quarter.....     19.20        14.62          8.03          5.25
</TABLE>

On March 5, 2004, there were 102 record holders of the Company's Common Stock as
reported by the Company's  stock transfer  agent and  registrar,  American Stock
Transfer & Trust Company.

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

Pursuant to an Asset Purchase and Sale Agreement,  on December 31, 2003, BNCCORP
issued  12,701  shares of its  Common  Stock to IASW in  connection  with  Milne
Scali's  acquisition of certain assets and assumption of certain  liabilities of
IASW. The shares of Common Stock were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.

Equity-Based  Compensation  Plans.  The following table  summarizes  information
relative to our equity-based compensation plans as of December 31, 2003:
<TABLE>
<CAPTION>
                                              (a)                            (b)                            (c)
                                   --------------------------      ----------------------    ----------------------------------
                                                                                               Number of securities remaining
                                    Number of securities to          Weighted-average            available for future issuance
                                    be issued upon exercise          exercise price of        under equity compensation plans
                                    of outstanding options,        outstanding options,       (excluding securities reflected
         Plan Category                warrants and rights           warrants and rights               in column (a))
-------------------------------    --------------------------      ----------------------    ----------------------------------
<S>                                        <C>                         <C>                               <C>
Equity compensation plans
approved by security holders                173,285                       $10.41                          134,151
-------------------------------    --------------------------      ----------------------    ----------------------------------
Equity compensation plans not
approved by security holders                  N/A                           N/A                             N/A
</TABLE>

Item 6. Selected Financial Data

The selected  consolidated  financial  data  presented  below under the captions
"Income  Statement  Data" and "Balance Sheet Data" as of and for the years ended
December 31, 2003,  2002,  2001,  2000 and 1999 are derived from the  historical
audited  consolidated  financial  statements  of the Company.  The  Consolidated
Balance  Sheets  as of  December  31,  2003,  2002  and  2001,  and the  related
Consolidated  Statements of Income,  Comprehensive Income,  Stockholders' Equity
and Cash Flows for each of the four years in the period ended  December 31, 2003
were  audited by KPMG LLP,  independent  public  accountants.  The  Consolidated
Balance Sheet as of December 31, 1999 and the related Consolidated Statements of
Income,  Comprehensive  Income,  Stockholders' Equity and Cash Flows for the one
year  period  ended  December  31,  1999 were  audited by Arthur  Andersen  LLP,
independent public  accountants who have ceased  operations.  The financial data
below should be read in  conjunction  with and is qualified by the  Consolidated
Financial Statements and the notes thereto included under Item 8.

<PAGE>
The adoption of Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial  Instruments with  Characteristics of both Liabilities and
Equity" ("SFAS 150") in 2003,  which requires that the expense  associated  with
BNCCORP's subordinated  debentures be included in interest expense, is reflected
in all  applicable  periods in the table below.  The data presented in the table
below includes the financial performance of Milne Scali since its acquisition in
April 2002.  Additionally,  the financial performance of the Bank's Fargo, North
Dakota  branch  (which  was  sold on  September  30,  2003)  and  BNC  Financial
Corporation,  Inc. (which was sold on December 31, 1999) is not reflected in the
data below.  All data presented is from continuing  operations as of and for all
periods presented.

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

                                                                         For the Years Ended December 31,
                                                   --------------------------------------------------------------------------
                                                      2003           2002           2001            2000            1999
                                                   -----------    ------------   ------------   -------------   -------------
                                                              (dollars in thousands, except share and per share data)
<S>                                                 <C>              <C>            <C>            <C>             <C>
Income Statement Data:
Total interest income.............................  $  28,646       $  31,818      $  37,586       $  40,658       $  28,535
Total interest expense............................     15,268          18,736         24,033          27,679          16,438
                                                   -----------    ------------   ------------   -------------   -------------
Net interest income...............................     13,378          13,082         13,553          12,979          12,097
Provision for credit losses.......................      1,475           1,202          1,699           1,202           1,138
Noninterest income................................     20,812          16,296          8,714           7,683           6,028
Noninterest expense...............................     27,290          25,329         18,182          15,821          17,435
Income tax provision (benefit)....................      1,581             822            691           1,183            (193)
                                                   -----------    ------------   ------------   -------------   -------------
Income (loss) from continuing operations..........  $   3,844       $   2,025      $   1,695       $   2,456       $    (255)
                                                   ===========    ============   ============   =============   =============
Balance Sheet Data: (at end of period)
Total assets......................................  $ 621,477       $ 602,228      $ 555,967       $ 547,447       $ 445,232
Investments.......................................    262,568         208,072        211,801         253,566         145,349
Federal Reserve Bank and Federal Home Loan Bank
     stock........................................      7,596           7,071          7,380           9,619           5,643
Loans, net of unearned income.....................    283,555         335,794        297,924         252,753         254,009
Allowance for credit losses.......................     (4,763)         (5,006)        (4,325)         (3,588)         (2,872)
Total deposits....................................    395,942         398,245        375,277         330,894         316,772
Short-term borrowings.............................     31,833          28,120            760          33,228           2,200
Federal Home Loan Bank advances...................    112,200          97,200        117,200         117,200          86,500
Long-term borrowings..............................      8,640           8,561             13          12,642          14,470
Guaranteed preferred beneficial interests in
     Company's subordinated debentures............     22,397          22,326         22,244           7,606              --
Common stockholders' equity.......................     38,686          36,223         30,679          29,457          23,149
Book value per common share outstanding...........  $   14.07       $   13.41      $   12.79       $   12.30       $    9.65
Earnings Performance / Share Data (1):
Return on average total assets....................      0.64%           0.36%          0.31%           0.47%         (0.07)%
Return on average common stockholders' equity.....      9.92%           5.77%          5.51%          10.02%         (1.22)%
Net interest margin...............................      2.47%           2.51%          2.63%           2.65%           3.38%
Net interest spread...............................      2.29%           2.29%          2.25%           2.35%           3.07%
Basic earnings (loss) per common share (1)........  $    1.38       $    0.74      $    0.71       $    1.02       $  (0.11)
Diluted earnings (loss) per common share (1)......  $    1.35       $    0.74      $    0.70       $    1.02       $  (0.11)
Cash dividends per common share...................         --              --             --              --              --
Cash dividends per preferred share................  $  800.00       $  526.67             --              --              --
Total cash dividends - preferred stock............  $     120       $      79             --              --              --
Average common shares outstanding.................  2,705,602       2,611,629      2,395,353       2,397,356       2,406,618
Average common and common equivalent shares.......  2,764,816       2,628,798      2,421,113       2,398,553       2,407,018
Shares outstanding at yearend.....................  2,749,196       2,700,929      2,399,170       2,395,030       2,399,980
Balance Sheet and Other Key Ratios (1):
Nonperforming assets to total assets..............      1.28%           1.27%          0.80%           0.12%           0.64%
Nonperforming loans to total loans................      2.80%           2.27%          1.47%           0.23%           0.65%
Net loan charge-offs to average loans.............    (0.56)%         (0.17)%        (0.33)%         (0.20)%         (0.46)%
Allowance for credit losses to total loans........      1.68%           1.49%          1.45%           1.42%           1.13%
 Allowance for credit losses to
    nonperforming loans...........................        60%             66%            99%            619%            173%
Average common stockholders' equity to average
    total assets..................................      6.25%           5.93%          5.64%           4.71%           5.48%

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

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

Overview

The following table summarizes income from continuing operations, net income and
basic  and  diluted  earnings  per share for the 12  months  ended  December  31
(amounts in thousands):
<TABLE>
<CAPTION>

                                           2003           2002          2001
                                      -------------  -------------  ------------
<S>                                    <C>             <C>           <C>
Income from continuing operations..... $   3,844       $   2,025     $  1,695
Net income............................     3,844           2,039        1,245
Basic earnings per common share.......      1.38            0.75         0.52
Diluted earnings per common share.....      1.35            0.75         0.51
</TABLE>

Executive  Summary - 2003 vs. 2002.  Strategic  initiatives we pursued in recent
years,  including  diversifying  our  sources of  business,  focusing on what we
believe are  attractive  and growing core  markets and  managing  for  long-term
stockholder value generated favorable results in 2003. The following information
highlights key developments during 2003.

o    2003 net income rose 88.5 percent,  to $3.84 million  ($1.35 per share on a
     diluted basis) compared with $2.04 million ($0.75 per share) for 2002.

o    Our  insurance   segment  provided  a  significant   contribution  to  2003
     profitability.

o    Noninterest  income rose to 60.9 percent of gross revenues in 2003 compared
     with 55.5 percent in 2002.

o    Noninterest  income  increased  27.7  percent  in  2003 to  $20.81  million
     compared with $16.30 million in 2002.

o    Insurance  commission income accounted for $14.57 million,  or 70.0 percent
     of noninterest  income,  compared with $8.98 million,  or 55.1 percent,  in
     2002 with 2003  representing a full year of contribution  from Milne Scali,
     acquired in April 2002.

o    Our trust and  financial  services  division  recorded a  $488,000  fee for
     coordinating the sale of two companies.

o    Net interest  income in 2003  remained  relatively  flat at $13.38  million
     compared with $13.08 million in 2002.  Included in net interest income were
     mark-to-market  losses  on  the  value  of  derivative  contracts  totaling
     ($80,000) in 2003 and ($779,000) in 2002.

o    Net interest  margin  narrowed to 2.47 percent in 2003  compared  with 2.51
     percent in 2002.  Adoption of SFAS 150 required  interest  associated  with
     BNCCORP's subordinated  debentures to be reflected as interest expense. All
     prior periods have been reclassified to reflect this change.

o    Noninterest  expense rose 7.7 percent to $27.29  million for 2003  compared
     with $24.33  million  for 2002.  The  increase  primarily  reflected  costs
     associated  with  expanded  banking and  insurance  operations  in Arizona,
     actions expected to support increased operating levels in 2004.

o    Total assets  reached  $621.45  million at December 31, 2003  compared with
     $602.23 million one year earlier.
<PAGE>

o    Total loans decreased 15.6 percent in 2003, to $283.56 million. Loan volume
     was  impacted  by planned  loan  reductions,  completion  of some  financed
     commercial  real estate projects and slower loan demand that was reflective
     of economic conditions.

o    The provision  for credit  losses in 2003 was $1.48  million  compared with
     $1.20 million in 2002.

o    Loan charge-offs were $1.82 million in 2003 compared with $657,000 in 2002.
     $1.3 million of the 2003 charge-offs related to one commercial contractor.

o    The  allowance for credit losses as a percentage of total loans at December
     31, 2003 was 1.68 percent compared with 1.45 percent one year earlier.  The
     ratio of the allowance for credit losses to total  nonperforming  loans was
     60 percent at December 31, 2003 compared with 66 percent one year earlier.

o    We had $7.95 million of  nonperforming  loans at December 31, 2003 compared
     with $7.63  million one year earlier.  During  January 2004, a $4.5 million
     loan (reflected as a  nonperforming  loan at December 31, 2003) was paid in
     full,  including accrued  interest.  A $2.2 million  nonperforming  loan is
     expected  to  be  resolved  during  the  second  quarter  of  2004.   These
     developments  should result in  much-improved  asset quality moving forward
     into 2004.

o    Investment securities available for sale increased 26.2 percent in 2003, to
     $262.57  million as  investments  were  increased to maintain an acceptable
     earning asset portfolio despite the reduction in loan volume.

o    Core deposits  increased  $24.89  million or 7.3 percent  during 2003.  The
     growth was primarily  attributable to our Arizona market as we continued to
     see demand for our Wealthbuilder family of deposit products.

o    Brokered and  national  market  certificates  of deposit  decreased  $27.21
     million during 2003.

o    Reflecting continued success of our expansion into new markets, the Arizona
     operations of the Bank  accounted for  approximately  31.2 percent of total
     loans and 19.9 percent of total deposits at December 31, 2003.

o    Total  common  stockholders'  equity was  approximately  $38.69  million at
     December  31,  2003,  equivalent  to book value per common  share of $14.07
     (tangible book value per common share of $5.54).

During 2003, we continued to take actions which we believe will  strengthen  the
performance of our core businesses.

In banking, we opened our Scottsdale branch office, relocated our East Camelback
office in Phoenix to a more prominent and visible  location,  acquired  property
for a branch office in Golden Valley,  Minnesota and acquired a mortgage banking
operation.

In insurance, the acquisition of IASW in December 2003 will help to increase the
volume of our insurance business.

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

We believe that our record  financial  performance in 2003 provides a meaningful
indication of our earnings potential. Looking ahead to 2004, we hope to continue
to derive  benefits from our  investments in expanding our banking and insurance
operations,  and implementing programs to encourage  cross-selling across all of
our business lines.

Executive  Summary - 2002 vs. 2001.  The following  information  highlights  key
developments during 2002.

o    Net income rose 63.8 percent, to $2.04 million ($0.75 per common share on a
     diluted basis) compared with $1.25 million ($0.51 per share) in 2001.

o    Our insurance segment made a strong contribution to 2002 profitability with
     the acquisition of Milne Scali in April 2002.

o    Noninterest  income rose to 55.5 percent of gross revenues in 2002 compared
     with 39.1 percent in 2001.

o    Noninterest  income  increased  87.0  percent  in 2002,  to $16.30  million
     compared with $8.71 million in 2001.
<PAGE>

o    Insurance  commission income accounted for $8.98 million,  or 55.1 percent,
     of noninterest  income,  compared with $1.89 million,  or 21.7 percent,  in
     2001.

o    Net interest  income in 2002  remained  relatively  flat at $13.08  million
     compared with $13.55 million in 2001.  Included in net interest income were
     mark-to-market  losses  on  the  value  of  derivative  contracts  totaling
     ($779,000) in 2002 and ($184,000) in 2001.

o    Net interest  margin  narrowed to 2.51 percent in 2002  compared  with 2.63
     percent in 2001.

o    Noninterest expense rose 39.3 percent, to $25.33 million, for 2002 compared
     with $18.18  million for 2001.  The 2002 increase  primarily  reflected our
     expanded  banking  and  insurance  operations  in  Arizona,  including  the
     acquisition  of Milne Scali in April,  2002,  and the  winding  down of the
     Fargo office of BNC AMI.

o    Total  assets were  $602.23  million at December  31,  2002  compared  with
     $585.06 million one year earlier.

o    Total loans increased $37.87 million,  or 12.7 percent,  to $335.79 million
     at the end of 2002.

o    The provision  for credit  losses in 2002 was $1.20  million  compared with
     $1.70 million in 2001.

o    Loan charge-offs were $657,000 in 2002 compared with $1.27 million in 2001.

o    The  allowance for credit losses as a percentage of total loans at December
     31, 2002 was 1.49 percent compared with 1.45 percent one year earlier.  The
     ratio of the allowance for credit losses to total  nonperforming  loans was
     66 percent at December 31, 2002 compared with 99 percent one year earlier.

o    We had $7.63 million of  nonperforming  loans at December 31, 2002 compared
     with $4.38 million one year earlier.

o    Total  deposits  rose 6.1 percent to $398.25  million at December  31, 2002
     compared with $375.28 million one year earlier.

o    Total  common  stockholders'  equity was  approximately  $36.22  million at
     December  31,  2002,  equivalent  to book value per common  share of $13.41
     (tangible book value per common share of $5.60).

o    Net unrealized gains in our investment  portfolio at December 31, 2002 were
     nearly $4.4 million.

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

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

In  insurance,  the  acquisition  of Milne  Scali in the second  quarter of 2002
significantly increased the scale of our insurance business.

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

Results of Operations

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

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

                                                                            For the Years ended December 31,
                                   -----------------------------------------------------------------------------------------------
                                                2003                            2002                            2001
                                   ------------------------------- -------------------------------  ------------------------------
                                              Interest   Average               Interest  Average                Interest  Average
                                    Average    earned    yield or   Average     earned    Yield      Average     earned    yield
                                    balance   or paid      cost     balance    or paid   or cost     balance    or paid   or cost
                                   ---------- ---------  --------- ----------  --------- ---------  ----------  --------  --------
                                                                       (dollars in thousands)
Assets
<S>                               <C>         <C>        <C>      <C>          <C>        <C>       <C>        <C>        <C>
 Federal funds sold/interest
  -bearing due from.............  $  1,447   $     11      0.76%   $  3,795     $    66     1.74%    $  1,830   $    50     2.73%
 Taxable investments............   203,051      7,803      3.84%    193,972       9,997     5.15%     206,572    12,716     6.16%
 Tax-exempt investments.........    32,982      1,535      4.65%     19,979         977     4.89%      16,452       829     5.04%
 Loans and leases (2)...........   308,115     19,297      6.26%    307,227      20,778     6.76%     293,716    23,991     8.17%
 Allowance for credit losses....    (4,909)        --                (4,579)         --                (4,153)       --
                                  ---------- ---------             ----------  ---------            ----------  --------
   Total interest-earning
    assets (3)..................   540,686     28,646      5.30%    520,394      31,818     6.11%     514,417    37,586     7.31%
 Noninterest-earning assets:
     Cash and due from banks....    11,733                           13,706                            11,997
     Other......................    48,249                           34,946                            19,388
                                  ----------                       ----------                       ----------
 Total assets from continuing
  operations....................   600,668                          569,046                           545,802
 Assets from discontinued
  Fargo branch..................        --                           22,258                            22,270
                                  ----------                       ----------                       ----------
           Total assets.........  $600,668                         $591,304                          $568,072
                                  ==========                       ==========                       ==========

Liabilities and Stockholders'
  Equity
 Deposits:
   Interest checking and
    money market accounts.......  $186,796      2,189      1.17%   $174,108       2,849     1.64%    $147,775     4,669     3.16%
    Savings.....................     6,052         51      0.84%      4,511          39     0.86%       3,758        56     1.49%
 Certificates of deposit:
   Under $100,000...............    94,820      3,012      3.18%    104,964       4,068     3.88%      98,639     5,280     5.35%
   $100,000 and over............    55,928      2,186      3.91%     73,639       3,286     4.46%      73,806     4,248     5.76%
                                  ---------- ---------             ----------  ---------            ----------  --------
 Total interest-bearing
  deposits......................   343,596      7,438      2.16%    357,222      10,242     2.87%     323,978    14,253     4.40%

  Borrowings:
    Short-term borrowings.......    21,942        382      1.74%      7,799         141     1.81%      10,206       441     4.32%
    FHLB advances...............   111,777      5,333      4.77%     97,711       6,214     6.36%     118,705     7,185     6.05%
   Long-term borrowings.........     8,623        387      4.49%      6,063         310     5.11%       8,378       777     9.27%
   Subordinated debentures......    22,141      1,728      7.80%     22,056       1,829     8.29%      13,542     1,377    10.17%
                                  ---------- ---------             ----------  ---------            ----------  --------
  Total interest-bearing
   liabilities..................   508,079     15,268      3.01%    490,851      18,736     3.82%     474,809    24,033     5.06%
    Noninterest-bearing
     demand accounts............    40,022                           33,951                            28,474
                                  ----------                       ----------                       ----------
          Total deposits and
        interest-bearing
        liabilities.............   548,101                          524,802                           503,283
Other noninterest-bearing
  liabilities...................    13,542                           11,336                             8,765
Liabilities from discontinued
  Fargo branch..................        --                           20,476                            24,654
                                  ----------                       ----------                       ----------
          Total liabilities.....   561,643                          556,614                           536,702
Stockholders' equity............    39,025                           34,690                            31,370
                                  ----------                       ----------                       ----------
      Total liabilities and
        stockholders' equity....  $600,668                         $591,304                          $568,072
                                  ==========                       ==========                       ==========
Net interest income.............             $ 13,378                           $13,082                         $13,553
                                             =========                         =========                        ========

Net interest spread.............                           2.29%                            2.29%                           2.25%
                                                          =========                       =========                       ========
Net interest margin (4).........                           2.47%                            2.51%                           2.63%
                                                          =========                       =========                       ========
   Ratio of average
    interest-earning assets
    to average interest-bearing
    liabilities.................   106.42%                          106.02%                           108.34%
                                  ==========                      ==========                        ==========
<PAGE>
<FN>
--------------------
(1) From continuing operations for all periods presented.

(2)  Average  balances of loans and leases include  nonaccrual loans and leases,
     and are presented net of unearned income.  Loan fee  amortization  totaling
     approximately  $1.5 million,  $1.3 million and $812,000 is included in loan
     interest income for the 12-month  periods ended December 31, 2003, 2002 and
     2001, respectively.

(3)  Tax-exempt  income has not been  presented on a taxable  equivalent  basis.
     Tax-exempt  income of $1.5  million,  $982,000 and $840,000 was  recognized
     during the years ended December 31, 2003, 2002 and 2001, respectively.

(4)  Net  interest   margin  equals  net  interest  income  divided  by  average
     interest-earning assets for the period.
</FN>
</TABLE>
The following table illustrates, for the periods indicated, the dollar amount of
changes in our interest income and interest  expense for the major components of
interest-earning  assets  and  interest-bearing  liabilities  and  distinguishes
between the increase related to higher  outstanding  balances and the volatility
of interest  rates.  Changes  attributable  to the combined impact of volume and
rate have been  allocated  proportionately  to the  change due to volume and the
change due to rate:
<TABLE>
<CAPTION>
                 Analysis of Changes in Net Interest Income (1)
                                                                           For the Years Ended December 31,
                                                       -------------------------------------------------------------------------
                                                               2003 Compared to 2002               2002 Compared to 2001
                                                       ------------------------------------  -----------------------------------
                                                             Change Due to                       Change Due to
                                                       --------------------------            ---------------------
                                                          Volume        Rate        Total      Volume      Rate        Total
                                                       ------------  ------------  --------  -----------  --------  ------------
                                                                                    (in thousands)
Interest Earned on Interest-Earning Assets
<S>                                                         <C>         <C>         <C>          <C>       <C>        <C>
   Federal funds sold/interest-bearing due from........   $   (30)     $   (26)     $  (56)     $    24   $   (8)    $     16
   Investments.........................................     1,347       (2,982)     (1,635)        (533)  (2,038)      (2,571)
   Loans...............................................        60       (1,541)     (1,481)       1,172   (4,385)      (3,213)
                                                       ------------  ------------  --------  -----------  --------  ------------
      Total increase (decrease) in interest income.....     1,377       (4,549)     (3,172)         663   (6,431)      (5,768)
                                                       ------------  ------------  --------  -----------  --------  ------------
Interest Expense on Interest-Bearing Liabilities
   Interest checking and money market accounts.........       228         (888)       (660)       1,067   (2,887)      (1,820)
   Savings.............................................        13           (1)         12           16      (33)         (17)
   Certificates of Deposit:
      Under $100,000...................................      (368)        (688)     (1,056)         367   (1,579)      (1,212)
      $100,000 and over................................      (726)        (374)     (1,100)         (10)    (952)        (962)
   Short-term borrowings...............................       246           (5)        241          (87)    (213)        (300)
     FHLB advances.....................................     1,198       (2,079)       (881)      (1,361)     390         (971)
   Long-term borrowings................................       108          (31)         77         (178)    (289)        (467)
   Subordinated debentures.............................         7         (108)       (101)         639     (187)         452
                                                       ------------  ------------  --------  -----------  --------  ------------
   Total increase (decrease) in interest expense.......       706       (4,174)     (3,468)         453   (5,750)      (5,297)
                                                       ------------  ------------  --------  -----------  --------  ------------
   Increase (decrease) in net interest income..........   $   671      $  (375)     $  296      $   210   $ (681)    $   (471)
                                                       ============  ============  ========  ===========  ========  ============
<FN>
(1) From continuing operations for all periods presented.
</FN>
</TABLE>

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

Net interest  income for the 12-month  periods ended  December 31, 2003 and 2002
reflected  mark-to-market  losses on the value of derivative  contracts totaling
($80,000) and ($779,000),  respectively.  Without the mark-to-market adjustments
on these  derivative  contracts for the two periods,  net interest  margin would
have been  2.49  percent  for the 12 months  ended  December  31,  2003 and 2.66
percent for the 12 months ended December 31, 2002.

The remaining fair value of our interest rate cap contracts on December 31, 2003
was  $56,000.  Therefore,  net  interest  income in future  periods  can only be
negatively  affected  to that  amount if the fair  value of the  contracts  were
required to be written to $0. If the fair value of the derivative contracts were
to be increased in future  periods due to  increases in  three-month  LIBOR (the
rate upon  which our  current  cap  contracts  are  based),  this  would  have a
favorable  effect on net interest  income in those  future  periods as favorable
adjustments  to the fair value of the  contracts  would be  reflected as reduced
interest expense.
<PAGE>

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

                                                                   For the Years Ended
                                                                       December 31,                   Change
                                                                 -------------------------    -----------------------
                                                                    2003           2002
                                                                 ----------    -----------
                                                                   (amounts in millions)
<S>                                                                <C>          <C>              <C> <C>        <C>
Total interest income decreased................................    $  28.7      $    31.8        $ ( 3.1)       (10)%
   Due to:
      Decrease in yield on interest-earnings assets............      5.30%          6.11%         (0.81)%       (13)%
   Driven by:
      Decrease in yield on loans (a)...........................      6.26%          6.76%         (0.50)%        (7)%
      Decrease in yield on investments (b).....................      3.96%          5.13%         (1.17)%       (23)%
   The decreases in yield on interest-earning assets
      were Offset by:
      Increase in average earning assets.......................    $ 540.7      $   520.4        $   20.3          4%
   Driven by:
      Increase in average loans (c)............................    $ 308.1      $   307.2        $   0.9           0%
      Increase in average investments (d)......................    $ 236.0      $   214.0        $   22.0         10%

Total interest expense decreased...............................    $  15.3      $    18.7        $  (3.4)       (18)%
   Due to:
      Decrease in cost of interest-bearing liabilities.........      3.01%          3.82%         (0.81)%       (21)%
   Driven by:
      Decrease in cost of interest-bearing deposits (e)........      2.16%          2.87%         (0.71)%       (25)%
      Decrease in cost of borrowings (f).......................      4.76%          6.36%         (1.60)%       (25)%
   These decreases were coupled with:
      Increase in average interest-bearing liabilities.........    $ 508.1      $   490.9        $   17.2          4%
    Driven by:
      Increase in average borrowings (g).......................    $ 164.5      $   133.6        $   30.9         23%
    Offset by:
      Decrease in average interest-bearing deposits (h)........    $ 343.6      $   357.2        $  (13.6)       (4)%
<FN>
---------------
(1)  From continuing operations for all periods presented.

(a)  Our  decreased  loan  yield  is  reflective  of  the  lower  interest  rate
     environment  during 2003. The lower rate  environment was caused by several
     Federal  Reserve  reductions in the Federal funds target rate causing prime
     rate to decrease  significantly  during 2001 and  continuing  into 2002 and
     2003.  The daily average prime rate in 2003 was 4.12 percent as compared to
     4.68 percent for 2002.  The lower prime rate caused  floating rate loans to
     reprice at lower  levels and new loans to be  originated  at interest  rate
     levels lower than those originated in the prior period.

(b)  The  decreased  yield on  investments  was  also  reflective  of the  lower
     interest rate environment during 2003.

(c)  Average  loans  remained  relatively  stable  during  2003  in  spite  of a
     significant  decline  in  period  end loans at  December  31,  2003  versus
     December 31, 2002.

(d)  Average  investments  increased in 2003 to maintain an  acceptable  average
     earning  asset  portfolio  and related  interest  income.  The  increase in
     average  investments in 2003 caused the mix in the earning asset  portfolio
     to change resulting in downward pressure on net interest margin.

(e)  The decrease in cost of  interest-bearing  deposits was  reflective  of the
     lower interest rate environment during 2003. Floating rate deposit accounts
     repriced at lower interest rate levels and  certificates of deposit renewed
     or were  originated  at lower  interest rate levels than those in the prior
     period.

(f)  2003 borrowing costs decreased due to the lower interest rate  environment.
     The lower  interest  rates were  reflected in  decreased  cost on our $15.0
     million floating rate  subordinated  debentures,  our $8.5 million floating
     rate loan, floating rate Federal funds purchased and repurchase  agreements
     with customers.

(g)  Average  borrowings  increased  in 2003 due to higher  average  balances of
     Federal funds purchased, customer repurchase agreements and FHLB advances.

(h)  Average deposits in 2003 decreased largely due to a $27.2 million reduction
     in brokered  and  national  market  certificates  of deposit  during the 12
     months ended December 31, 2003.
</FN>
</TABLE>
<PAGE>

Year ended  December 31, 2002  compared to year ended  December  31,  2001.  Net
interest  income  decreased  $471,000,  or 3.5 percent,  to $13.1  million.  Net
interest  spread and net  interest  margin  adjusted  to 2.29 and 2.51  percent,
respectively,  for the  12-month  period  ended  December 31, 2002 from 2.25 and
2.63, respectively, for the 12-month period ended December 31, 2001.

Net interest  income for the 12-month  periods ended  December 31, 2002 and 2001
reflected  mark-to-market  losses on the value of derivative  contracts totaling
($779,000) and ($184,000),  respectively. Without the mark-to-market adjustments
on these  derivative  contracts for the two periods,  net interest  margin would
have been  2.66  percent  for the 12 months  ended  December  31,  2002 and 2.67
percent for the 12 months ended December 31, 2001.


The following  condensed  information  summarizes the major factors combining to
create the  changes to net  interest  income,  spread and margin  during 2002 as
compared to 2001. Lettered explanations following the summary describe causes of
the changes in these major factors.
<TABLE>
<CAPTION>

                Net Interest Income Analysis - 2002 vs. 2001 (1)

                                                                          For the Years Ended
                                                                    December 31,                   Change
                                                              -------------------------    -----------------------
                                                                2002           2001
                                                              ----------    -----------
                                                               (amounts in millions)
<S>                                                           <C>            <C>              <C>          <C>
Total interest income decreased.............................. $    31.8      $    37.6        $  (5.8)     (15)%

   Due to:
      Decrease in yield on earnings assets...................     6.11%          7.31%         (1.20)%     (16)%
   Driven by:
      Decreased yield on loans (a)...........................     6.76%          8.17%         (1.41)%     (17)%
      Decreased yield on investments (b).....................     5.13%          6.07%         (0.94)%     (15)%
    The decreased yields were offset by:
      Increased average earning assets ...................... $   520.4      $   514.4        $    6.0        1%
   Driven by:
      Increase in average loans (c).......................... $   307.2      $   293.7        $   13.5        5%
   Offset by:
      Decrease in average investments (d).................... $   214.0      $   223.0        $  (9.0)      (4)%


Total interest expense decreased............................. $    18.7      $    24.0        $  (5.3)     (22)%
   Due to:
      Decrease in cost of interest-bearing liabilities.......     3.82%          5.06%         (1.24)%     (25)%
   Driven by:
      Decrease in cost of interest-bearing deposits (e)......     2.87%          4.40%         (1.53)%     (35)%
      Decrease in cost of borrowings (f).....................     6.36%          6.48%         (0.12)%      (2)%
   These decreases in cost of interest-bearing liabilities
      were offset by:
      Increase in average interest-bearing liabilities....... $   490.9      $   474.8        $   16.1        3%
   Driven by:
      Increase in average interest-bearing deposits (g)...... $   357.2      $   324.0        $  33.2        10%
   Offset by:
      Decrease in average borrowings (h)..................... $   133.6      $   150.8        $ (17.2)     (11)%
<FN>
--------------------

(1)  From continuing operations for all periods presented.

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

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

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

(d)  Average  investments  declined in 2002 as the portfolio was restructured to
     better manage our capital,  shift our earning asset mix from investments to
     loans and establish the proper forward-looking  risk/reward profile for the
     investment portfolio.
<PAGE>
(e)  The decrease in cost of  interest-bearing  deposits was  reflective  of the
     lower interest rate environment during 2002. Floating rate deposit accounts
     repriced  at lower  levels  and  certificates  of  deposit  renewed or were
     originated at lower interest rate levels than those in the prior period.

(f)  Borrowing  costs decreased due to the lower rate  environment  during 2002,
     the payoff of our 8 5/8  percent  subordinated  notes  during  2001 and the
     adjustment of the $15.0 million  floating rate  subordinated  debentures in
     response to the lower rates in 2002.

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

(h)  Average   borrowings   decreased  due  to  lower   averages  of  short-term
     borrowings, the pay down of $20.0 million of FHLB advances in early 2002, a
     continued  shift in our funding base from  borrowings  to core deposits and
     the retirement of our subordinated  notes,  which were outstanding  through
     August 31, 2001.
</FN>
</TABLE>

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

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

Provision for Credit Losses. We determine a provision for credit losses which we
consider  sufficient  to maintain  our  allowance  for credit  losses at a level
considered  adequate to provide for an  estimate of probable  losses  related to
specifically  identified  loans as well as probable losses in the remaining loan
and lease  portfolio  that have been incurred as of each balance sheet date. The
provision  for  credit  losses  for the year ended  December  31,  2003 was $1.5
million as compared to $1.2 million in 2002 and $1.7  million in 2001.  Net loan
and lease  charge-offs  were $1.7 million,  or 0.56 percent of average loans and
leases in 2003 compared with $521,000,  or 0.17 percent in 2002 and $962,000, or
0.33 percent in 2001.  The increase in the  provision  for credit losses and net
charge-offs in 2003 reflected the inclusion of certain commercial credits in the
nonperforming loans category and subsequent charge-off of some commercial loans.

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

The allowance for loan losses totaled $4.8 million at December 31, 2003 compared
with $5.0 and $4.3 million at December 31, 2002 and 2001, respectively. See Note
1 to the Consolidated  Financial  Statements  included under Item 8, "-Financial
Condition-Loan  Portfolio-Allowance for Credit Losses" and "-Critical Accounting
Policies" for further  discussion of the  components of the allowance for credit
losses, our systematic methodology for determining the adequacy of the allowance
and  additional  data  pertaining to  charge-offs,  recoveries and other related
information.

Noninterest   Income.   Noninterest   income,   primarily  driven  by  insurance
commissions,  is becoming a more  significant  source of  revenues  for us as we
continue to  emphasize  our goal of focusing on local  relationship  banking and
providing a broad range of financial  products  and services  that will meet the
needs of our customers,  both commercial and consumer.  Our  noninterest  income
increased  approximately $4.5 million, or 27.7 percent, in 2003 largely due to a
full year of insurance  commission  income  generated  by Milne Scali,  which we
acquired in April 2002. Service charges, trust and financial services income and
rental income also  increased in 2003 while fees on loans,  net gain on sales of
securities  and  brokerage   income  declined.   Noninterest   income  increased
approximately  $7.6 million,  or 87.0 percent,  in 2002 largely due to insurance
commission  income generated by Milne Scali.  Fees on loans, net gain on sale of
securities and service charges also increased,  while brokerage income and trust
and financial services income declined.

The following table presents, for the periods indicated, the major categories of
our noninterest  income as well as the amount and percent of change between each
of the  periods  presented.  Related  information  and  significant  changes are
discussed in lettered explanations following the table:
<TABLE>
<CAPTION>
                             Noninterest Income (1)
                                                                                            Increase (Decrease)
                                                                        ----------------------------------------------------
                              For the Years Ended December 31,                2003 - 2002                  2002 - 2001
                           ----------------------------------------     -------------------------     ----------------------
                              2003           2002          2001             $              %              $            %
                           -----------     ---------     ----------     ----------     ----------     ----------    --------
                                       (in thousands)
<S>                          <C>            <C>            <C>          <C>                 <C>        <C>            <C>
Insurance commissions.....   $ 14,568       $ 8,981        $ 1,891      $  5,587            62%        $ 7,090        375%  (a)
Fees on loans.............      2,022         2,169          1,936          (147)          (7)%            233         12%  (b)
Trust and financial
   services...............      1,009           751            899           258            34%           (148)      (16)%  (c)
Net gain on sales of
   securities ............        968         1,870          1,396          (902)         (48)%            474         34%  (d)
Service charges...........        909           755            636           154            20%            119         19%  (e)
Brokerage income..........        420         1,094          1,407          (674)         (62)%           (313)      (22)%  (f)
Rental income.............        212            89             54           123           138%             35         65%  (g)
Other.....................        704           587            495           117            20%             92         19%
                           -----------     ---------     ----------     ----------                    ----------
Total noninterest income..   $ 20,812       $16,296        $ 8,714      $  4,516            28%        $ 7,582         87%
                           ===========     =========     ==========     ==========                    ==========
<FN>
--------------------

(1)  From continuing operations for all periods presented.

     (a)  Insurance commissions. In 2003, insurance commissions increased due to
          a full year of  production  of Milne  Scali,  acquired  in April 2002.
          Insurance  commissions in 2002 increased  dramatically also due to the
          acquisition  of Milne  Scali.  Contingency  fees  (received  primarily
          during the first  quarter of each year)  included in the amounts above
          totaled  approximately  $990,000,  $124,000  and $27,000 for the years
          ended December 31, 2003, 2002 and 2001, respectively.

     (b)  Fees on loans.  The decrease in  noninterest  income loan fees in 2003
          primarily  reflects a decline in loan  generation  due to reduced loan
          demand which was reflective of the economic  environment  during 2003.
          The  increase in loan fees for 2002 is largely  attributable  to loans
          originated and sold on the secondary  market.  Loan volume  generation
          and the related loan fees associated with such loans can be subject to
          significant  fluctuations making it difficult to anticipate the amount
          of loans that will be  originated or placed and related loan fees that
          will be recognized in future periods.
<PAGE>
     (c)  Trust and financial  services.  The 2003 increase  reflects a $488,000
          fee  recognized  by  the  Bank's  financial   services   division  for
          management of the sale of two companies on behalf of a customer.  This
          fee was  offset  by  decreases  in other  fee  income in the trust and
          financial   services  division   including  the  loss  of  fee  income
          associated  with  the BNC  U.S.  Opportunities  Fund  LLC,  which  was
          terminated  during  2003.  The 2002  decrease  in trust and  financial
          services  revenue is  attributable  to reduced  fees from the BNC U.S.
          Opportunities  Fund LLC as such fees were  primarily a function of the
          asset size of the fund and the fund decreased  during 2002. The fund's
          size was also  negatively  impacted by the  overall  decline in equity
          markets in 2002.

     (d)  Net  gain on  sales of  securities.  Net  gain on sales of  securities
          varies  depending  on  the  nature  of  investment   securities  sales
          transacted  during the  respective  periods.  The net gain on sales of
          securities  in 2002  was  primarily  a  result  of  repositioning  the
          investment portfolio's  forward-looking risk/reward profile. We cannot
          guarantee our ability to generate realized gains in the future such as
          those recognized  during the most recent three years given the current
          absolute low level of interest  rates.  In the future,  the investment
          portfolio  risk/reward  management process may require us to recognize
          net realized losses in order to optimize the  forward-looking  profile
          of the portfolio.

     (e)  Service  charges.  Service  charges  increased in 2003 and 2002 as the
          Bank  continued to increase its  Wealthbuilder  interest  checking and
          money market  account  volume  along with an increase in  non-interest
          bearing deposits which are primarily  business  deposit  relationships
          that tend to utilize a greater level of fee-based deposit services.

     (f)  Brokerage  income.  In 2003,  brokerage income declined largely due to
          the  Bank  having  fewer  brokers  on  staff  in  Minnesota.  In 2002,
          brokerage  income  declined  as a result  of market  conditions  and a
          decrease in the number of brokers at BNC AMI, including the closing of
          BNC AMI's Fargo office in September.

     (g)  Rental income.  The increase in rental income in 2003 is  attributable
          to the  rental  of space  associated  with some of the  Company's  new
          facilities.
</FN>
</TABLE>

Noninterest Expense.  Noninterest expense increased  approximately $2.0 million,
or 7.7  percent,  in 2003  primarily  as a result of the April 2002 Milne  Scali
acquisition  and our  expanding  presence  in the  Arizona  market.  Noninterest
expense increased  approximately $7.1 million, or 39.3 percent, in 2002 also due
to the April 2002  acquisition  of Milne Scali and our expanded  presence in the
Arizona market.

The following table presents, for the periods indicated, the major categories of
our noninterest expense as well as the amount and percent of change between each
of the  periods  presented.  Related  information  and  significant  changes are
discussed in lettered explanations below the table:
<TABLE>
<CAPTION>
                     Noninterest Expense (1)
                                                                                      Increase (Decrease)
                                                                          --------------------------------------------
                                     For the Years Ended December 31,           2003 - 2002           2002 - 2001
                                    ----------------------------------    ----------------------  --------------------
                                       2003         2002        2001            $           %          $         %
                                    ----------  ----------  ----------    -----------  ---------  ---------  ---------
                                                                (in thousands)
<S>                                 <C>         <C>         <C>            <C>              <C>    <C>          <C>
Salaries and employee benefits..... $ 16,478    $  14,723   $   9,911      $  1,755         12%    $ 4,812      49%  (a)
Occupancy..........................    2,306        2,235       1,661            71          3%        574      35%  (b)
Depreciation and amortization......    1,458        1,320       1,123           138         10%        197      18%  (c)
Office supplies, telephone and
  postage..........................    1,214        1,106         940           108         10%        166      18%  (d)
Professional services..............    1,146        1,495       1,326          (349)      (23)%        169      13%  (e)
Amortization of intangible assets..    1,063          881         482           182         21%        399      83%  (f)
Marketing and promotion............      803          749         709            54          7%         40       6%
FDIC and other assessments.........      201          214         193           (13)       (6)%         21      11%
Repossessed and impaired asset
  expenses/write-offs..............       40          142          40          (102)      (72)%        102     255%
Other..............................    2,581        2,464       1,797           117          5%        667      37%  (g)
                                    ----------  ----------  ----------    -----------              ----------
Total noninterest expense.......... $ 27,290    $  25,329   $  18,182      $  1,961          8%    $ 7,147      39%
                                    ==========  ==========  ==========    ===========              ==========
Efficiency ratio...................   79.82%       86.22%      81.65%       (6.40)%                  4.57%           (h)

Total operating expenses as a
 percent of average assets.........    4.54%        4.45%       3.33%         0.09%                  1.12%           (i)

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

(1)  From continuing operations for all periods presented.

     (a)  Salaries  and  employee   benefits.   The  2003  increase  is  largely
          attributable to the addition of banking personnel, particularly in the
          Arizona  market.   The  2002  increase   represents  the  addition  of
          approximately  85 Milne Scali  employees  effective  April 16, 2002 as
          well as additional employees added in the Arizona market. Average full
          time equivalents for each year in the three-year period ended December
          31, 2003 were 276, 253 and 189, respectively.

     (b)  Occupancy.  Occupancy  expenses remained  relatively stable in 2003 as
          the  restructuring of some of the Company's  facilities  leases offset
          expansion in the Arizona market.  The 2002 increase reflects increased
          activity  in the  Arizona  market and the  addition  of Milne Scali in
          April 2002.

     (c)  Depreciation and amortization.  Depreciation and amortization expenses
          increased  in 2003 and 2002 due to the Milne Scali  acquisition  along
          with costs associated with additional expansion in the Arizona market.

     (d)  Office supplies, telephone and postage. Increases in this line item in
          2003 and 2002 are  associated  with the Milne  Scali  acquisition  and
          additional expenses associated with expansion in the Arizona market.

     (e)  Professional  services. The 2003 decrease is attributable to decreased
          expenses  in a  number  of  areas  including  brokerage  clearing  and
          retainage expense (resulting from the decrease in associated brokerage
          revenue),  appraisal and recording fees,  audit fees, other consulting
          fees,  legal and collection  fees and software  support fees. The 2002
          increase in professional  services represents  increases in legal fees
          (including  those incurred by Milne Scali),  software support fees and
          other consulting and investment banking fees.

     (f)  Amortization  of  intangible  assets.  2003  reflects  a full  year of
          amortization  of the Milne Scali books of  business  intangibles.  The
          increase  in  2002  primarily   represents  the  amortization  of  the
          insurance  books of  business  intangibles  booked in the Milne  Scali
          acquisition in April 2002.

     (g)  Other. The 2002 increase represents increases in several miscellaneous
          line items  included in this  category  (some of which are  associated
          with the  acquisition  of  Milne  Scali in  April  2002)  and  include
          increases in insurance  premiums,  OCC  assessments,  travel expenses,
          dues and  publications,  data processing fees and expenses  associated
          with winding down the BNC AMI operations in Fargo.

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

     (i)  Total operating expenses as a percent of average assets have increased
          as  our  profile  has  changed  from  that  of a  traditional  banking
          organization  to an  organization  with a  broader  base of  financial
          product and service  offerings  the revenues and expenses of which are
          generally not asset-based.
</FN>
</TABLE>
Income  taxes.  We recorded  income tax expense of $1.6  million,  $822,000  and
$691,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Our
effective tax rates were 29.14, 28.87 and 28.96 percent for the 12-month periods
ended December 31, 2003,  2002 and 2001,  respectively.  The effective tax rates
were lower than the statutory  rates  principally  due to  tax-exempt  income on
municipal securities.

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

Financial Condition

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

Total assets  increased  approximately  $19.2 million,  or 3.2 percent,  between
December 31, 2002 and December 31, 2003 and approximately  $17.2 million, or 2.9
percent,  between  December 31, 2001 and December 31, 2002.  Our total assets at
December 31, 2003 were approximately $621.5 million.
<PAGE>

The  following  table  presents  our assets by category as of December 31, 2003,
2002 and 2001,  as well as the amount and  percent of change  between the dates.
Significant changes are discussed in lettered notes following the table (amounts
are in thousands):
<TABLE>
<CAPTION>
                                                                  Assets
                                                                                     Increase (Decrease)
                                                                    ----------------------------------------------------
                                         As of December 31,                2003 - 2002                 2002 - 2001
                              ----------------------------------    -------------------------   ------------------------
                                 2003        2002        2001           $              %             $             %
                              ----------  ----------  ----------    -----------    ----------   -----------   ----------

<S>                            <C>        <C>          <C>          <C>            <C>          <C>           <C>
Cash and due from
 banks.......................  $ 12,520   $ 16,978     $ 16,346      $ (4,458)       (26)%       $   632          4%  (a)
Interest-bearing deposits
 with banks..................        --        159          126          (159)      (100)%            33         26%
Federal funds sold...........        --         --        7,500            --           --        (7,500)     (100)%  (b)
Investment securities
 available for sale..........   262,568    208,072      211,801        54,496          26%        (3,729)       (2)%  (c)
Federal Reserve Bank and
 Federal Home Loan Bank
 stock.......................     7,596      7,071        7,380           525           7%          (309)       (4)%
Loans and leases, net........   278,792    330,788      293,599       (51,996)       (16)%        37,189         13%  (d)
Premises and equipment, net..    18,570     11,100        9,180         7,470          67%         1,920         21%  (e)
Interest receivable..........     2,462      2,856        3,008          (394)       (14)%          (152)       (5)%
Other assets.................    15,507      4,119        4,856        11,388         276%          (737)      (15)%  (f)
Goodwill.....................    15,089     12,210          437         2,879          24%        11,773      2,694%  (g)
Other intangible assets, net.     8,373      8,875        1,734          (502)        (6)%         7,141        412%  (h)
Assets of discontinued
 Fargo operations............        --         --       29,090            --           --       (29,090)     (100)%  (i)
                              ----------  ----------  ----------    -----------                 -----------
      Total assets...........  $621,477   $602,228     $585,057      $ 19,249           3%       $17,171          3%
                              ==========  ==========  ==========    ===========                 ===========
<FN>
(a)  Cash and due from  banks.  The 2003  decrease in cash and due from banks is
     primarily  attributable  to an account  reclassification  program  that was
     implemented  during 2003 and results in the Bank  holding  less cash at the
     Federal Reserve.

(b)  Federal  funds  sold.  Federal  funds sold can  fluctuate  on a daily basis
     depending upon our liquidity management  activities.  There were no Federal
     funds sold outstanding at December 31, 2002 or 2003.

(c)  Investment   securities   available  for  sale.  During  2003,   investment
     securities  available for sale increased as loan volume  decreased (see (d)
     below) and we maintained a somewhat static earning asset portfolio.

(d)  Loans and leases.  Loan volume in 2003 was  negatively  impacted by planned
     loan reductions and the completion of some financed  commercial real estate
     projects.  The loan reductions were not offset by loan growth due to a lack
     of loan demand  driven by  economic  conditions  during the year.  The 2002
     increase  in loans  represented  loan growth  primarily  in the Arizona and
     Minnesota  markets.  Due to current  economic and other  conditions,  it is
     difficult to predict,  with any degree of certainty,  loan volume in future
     periods.

(e)  Premises and  equipment,  net.  The 2003  increase is  attributable  to the
     purchase of the Milne Scali building in Phoenix,  Arizona in March 2003 for
     its appraised  value of $3.9  million,  the  construction  of a facility in
     Scottsdale,  Arizona,  leasehold  improvements related to the relocation of
     our office at 2725 East  Camelback  Road,  Phoenix  to 2425 East  Camelback
     Road,  the  purchase  of  property  in Golden  Valley,  Minnesota  and some
     improvements  to our office  building  at 322 East Main  Avenue,  Bismarck,
     North Dakota.

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

(g)  Goodwill.  Goodwill increased in 2003 due to a $2.3 million earnout payment
     related to the purchase of Milne Scali and the purchase of IASW in December
     2003.  Goodwill  increased  significantly in 2002 due to the acquisition of
     Milne Scali in April 2002.

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

(i)  Assets of discontinued  Fargo operations.  The Fargo branch of the Bank was
     sold on September  30,  2002.  The assets  indicated  for December 31, 2001
     represent the assets attributable to that branch as of that date.
</FN>
</TABLE>
<PAGE>
Our total liabilities  increased  approximately  $16.8 million,  or 3.0 percent,
between December 31, 2002 and December 31, 2003 and increased $10.1 million,  or
1.8 percent,  between December 31, 2001 and December 31, 2002. Total liabilities
at December 31, 2003 were approximately $581.3 million. Stockholders' equity was
approximately  $40.2,  $37.7 and $30.7  million at December 31,  2003,  2002 and
2001, respectively.

The  following  table  presents  our  liabilities  and  stockholders'  equity by
category  as of  December  31,  2003,  2002 and 2001,  as well as the amount and
percent of change  between  the dates.  Significant  changes  are  discussed  in
lettered notes following the table (amounts are in thousands):
<TABLE>
<CAPTION>
          Liabilities, Subordinated Debentures and Stockholders' Equity
                                                                                       Increase (Decrease)
                                                                      --------------------------------------------------
                                         As of December 31,                    2003 - 2002               2002 - 2001
                              --------------------------------------  -----------------------   ------------------------
                                 2003          2002         2001           $            %           $           %
                              ------------  -----------  -----------  -----------  ----------   -----------  -----------
Deposits:
<S>                             <C>           <C>          <C>          <C>             <C>      <C>              <C>
Noninterest-bearing..........   $  44,725     $ 44,362     $ 30,521     $    363        1%       $ 13,841         45%  (a)
Interest-bearing -
  Savings, interest checking
    and money market.........     215,525      187,531      160,721       27,994       15%         26,810         17%  (b)
  Time deposits $100,000 and
    over.....................      46,569       64,905       78,969      (18,336)    (28)%        (14,064)      (18)%  (c)
  Other time deposits........      89,123      101,447      105,066      (12,324)    (12)%         (3,619)       (3)%  (d)
Short-term borrowings........      31,383       28,120          760        3,263       12%         27,360      3,600%  (e)
FHLB advances................     112,200       97,200      117,200       15,000       15%        (20,000)      (17)%  (f)
Long-term borrowings.........       8,640        8,561           13           79        1%          8,548     65,754%  (g)
Guaranteed preferred
 beneficial interests in
 Company's subordinated
 debentures..................      22,397       22,326       22,244           71        0%             82          0%
Other liabilities............      10,729       10,053        6,192          676        7%          3,861         62%
Liabilities of discontinued
 Fargo operations............          --           --       32,692           --       --         (32,692)     (100)%  (h)
                              ------------  -----------  -----------  -----------               -----------
      Total liabilities......     581,291      564,505      554,378       16,786        3%         10,127          2%
Stockholders' equity.........      40,186       37,723       30,679        2,463        7%          7,044         23%  (i)
                              ------------  -----------  -----------  -----------               -----------
      Total..................   $ 621,477     $602,228     $585,057     $ 19,249        3%       $ 17,171          3%
                              ============  ===========  ===========  ===========               ===========
<FN>
-----------------------------
(a)  Noninterest-bearing  deposits.  Noninterest-bearing  deposits can fluctuate
     significantly  on a daily basis due to  transactions  associated  primarily
     with  commercial  customers.   The  increase  in  2002  also  reflects  new
     commercial  and retail  customer  activity  in the  Arizona  and  Minnesota
     markets.

(b)  Savings, interest checking and money market. Increases in this category are
     attributable  to the  continued  popularity  of our  Wealthbuilder  deposit
     products and reflect  deposit  growth  primarily in the Arizona  market for
     2003 and in the Arizona and Minnesota markets in 2002.

(c)  Time deposits  $100,000 and over. Time deposits  $100,000 and over declined
     in 2003 and 2002  primarily  because of a decrease in brokered and national
     market  certificates of deposit during the two periods.  Brokered  deposits
     totaled  $18.6  million at December  31,  2003  compared to $31.4 and $34.4
     million at December 31, 2002 and 2001, respectively.  National certificates
     of deposit  acquired  through  national  networks  totaled $12.9 million at
     December 31, 2003  compared to $27.3 million at December 31, 2002 and $34.0
     million at December  31,  2001.  In 2003 we allowed  brokered  and national
     market  certificates of deposit to run off and be replaced by growth in the
     Wealthbuilder  interest  checking and money market account  categories.  In
     2002, we allowed national market  certificates of deposit to run off and be
     replaced by growth in the Wealthbuilder  interest checking and money market
     account categories.

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

(e)  Short-term  borrowings.  The  increase  in  short-term  borrowings  in 2002
     reflects  $15.0  million of Federal  funds  purchased  at December 31, 2002
     coupled with $13.1 million of repurchase  agreements with customers.  These
     repurchase agreements are renewable daily.
<PAGE>

(f)  FHLB  advances.  $10.0  million of FHLB  advances held at December 31, 2002
     matured in January 2003 and, during the third quarter of 2003, we converted
     $20.0 million of  short-term  FHLB advances to $30.0 million of longer term
     FHLB  advances  maturing in 2005 and 2006.  Additionally,  $20.0 million of
     FHLB  advances  matured  in early  2002 and  were not  replaced  due to the
     availability of other funding sources.

(g)  Long-term borrowings. The 2002 increase reflects the $8.5 million long-term
     note originated at the time of the Milne Scali acquisition in April 2002.

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

(i)  Stockholders'  equity. The increase in 2003 primarily reflects $3.8 million
     of earnings offset by a $1.7 million  decrease in unrealized  holding gains
     on securities  available for sale, net of income taxes and reclassification
     adjustment.  The increase in 2002 reflects $1.5 million of preferred  stock
     issued in 2002, $2.5 million of common stock issued in conjunction with the
     Milne Scali acquisition in April 2002, $2.0 million of earnings recorded in
     2002 and $1.1 million in after-tax  unrealized  holding gains on securities
     available for sale arising during the period.
</FN>
</TABLE>
Investment  Securities  Available for Sale. Our investment policy is designed to
enhance  net income and return on equity  through  prudent  management  of risk,
ensure  liquidity for cash-flow  requirements,  help manage  interest rate risk,
ensure  collateral is available  for public  deposits,  advances and  repurchase
agreements and manage asset diversification.  In managing the portfolio, we seek
a balance  between  current income  (yield) and future market value  volatility,
while  simultaneously  managing  credit and  liquidity  risks.  The goal of this
process is to maximize  our longer term  profitability  as well as the  economic
performance of the portfolio over the long-term.

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

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

                                                                December 31,
                                 ---------------------------------------------------------------------------------
                                            2003                        2002                        2001
                                 -------------------------- --------------------------- --------------------------
                                               Estimated                  Estimated                  Estimated
                                  Amortized    fair market   Amortized    fair market    Amortized   fair market
                                    cost         value          cost         value         Cost        value
                                 ------------ ------------- ------------- ------------- ------------ -------------
                                                                  (in thousands)
<S>                                 <C>          <C>            <C>          <C>           <C>         <C>
U.S. government agency
  mortgage-backed securities...    $  14,374     $  14,755     $  47,072     $  47,576    $  42,027     $  41,946
U.S. government agency
  securities...................          961         1,083         4,608         5,203        4,396         4,495
Collateralized mortgage
  obligations..................      210,760       209,676       122,795       124,480      135,423       137,268
State and municipal bonds......       32,909        35,056        27,276        28,815       16,952        17,481
Corporate bonds................        1,939         1,998         1,938         1,998       10,329        10,611
                                 ------------ ------------- ------------- ------------- ------------ -------------
Total investments..............    $ 260,943     $ 262,568     $ 203,689     $ 208,072    $ 209,127     $ 211,801
                                 ============ ============= ============= ============= ============ =============
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>
<PAGE>
The following  table presents  maturities for all securities  available for sale
(other than equity  securities)  and yields for all securities in our investment
portfolio at December 31, 2003:
<TABLE>
<CAPTION>
                   Investment Portfolio - Maturity and Yields

                                                           Maturing
                            --------------------------------------------------------------------------
                                                 After 1 but        After 5 but
                              Within 1 year     within 5 years     within 10 years     After 10 years           Total
                            ----------------   -----------------  -----------------  ------------------  --------------------
                             Amount  Yield(1)   Amount  Yield(1)   Amount  Yield(1)   Amount   Yield(1)   Amount     Yield(1)
                            -------- --------  -------- --------  -------- --------  --------- --------  ----------  --------
<S>                           <C>       <C>   <C>        <C>     <C>        <C>      <C>        <C>      <C>          <C>
U.S. government agency
  mortgage-backed
  securities (2) (3)........  $  --      --    $    --       --   $ 5,417    4.34%    $  8,957       --   $ 14,374     4.89%
U.S. government agency
  securities (2)............     --      --        961    10.18%       --      --           --       --        961    10.18%
Collateralized mortgage
  obligations (2) (3).......     --      --      1,631     6.90%   16,074    3.74%     193,055    4.03%    210,760     4.03%
State and municipal
 bonds (2)..................     --      --         --       --     2,145    7.09%      30,764    7.06%     32,909     7.06%
Corporate bonds (2).........     --      --         --       --        --      --        1,939    3.36%      1,939     3.36%
                            --------           --------           --------           ---------           ----------
Total book value of
   investment securities....  $ --       --    $ 2,592     8.12%  $23,636    4.18%    $234,715    4.46%    260,943     4.47%
                            ========           ========           ========           =========
Unrealized holding gain on
  securities available for
  sale......................                                                                                 1,625
                                                                                                         ----------
Total investment in
  securities available for
  sale (4)..................                                                                              $262,568     4.45%
                                                                                                         ==========
<FN>
--------------------
(1)  Yields include  adjustments  for tax-exempt  income;  yields do not reflect
     changes  in fair  value  that are  reflected  as a  separate  component  of
     stockholders' equity (except as noted in (4) below).

(2)  Based on amortized cost/book value.

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

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

As of December 31, 2003, we had $262.6 million of available-for-sale  securities
in the investment portfolio as compared to $208.1 and $211.8 million at December
31, 2002 and 2001, respectively,  based on fair value of the securities on those
dates. During 2003, the amount of available-for-sale  securities increased $54.5
million in order to maintain  earning asset portfolio  levels while planned loan
reductions and the completion of some financed  commercial  real estate projects
reduced  the  loan  portfolio  by  $52.2  million.   Much  of  the  increase  in
available-for-sale securities was directed toward CMOs because of their economic
risk/reward  profiles (due to the  structure of the CMO cash flows)  relative to
mortgage-backed  or other  types of  securities  and the  ability to pledge such
securities as collateral  for borrowings at the FHLB. In the process of carrying
out the portfolio  management  objective to purchase securities and combinations
of securities with good economic risk/reward characteristics,  we decreased U.S.
government  agency   mortgage-backed   securities  and  U.S.  government  agency
securities by $32.8 and $4.1 million, respectively, and increased CMOs and state
and municipal bonds by $85.2 and $6.2 million, respectively.  Given our earnings
during  2003 and the  forecasted  level of future  earnings,  we  increased  our
holdings of state and  municipal  bonds by $6.2 million in order to increase our
level of tax-exempt income.
<PAGE>

The first half of 2003 saw the level of interest rates, including interest rates
for  mortgages,  decline to record or near  record  lows.  The pace of  mortgage
refinancing  reached  record  levels in the second  quarter of 2003.  During the
third  quarter of 2003,  interest  rates rose from the record  lows of the first
half of the year. This decreased mortgage prepayments from their earlier levels.
This made 2003 a volatile year for interest rates and mortgage prepayments.  The
ongoing portfolio  management  process  described above and individual  security
risk/reward   analysis  led  to  the  sale  of   individual   securities   whose
forward-looking  risk/reward  profiles  given  the  changed  interest  rate  and
prepayment   environments  were  inferior  to  other  securities  available  for
purchase.  This  analysis  and ongoing  management  of the  portfolio's  forward
looking risk/reward profile resulted in transactions that generated net realized
securities  gains of $968,000  during 2003.  We cannot  guarantee our ability to
generate  realized gains in the future such as those recognized  during the most
recent  year given the current  absolute  low level of  interest  rates.  In the
future,  the  risk/reward  management  process may require us to  recognize  net
realized losses in order to optimize the forward-looking economic profile of the
portfolio.

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

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

In 2001,  as a result of 475 basis points of monetary  easing over the course of
the year, the yield curve experienced a significant  downward shift and increase
in  slope  relative  to 2000.  The  ongoing  portfolio  management  process  and
individual  security  risk/reward  analysis  described  above led to the sale of
individual  securities whose  forward-looking  risk/reward profile given various
interest rate scenarios was inferior to other securities available for purchase.
The need to optimize  the  risk/reward  profile of the  portfolio  as a whole in
addition to the  reduction in the  portfolio  size as more  earning  assets were
shifted to loans resulted in transactions that generated net realized securities
gains of $1.4 million.

At December 31, 2003,  we held no securities  of any single  issuer,  other than
U.S.  government  agency  securities and agency  mortgage-backed  securities and
CMOs, that exceeded 10 percent of stockholders' equity. A significant portion of
our investment  securities  portfolio  (approximately 89 percent at December 31,
2003) was pledged as collateral for public  deposits and  borrowings,  including
borrowings with the FHLB.

Federal  Reserve  Bank and Federal Home Loan Bank Stock.  Our equity  securities
consisted of $1.2  million,  $1.2  million and $849,000 of Federal  Reserve Bank
("FRB") stock at December 31, 2003, 2002 and 2001, respectively,  and $6.4, $5.8
and  $6.5  million  of  FHLB  stock  at  December  31,  2003,   2002  and  2001,
respectively.  Our holdings in FRB stock  increased due to the amount of capital
stock issued by the Bank. Our holdings in FHLB stock  fluctuate due to the level
of FHLB advances  outstanding.  From 2001 to 2003,  our investment in FHLB stock
fluctuated with our usage of FHLB advances.

Loan  Portfolio.  The  banking  segment's  primary  source of income is interest
earned on loans.  Total loans,  net of unearned income and unamortized  fees and
costs,  decreased $52.2 million,  or 15.6 percent, to $283.6 million at December
31, 2003 as compared to $335.8  million at December 31, 2002. In 2002, net loans
increased $37.9 million,  or 12.7 percent, as compared to December 31, 2001. The
following  table presents the  composition of our loan portfolio as of the dates
indicated:
<PAGE>
<TABLE>
<CAPTION>
                         Loan Portfolio Composition (1)
                                                                    December 31,
                            ---------------------------------------------------------------------------------------------------
                                    2003               2002                 2001               2000                   1999
                            -------------------  ------------------  ------------------  -------------------  -----------------
                              Amount       %      Amount       %      Amount       %     Amount        %        Amount      %
                            ---------- --------  --------- --------  ---------- -------  --------- ---------  --------- -------
                                                                  (dollars in thousands)
<S>                         <C>          <C>     <C>          <C>    <C>          <C>    <C>          <C>     <C>         <C>
Commercial and industrial . $ 73,001     26.2    $ 94,075     28.4   $ 103,883    35.4   $109,335     43.9    $108,593    43.2
Real estate mortgage.......  129,443     46.4     147,825     44.7     123,727    42.1     85,082     34.1      88,251    35.1
Real estate construction...   60,056     21.5      62,926     19.0      34,225    11.7     21,879      8.8      15,684     6.3
Agricultural...............   12,529      4.5      18,023      5.5      19,069     6.5     15,016      6.0      15,906     6.3
Consumer/other.............    6,277      2.3       8,227      2.5       9,953     3.4     11,552      4.6      14,559     5.8
Lease financing............    2,757      1.0       5,584      1.7       7,578     2.6     10,154      4.1      11,214     4.5
                            ---------- --------  --------- --------  ---------- -------  --------- ---------  --------- -------
Total principal amount of
  loans....................  284,063    101.9     336,660    101.8     298,435   101.7    253,018    101.5     254,207   101.2
Unearned income and net
  unamortized deferred
  fees and costs...........     (508)    (0.2)       (866)    (0.3)       (511)   (0.2)      (265)    (0.1)       (198)   (0.1)
                            ---------- --------  --------- --------  ----------  ------  --------- ---------  --------- -------
Loans, net of unearned
  income and unamortized
  fees and costs...........  283,555    101.7     335,794    101.5     297,924   101.5    252,753    101.4     254,009   101.1
Less allowance for credit
  losses...................   (4,763)    (1.7)     (5,006)    (1.5)     (4,325)   (1.5)    (3,588)    (1.4)     (2,872)   (1.1)
                            ---------- --------  --------- -------- ----------  -------  --------- ---------  --------- -------
Net loans.................. $278,792   100.00    $330,788   100.00   $ 293,599  100.00   $249,165   100.00    $251,137  100.00
                            ========== ========  ========= ======== ==========  =======  ========= =========  ========= =======
<FN>
(1)  From continuing operations for all periods presented.
</FN>
</TABLE>
The following table presents, for the periods indicated,  the amount and percent
of change in each category of loans in our loan portfolio.  Significant  changes
are discussed in lettered explanations below the table:
<TABLE>
<CAPTION>
                    Change in Loan Portfolio Composition (1)

                                                        Increase (Decrease)
                                       ---------------------------------------------------
                                              2003 - 2002                2002 - 2001
                                       -------------------------  ------------------------
                                           $              %            $            %
                                       ------------  -----------  ------------  ----------
                                                      (dollars in thousands)
<S>                                    <C>              <C>       <C>              <C>
Commercial and industrial..............$  (21,074)      (22)%     $   (9,808)      (9)% (a)
Real estate mortgage...................   (18,382)      (12)%         24,098        19% (b)
Real estate construction...............    (2,870)       (5)%         28,701        84% (c)
Agricultural...........................    (5,494)      (30)%         (1,046)      (5)% (d)
Consumer/other.........................    (1,950)      (24)%         (1,726)     (17)%
Lease financing........................    (2,827)      (51)%         (1,994)     (26)%
                                       ------------               ------------
Total principal amount of loans........   (52,597)      (16)%         38,225        13%
Unearned income/unamortized fees
  and costs............................       358         41%           (355)     (69)%
                                       ------------               ------------
Loans, net of unearned
   income/unamortized fees and costs...   (52,239)      (16)%         37,870        13%
Allowance for credit losses............       243          5%           (681)     (16)%
                                       ------------               ------------
Net Loans..............................$  (51,996)      (16)%     $   37,189        13%
                                       ============               ============
<FN>
(1)  From continuing operations for all periods presented.

     (a)  Commercial and  industrial  loans.  Commercial  and  industrial  loans
          decreased  in 2003 due to planned loan  pay-downs,  loan pay- offs and
          the lack of loan demand due to economic  conditions.  The  decrease in
          2002  reflects  general  pay-down of loans in the  ordinary  course of
          business.
     (b)  Real estate mortgage loans. The decrease in real estate mortgage loans
          during 2003 reflects the completion of some financed  commercial  real
          estate  projects.  The increase in 2002 is  attributable to commercial
          real  estate  loan  growth  primarily  in the  Arizona  and  Minnesota
          markets.
     (c)  Real estate  construction  loans. The increase in 2002 is attributable
          to commercial real estate  construction  loan growth  primarily in the
          Arizona and Minnesota markets.
     (d)  Agricultural  loans.  The  2003  decrease  is  primarily  due to  loan
          pay-offs in the North Dakota market.
</FN>
</TABLE>
<PAGE>
While  prospects for loan growth appear to be developing in some of our markets,
future loan growth  potential is subject to  volatility.  Our loan  portfolio is
concentrated in commercial,  industrial and real estate loans and we have credit
concentrations  in certain  industries  (see  "-Concentrations  of Credit")  and
certain  geographic  concentrations  that relate to our primary  market areas. A
downturn in certain sectors of the economy could adversely impact our borrowers.
This  could,  in turn,  reduce the  demand  for loans and impact the  borrowers'
ability to repay their loans,  while also  decreasing  our net interest  margin.
Taking a conservative posture relative to credit underwriting,  we believe, is a
prudent course of action, especially during weaker economic times. We believe it
is in our  best  interest  and in the  interest  of our  stockholders  to  focus
attention  on our quality  customer  relationships  and to avoid growth in other
than  high-quality  credit during  uncertain  times.  We cannot predict with any
degree of certainty the full impact of current or future economic  conditions on
our  ability  to  generate  loan  volume  or the  ultimate  impact  of  economic
conditions on our currently  existing  portfolio of loans. See "Factors That May
Affect Future Results of Operations" included under Item 1 of Part I.

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

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

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

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

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

           Loan Participations Sold (1)

                   December 31,
---------------------------------------------------
                  (in thousands)

<S> <C>                              <C>
    2003...................          $  146,988
    2002...................             173,895
    2001...................             208,975
    2000...................             187,773
    1999...................             118,463
<FN>

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

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

Concentrations of Credit. Our credit policies emphasize  diversification of risk
among industries,  geographic areas and borrowers.  For purposes of the analysis
of  concentrations of credit as of December 31, 2003 the total outstanding loans
as well as all outstanding loan  commitments  were included.  As of December 31,
2003, we identified three  concentrations of loans exceeding 10 percent of total
loans  and  loan  commitments  outstanding.  These  concentrations  were in real
estate,  construction and lodging places,  which represented 18.9, 12.4 and 11.7
percent, respectively, of total loans and loan commitments outstanding.

The real estate loans and  commitments  were  extended to 105  customers who are
diversified  across our market  areas and who can  generally be  categorized  as
indicated below:
<TABLE>
<CAPTION>
                                                            Percent of total
                                                            outstanding loans
                                       Number of               and loan
                                       customers              commitments
                                    -----------------     --------------------
<S>                                         <C>                    <C>
Non-residential and apartment
 building operators, developers
 and lessors of real property.......          61                    13.1%
Real estate holding companies.......          44                     5.8%
                                    -----------------     --------------------
      Total.........................         105                    18.9%
                                    =================     ====================
</TABLE>

Loans and commitments in the construction category were extended to 47 customers
who are located primarily in Minnesota,  Iowa, North Dakota and South Dakota and
who can generally be categorized as indicated below:
<TABLE>
<CAPTION>
                                                               Percent of total
                                                                  outstanding
                                               Number of        loans and loan
                                               customers          commitments
                                           ------------------  -----------------
<S>                                                  <C>              <C>
General building contractors..............           21               10.8%
Special trade contractors.................           18                1.0%
Heavy construction, excluding building....            8                 .6%
                                           ------------------  -----------------
     Total................................           47               12.4%
                                           ==================  =================
</TABLE>

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

The lodging loans and commitments were extended to 15 customers whose properties
are  located  throughout  the United  States.  Loans in this  category  are made
primarily to borrowers  that have seasoned  hotel  portfolios  and that are well
diversified by location, property type and chain.

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

Agricultural  Loans. Our agricultural loan portfolio totals  approximately $12.5
million,  or 4.4  percent  of total  loans.  Within  the  portfolio,  loans  are
diversified  by type and  include  loans to grain  and/or  livestock  producers,
agricultural  real estate  loans,  machinery  and  equipment  and other types of
loans. The majority of our agricultural  loans are extended to borrowers located
in North Dakota,  and are diversified over several counties.  As of December 31,
2003, there were no agricultural loans classified as nonperforming.
<PAGE>

Loan  Maturities.  The following  table sets forth the  remaining  maturities of
loans in each major  category of our  portfolio as of December 31, 2003.  Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments.  Loan renewals are evaluated in the same manner as new
credit applications:
<TABLE>
<CAPTION>
                             Maturities of Loans (1)
                                                           Over 1 year
                                                         through 5 years                Over 5 years
                                                   -----------------------------  -------------------------
                                     One year         Fixed          Floating        Fixed       Floating
                                      or less         rate             rate          rate          rate          Total
                                    ------------   ------------    -------------  ------------  -----------   -------------
                                                                        (in thousands)
<S>                                    <C>            <C>             <C>            <C>           <C>           <C>
Commercial and industrial..........    $ 46,209       $ 10,984        $  13,208     $   1,686     $    914       $  73,001
Real estate mortgage...............      32,117         21,584           39,216        18,296       18,230         129,443
Real estate construction...........      45,547            434           13,395           576          104          60,056
Agricultural.......................       5,792          2,318            1,384         1,209        1,826          12,529
Consumer/other.....................       3,318          2,656              183           120           --           6,277
Lease financing....................         768          1,989               --            --           --           2,757
                                    ------------   ------------    -------------  ------------  -----------   -------------
Total principal amount of loans....   $ 133,751       $ 39,965        $  67,386     $  21,887     $ 21,074       $ 284,063
                                    ============   ============    =============  ============  ===========   =============
<FN>
--------------------------

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

Interest  Rate Caps and Floors.  From time to time we may use  off-balance-sheet
instruments,  principally  interest rate caps and floors, to adjust the interest
rate sensitivity of on-balance-sheet items, including loans. At January 1, 2001,
we had an interest rate floor  contract  that  qualified as a cash flow hedge of
interest  rate  risk  associated  with  floating  rate  commercial  loans  under
Statement of Financial  Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging  Activities"  ("SFAS 133").  The floor contract was sold
during 2001. See  -"Liquidity,  Market and Credit Risk," Item 7A,  "Quantitative
and  Qualitative  Disclosures  about  Market  Risk,"  and  Notes 1 and 17 to the
Consolidated  Financial  Statements included under Item 8 for further discussion
about accounting  policies  applicable to derivative  financial  instruments and
currently outstanding instruments.

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

The  following  table sets  forth,  as of the dates  indicated,  the  amounts of
nonperforming  loans and other  assets,  the  allowance  for  credit  losses and
certain related ratios:
<PAGE>
<TABLE>
<CAPTION>
                            Nonperforming Assets (1)
                                                                                 December 31,
                                                      --------------------------------------------------------------------
                                                          2003          2002          2001           2000          1999
                                                      -----------   -----------   ------------   -----------   -----------
                                                                           (dollars in thousands)
<S>                                                      <C>          <C>             <C>            <C>           <C>
Nonperforming loans:
     Loans 90 days or more delinquent and still
       accruing interest.............................    $    38      $  5,081        $   983       $   221      $     22
     Nonaccrual loans (2) (3)........................      7,913         2,549          3,391           343         1,620
     Restructured loans (2) (3)......................         --            --              5            16            16
                                                      -----------   -----------   ------------   -----------   -----------
         Total nonperforming loans...................      7,951         7,630          4,379           580         1,658
     Other real estate owned and repossessed assets..         --             8             70            84         1,207
                                                      -----------   -----------   ------------   -----------   -----------
         Total nonperforming assets..................    $ 7,951      $  7,638        $ 4,449       $   664      $  2,865
                                                      ===========   ===========   ============   ===========   ===========
Allowance for credit losses..........................    $ 4,763      $  5,006        $ 4,325       $ 3,588      $  2,872
                                                      ===========   ===========   ============   ===========   ===========
Ratio of total nonperforming loans to total loans....      2.80%         2.27%          1.47%          .23%          .65%
Ratio of total nonperforming assets to total assets..      1.28%         1.27%           .80%          .12%          .64%
Ratio of allowance for credit losses to
nonperforming loans..................................        60%           66%            99%          619%          173%
<FN>
--------------------
(1)  From continuing operations for all periods presented.

(2)  If the  Company's  nonaccrual  and  restructured  loans had been current in
     accordance with their original  terms, we would have recognized  additional
     interest income of $65,000, $236,000, $84,000, $29,000 and $112,000 for the
     years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively.

(3)  The interest income on nonaccrual and restructured  loans actually included
     in our net income was $56,000,  $1,000,  $3,000, $6,000 and $29,000 for the
     years ended December 31, 2003, 2002, 2001, 2000 and 1999 respectively.
</FN>
</TABLE>

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

Nonaccrual  loans  include  loans on which  the  accrual  of  interest  has been
discontinued.  Accrual  of  interest  is  discontinued  when we  believe,  after
considering  economic and business conditions and collection  efforts,  that the
borrower's  financial  condition  is such that the  collection  of  interest  is
doubtful.  A delinquent  loan is generally  placed on nonaccrual  status when it
becomes  90 days or more past due  unless  the loan is well  secured  and in the
process of collection.  When a loan is placed on nonaccrual status,  accrued but
uncollected  interest  income  applicable  to the  current  reporting  period is
reversed against interest income of the current period.  Accrued but uncollected
interest income applicable to previous  reporting periods is charged against the
allowance  for credit  losses.  No  additional  interest  is accrued on the loan
balance until the collection of both principal and interest  becomes  reasonably
certain.  When a problem loan is finally  resolved,  there may  ultimately be an
actual write down or charge-off  of the principal  balance of the loan which may
necessitate  additional  charges  to  earnings.  Of the  $7.9  million  of loans
included in the  nonaccrual  loan  category at December 31,  2003,  $6.7 million
relates to two commercial customers.  One of the loans, with a principal balance
of $4.5  million at  December  31,  2003,  was paid in full,  including  accrued
interest,  during January 2004. The second loan for $2.2 million is a commercial
loan on which a liquidation  settlement agreement has been executed.  We believe
the agreement will result in resolution of this problem credit during the second
quarter of 2004. A charge-off of approximately $900,000 is expected as this loan
is brought  to full  resolution  and that  amount  had been  fully  reserved  at
December 31, 2003.

Restructured loans are those for which concessions, including a reduction of the
interest rate or the deferral of interest or principal, have been granted due to
the borrower's weakened financial  condition.  Interest on restructured loans is
accrued  at the  restructured  rates  when  it is  anticipated  that  no loss of
original  principal will occur. We had no restructured loans in our portfolio at
December 31, 2003.
<PAGE>

Other real estate owned and repossessed  assets represents  properties and other
assets acquired through,  or in lieu of, loan  foreclosure.  Such properties and
assets are included in other assets in the consolidated balance sheets. They are
initially  recorded at fair value at the date of acquisition  establishing a new
cost basis.  Write-downs to fair value at the time of acquisition are charged to
the  allowance  for credit  losses.  After  foreclosure,  we perform  valuations
periodically  and the real estate or assets are carried at the lower of carrying
amount or fair  value  less cost to sell.  Write-downs,  revenues  and  expenses
incurred    subsequent   to   foreclosure   are   charged   to   operations   as
recognized/incurred.   We  had  no  outstanding   other  real  estate  owned  or
repossessed assets at December 31, 2003.

Our ratios of total  nonperforming loans to total loans, and total nonperforming
assets to total  assets,  increased  between  December 31, 2002 and December 31,
2003.  The ratio of the  allowance  for  credit  losses to  nonperforming  loans
decreased  between  December  31,  2002 and  December  31,  2003.  This ratio at
December 31, 2003 was 60 percent as compared to 66 percent at December 31, 2002.
This  decrease  (and the increase in the other asset  quality  ratios  mentioned
above) is primarily  attributable  to the previously  mentioned  commercial loan
that was paid in full during  January  2004.  Without this sizable  credit,  the
above-mentioned ratios would be significantly positively impacted. Additionally,
the pending  resolution  of the $2.2 million  commercial  credit also  mentioned
above should positively impact our asset quality ratios.

Potential  Problem Loans. In accordance with accounting  standards,  we identify
loans  considered  impaired and the valuation  allowance  attributable  to these
loans.  Impaired  loans  generally  include loans on which we believe,  based on
current  information  and  events,  it is  probable  that we will not be able to
collect all amounts due in accordance  with the terms of the loan  agreement and
which are analyzed for a specific reserve  allowance.  We generally consider all
loans   risk-graded   substandard   and  doubtful  as  well  as  nonaccrual  and
restructured  loans as impaired.  Potential  problem loans at December 31, 2003,
not including the past due,  nonaccrual and  restructured  loans reported above,
totaled  $3.1  million as  compared  to $5.8  million at December  31,  2002.  A
significant  portion of these potential problem loans are not in default but may
have characteristics such as recent adverse operating cash flows or general risk
characteristics  that the loan officer feels might  jeopardize the future timely
collection of principal and interest payments.  The ultimate resolution of these
credits is subject to changes in economic  conditions and other  factors.  These
loans are closely monitored to ensure that our position as creditor is protected
to the fullest extent possible.

Allowance  for Credit  Losses.  Credit  risk is the risk of loss from a customer
default.  We have in place a process to identify and manage our credit risk. The
process  includes  initial  credit review and approval,  periodic  monitoring to
measure compliance with credit agreements and internal credit policies, internal
credit  review,  monitoring  changes in the risk  ratings  of loans and  leases,
identification of problem loans and leases and special procedures for collection
of problem  loans and leases.  The risk of loss is  difficult to quantify and is
subject to  fluctuations  in values and general  economic  conditions  and other
factors. As discussed previously,  the determination of the allowance for credit
losses  is a  critical  accounting  policy,  which  involves  estimates  and our
judgment on a number of factors such as net  charge-offs,  delinquencies  in the
loan and lease  portfolio and general and economic  conditions.  We consider the
allowance for credit losses of $4.8 million adequate to cover losses inherent in
the loan and lease portfolio as of December 31, 2003.  However, no assurance can
be given that we will not,  in any  particular  period,  sustain  loan and lease
losses that are sizable in relation to the amount  reserved,  or that subsequent
evaluations  of  the  loan  and  lease  portfolio,  in  light  of  factors  then
prevailing, including economic conditions and our ongoing credit review process,
will not require  significant  increases in the allowance for credit  losses.  A
protracted economic slowdown and/or a decline in commercial,  industrial or real
estate  segments may have an adverse impact on the adequacy of the allowance for
credit  losses by  increasing  credit risk and the risk of potential  loss.  See
Notes 1 and 7 to the Consolidated Financial Statements included under Item 8 and
"-Critical  Accounting Policies" for further information  concerning  accounting
policies associated with the allowance for credit losses.

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

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

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

At  yearend  2003,  our  total  allowance  was $4.8  million  which  equates  to
approximately  3.8 and 4.1 times the average  charge-offs for the last three and
five years, respectively,  and 4.5 and 5.0 times the average net charge-offs for
the  same  three-and   five-year  periods,   respectively.   Because  historical
charge-offs are not necessarily  indicative of future charge-off levels, we also
give  consideration  to other risk indicators  when  determining the appropriate
allowance level.  Those risk factors have been summarized  above. Our charge-off
policy is generally consistent with regulatory standards.

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

Concentrations of credit risk are discussed under  "-Concentrations  of Credit."
Concentrations  exist in real estate,  construction and lodging places loans and
commitments. Additionally, a geographic concentration of credit risk also arises
because we have  historically  operated  primarily in the upper  Midwest with 67
percent of loans  outstanding  as of December  31, 2003 having been  extended to
customers in Minnesota,  North Dakota and South Dakota. As of December 31, 2003,
29 percent of our loans had been extended to customers in Arizona.  Other groups
of credit risk may not constitute a significant concentration,  but are analyzed
based on other evident risk factors for the purpose of  determining  an adequate
allowance level.

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

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

The  following  table  summarizes,  for the periods  indicated,  activity in the
allowance for credit losses, including amounts of loans charged-off,  amounts of
recoveries,  additions to the allowance charged to operating expense,  the ratio
of net  charge-offs to average total loans,  the ratio of the allowance to total
loans at the end of each period and the ratio of the allowance to  nonperforming
loans:
<PAGE>
<TABLE>
<CAPTION>
                   Analysis of Allowance for Credit Losses (1)
                                                                         For the Years ended December 31,
                                                        --------------------------------------------------------------------
                                                           2003          2002          2001           2000          1999
                                                        -----------   ------------  ------------   -----------   -----------
                                                                              (dollars in thousands)
<S>                                                       <C>            <C>          <C>           <C>            <C>
Balance of allowance for credit losses,
  beginning of period..................................  $  5,006       $  4,325      $  3,588      $  2,872       $  2,854
                                                        -----------   ------------  ------------   -----------   -----------
Charge-offs:
     Commercial and industrial.........................     1,508            408           542           574          1,090
     Real estate mortgage..............................       189              9            99            58             10
     Agricultural......................................        10             --            --            16             35
     Consumer/other....................................        23             75           213            39            137
     Lease financing...................................        90            165           411            68             18
                                                        -----------   ------------  ------------   -----------   -----------
        Total charge-offs..............................     1,820            657         1,265           755          1,290
                                                        -----------   ------------  ------------   -----------   -----------
Recoveries:
     Commercial and industrial.........................        73             86           140           100             86
     Real estate mortgage..............................         7              8            30            96              1
     Agricultural......................................        --              4             1            33             --
     Consumer/other....................................        11             11           132            25             71
     Lease financing...................................        11             27            --            15             12
                                                        -----------   ------------  ------------   -----------   -----------
        Total recoveries...............................       102            136           303           269            170
                                                        -----------   ------------  ------------   -----------   -----------
Net charge-offs........................................    (1,718)          (521)         (962)         (486)        (1,120)
Provision for credit losses charged to operations......     1,475          1,202         1,699         1,202          1,138
                                                        -----------   ------------  ------------   -----------   -----------
Balance of allowance for credit losses, end of period..  $  4,763       $  5,006      $  4,325      $  3,588       $  2,872
                                                        ===========   ============  ============   ===========   ===========
Ratio of net charge-offs to average loans..............    (0.56)%        (0.17)%       (0.33)%       (0.20)%        (0.46)%
                                                        ===========   ============  ============   ===========   ===========
Average gross loans outstanding during the period......  $308,115       $307,227      $293,716      $244,526       $246,148

                                                        ===========   ============  ============   ===========   ===========
Ratio of allowance for credit losses to total loans....      1.68%          1.49%         1.45%         1.42%          1.13%
                                                        ===========   ============  ============   ===========   ===========
Ratio of allowance for credit losses to
nonperforming loans....................................        60%            66%           99%          619%           173%
                                                        ===========   ============  ============   ===========   ===========
<FN>

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

Of the $1.8  million  of  charge-offs  for the year  ended  December  31,  2003,
approximately  $1.3 million  relates to one commercial  contractor.  The Bank is
continuing  the  liquidation  process  with this  credit,  which has been  fully
charged-off.  Due to further liquidation  efforts,  the Bank may recover some of
the previously charged-off amounts.

Our ratio of allowance for credit losses to  nonperforming  loans decreased from
66  percent  at  December  31,  2002 to 60 percent at  December  31,  2003.  See
"-Nonperforming  Loans  and  Assets"  for a  discussion  of the  specific  loans
responsible  for this decrease and the facts and  circumstances  surrounding the
status of the loans.

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

                 Allocation of the Allowance for Loan Losses (1)
                                                                       December 31,
                  ---------------------------------------------------------------------------------------------------------------
                          2003                  2002                   2001                  2000                   1999
                  --------------------- ---------------------- --------------------- ---------------------- ---------------------
                             Loans in              Loans in              Loans in                Loans in              Loans in
                             category              category              category                category              category
                               as a                  as a                  as a                    as a                  as a
                    Amount  percentage   Amount   percentage    Amount   percentage   Amount    percentage    Amount  percentage
                     of       of total     of      of total       of     of total       of       of total       of     of total
                  allowance gross loans allowance gross loans  allowance gross loans allowance  gross loans allowance gross loans
                  --------- ----------- --------- ------------ --------- ----------- ---------- ----------- --------- -----------
                                                              (dollars in thousands)
<S>                <C>          <C>      <C>            <C>     <C>          <C>      <C>             <C>   <C>           <C>
Commercial and
  industrial.....  $ 2,093       26%     $ 2,344        28%     $ 2,586      34%      $ 2,066         42%    $1,356       43%
Real estate
  mortgage.......    1,976       46%       1,836        44%       1,038      42%          702         34%       712       35%
Real estate
  construction...      395       21%         398        19%         137      11%          112         10%       151        6%
Agricultural.....      211        4%         231         5%         267       6%          342          6%       220        6%
Consumer/other...       68        2%          85         2%         118       5%          128          5%       138        6%
Lease financing..       20        1%         112         2%         179       2%          145          3%        88        4%
Unallocated......       --        0%          --         0%          --       0%           93          0%       207        0%
                  --------- ----------- --------- ------------ --------- ----------- ---------- ----------- --------- -----------
Total............  $ 4,763      100%     $ 5,006       100%     $ 4,325     100%      $ 3,588        100%    $2,872      100%
                  ========= =========== ========= ============ ========= =========== ========== =========== ========= ===========
<FN>

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

Deposits. Our core deposits consist of noninterest- and interest-bearing  demand
deposits,  savings  deposits,  money market deposit  accounts,  certificates  of
deposit under $100,000, certain certificates of deposit of $100,000 and over and
public funds.  Total  deposits were $395.9 million at December 31, 2003 compared
with $398.2 and $375.3 million at December 31, 2002 and 2001,  respectively.  We
use these deposits, along with other borrowed funds, to support our asset base.

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

                     Average Deposits and Deposit Costs (1)

                                                             For the Years Ended December 31,
                          --------------------------------------------------------------------------------------------------------
                                       2003                               2002                                2001
                          --------------------------------  ---------------------------------  -----------------------------------
                                        Percent     Wgtd.                 Percent      Wgtd.                   Percent     Wgtd.
                           Average        of        avg.      Average        of        avg.      Average         of        avg.
                           balance     deposits     rate      balance     deposits     rate      balance      deposits     rate
                          ----------  -----------  -------  -----------  ----------  --------  -----------   ---------  ----------
                                                                  (dollars in thousands)
<S>                        <C>           <C>        <C>      <C>           <C>        <C>       <C>           <C>         <C>
Interest checking
 and MMDAs................ $186,796       48.69%    1.17%    $ 174,108      44.51%     1.64%    $ 147,775      41.92%       3.16%
Savings deposits..........    6,052        1.58%    0.84%        4,511       1.15%     0.86%        3,758       1.07%       1.49%
Time deposits (CDs):
CDs under $100,000........   94,820       24.72%    3.18%      104,964      26.83%     3.88%       98,639      27.99%       5.35%
CDs $100,000 and over.....   55,928       14.58%    3.91%       73,639      18.83%     4.46%       73,806      20.94%       5.76%
                          ----------  -----------           -----------  ----------            -----------   ---------
Total time deposits.......  150,748       39.30%    3.45%      178,603      45.66%     4.12%      172,445      48.93%       5.52%
                          ----------  -----------           -----------  ----------            -----------   ---------
Total interest-bearing
 deposits.................  343,596       89.57%    2.16%      357,222      91.32%     2.87%      323,978      91.92%       4.40%
Noninterest-bearing
 demand deposits..........   40,022       10.43%       --       33,951       8.68%        --       28,474       8.08%          --
                          ----------  -----------           -----------  ----------            -----------   ---------
Total deposits............ $383,618      100.00%    1.94%    $ 391,173     100.00%     2.62%    $ 352,452     100.00%       4.04%
                          ==========  ===========           ===========  ==========            ===========   =========
<FN>

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

At times earning asset growth can outpace core deposit  growth  resulting in the
use of brokered  and out of market  certificates  of deposit and other  borrowed
funds. See "-Borrowed Funds." This trend has been common in the banking industry
because  of the  proliferation  of  nonbank  competitors  and the  multitude  of
financial and investment  products available to customers as well as the need to
utilize such funds in the process of our overall  balance sheet  management.  At
times,  access to brokered and out of market deposits is available at maturities
and rates  more  favorable  than those  available  in our local  markets.  As of
December  31,  2003,  we  held a total  of  $12.9  million  of  national  market
certificates of deposit and $18.6 million of  certificates  of deposit  acquired
through  brokers.  Under  current  FDIC  regulations,  only  "well  capitalized"
financial  institutions may fund themselves with brokered deposits without prior
approval of regulators.  Our Bank was well capitalized at December 31, 2003. See
"Capital  Resources and Expenditures" and Note 18 to the Consolidated  Financial
Statements  included  under  Item 8 for a summary of the  capital  status of the
Bank.

Time  deposits in  denominations  of $100,000 and more totaled  $46.6 million at
December  31, 2003 as compared to $64.9 and $79.0  million at December  31, 2002
and 2001, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 2003:
<TABLE>
<CAPTION>

                       Time Deposits of $100,000 and Over
                                 (in thousands)
        <S>                                         <C>
        Maturing in:
        3 months or less.......................     $  10,109
        Over 3 months through 6 months.........        16,231
        Over 6 months through 12 months........        11,742
        Over 12 months.........................         8,487
                                                  --------------
         Total.................................     $  46,569
                                                  ==============
</TABLE>

Borrowed  Funds.  We use  short-term  borrowings,  FHLB  advances and  long-term
borrowings  to support our asset base.  Short-term  borrowings  include  Federal
funds  purchased  and  U.S.  Treasury  tax and loan  note  option  accounts  and
securities sold under agreements to repurchase. At December 31, 2003, short-term
borrowings were $31.4 million compared to $28.1 million at December 31, 2002 and
$760,000 at December 31, 2001.

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

                            Short-Term Borrowings (1)

                                         2003           2002           2001
                                     -----------    ------------   ------------
                                              (dollars in thousands)
<S>                                     <C>             <C>          <C>
Short-term borrowings outstanding
 at period end.......................   $31,383         $28,120       $  760
Weighted average interest rate
 at period end.......................     1.41%           1.48%        2.53%
Maximum month-end balance
 during the period...................   $37,670         $28,120      $39,924
Average borrowings outstanding
 for the period......................   $21,942         $ 7,799      $10,206
Weighted average interest rate
 for the period......................     1.74%           1.81%        4.32%
<FN>

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

Note  11  to  the  Consolidated  Financial  Statements  included  under  Item  8
summarizes  the  general  terms  of our  short-term  borrowings  outstanding  at
December 31, 2003 and 2002, including interest rates,  maturity dates,  weighted
average yields and other applicable terms.

FHLB advances  totaled $112.2,  $97.2,  and $117.2 million at December 31, 2003,
2002 and 2001,  respectively  while long-term  borrowings  totaled $8.6 million,
$8.6 million and $13,000, respectively, for the same periods.

Notes 12 and 13 to the Consolidated  Financial  Statements included under Item 8
summarize the general  terms of our FHLB  advances and  long-term  borrowings at
December 31, 2003 and 2002, including interest rates,  maturity dates,  weighted
average yields and other applicable terms.

During 2003,  $15.0 million of our FHLB advances matured and we originated $30.0
million of new FHLB  advances  primarily for the purpose of funding the purchase
of CMOs.

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

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

Interest  Rate Caps and Floors.  From time to time we may use  off-balance-sheet
instruments,  principally  interest rate caps and floors, to adjust the interest
rate sensitivity of on-balance-sheet items, including borrowings. During May and
June 2001, we  purchased,  for $1.2  million,  interest rate cap contracts  with
notional  amounts  totaling  $40.0  million to  mitigate  interest  rate risk in
rising-rate  scenarios.  The referenced  interest rate is three-month LIBOR with
$20.0 million of 4.50 percent  contracts having three-year  original  maturities
and  $20.0  million  of  5.50  percent   contracts  having  five-year   original
maturities.  The $20.0  million  of 4.50  percent  contracts  having  three-year
original  maturities  will mature in the second  quarter of 2004. The contracts,
classified as other assets,  are reflected in our December 31, 2003 consolidated
balance  sheet at their  combined  fair value of $56,000.  The contracts are not
being accounted for as hedges under SFAS 133. As a result, the impact of marking
the contracts to fair value has been,  and will continue to be,  included in net
interest  income.  During the years ended December 31, 2003 and 2002, the impact
of  marking  the  contracts  to market  (reflected  in the  consolidated  income
statements  as an increase in interest  expense on  borrowings)  was $80,000 and
$779,000,  respectively.  The fair  value of  $56,000 as of  December  31,  2003
reflects the full extent of the potential  loss on the contracts  should further
write downs to fair value be required. See -"Liquidity, Market and Credit Risk,"
Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," and Notes
1 and 17 to the  Consolidated  Financial  Statements  included  under Item 8 for
further discussion about accounting policies applicable to derivative  financial
instruments.

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

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

Capital  Resources  and  Expenditures.   We  actively  monitor  compliance  with
regulatory  capital  requirements,  including  risk-based  and leverage  capital
measures. Under the risk-based capital method of capital measurement,  the ratio
computed is dependent on the amount and  composition  of assets  recorded on the
balance sheet,  and the amount and  composition of  off-balance-sheet  items, in
addition  to  the  level  of  capital.  Note  18 to the  Consolidated  Financial
Statements  included  under  Item 8 includes  a summary  of the  risk-based  and
leverage  capital  ratios of BNCCORP  and the Bank as of  December  31, 2003 and
2002,  including  the  capital  ratios  and  capital  amounts  necessary  to  be
considered  "well   capitalized"   under  prompt  corrective  action  regulatory
provisions and adequately  capitalized for capital adequacy purposes. As of each
of those dates, BNCCORP and the Bank exceeded capital adequacy  requirements and
the Bank was  considered  "well  capitalized"  under  prompt  corrective  action
provisions.

The capital ratios of the Company and the Bank were as follows as of those
dates:
<TABLE>
<CAPTION>

                                            Tier 1        Total
                                            Risk-         Risk-        Tier 1
           As of December 31, 2003          Based         Based       Leverage
                                            Ratio         Ratio        Ratio
                                        -------------  ------------  -----------
<S>                                          <C>          <C>           <C>
BNCCORP, consolidated...................     7.14%        10.63%        4.90%
BNC National Bank.......................    10.74%        11.92%        7.37%

           As of December 31, 2002

BNCCORP, consolidated...................     5.92%         9.53%        4.46%
BNC National Bank.......................     9.29%        10.45%        7.00%
</TABLE>

Our  consolidated  risk-based  capital ratios improved between December 31, 2002
and December 31, 2003. The improvements were attributable to increases in Tier 1
capital  and total  capital  combined  with a  decrease  in total  risk-weighted
assets.  Total Tier 1 capital  increased from $25.6 million at December 31, 2002
to $28.8 million at December 31, 2003.  An increase in total equity  capital was
primarily attributable to earnings recognized during 2003. Additionally, because
of the increase in total equity capital,  $1.4 million more of our  subordinated
debentures qualified as Tier 1 capital at December 31, 2003 than at December 31,
2002. These capital increases were partially offset by an increase in intangible
assets (a direct  deduction from equity capital) of $2.4 million in 2003.  Total
risk-weighted assets declined from $433.0 million at December 31, 2002 to $403.7
million at December 31, 2003.  The  decrease in total  risk-weighted  assets was
attributable  to several  factors,  but most  importantly,  our decrease in loan
volume. Our consolidated  leverage ratio also improved between December 31, 2002
and  December  31,  2003 due to the  increase  in Tier 1  capital  offset  by an
increase in quarterly  average assets (less  intangible  assets) between the two
dates,  from $573.7  million at December 31, 2002 to $588.6  million at December
31, 2003.

During 2003,  we completed  construction  of our office  building at 17045 North
Scottsdale Road, Scottsdale, Arizona. We also purchased the Milne Scali building
at 1750  East  Glendale  Avenue,  Phoenix,  Arizona,  relocated  our  2725  East
Camelback  Road  office  to 2425  East  Camelback  Road,  Phoenix  and made some
improvements  to our office  building at 322 East Main Avenue,  Bismarck,  North
Dakota.  Additionally  during 2003,  we  purchased a property in Golden  Valley,
Minnesota.  This facility is presently undergoing  renovation and is expected to
open during 2004.  In early 2004, we purchased  property in Tucson,  Arizona for
future use by IASW  personnel  along with  adjacent land for a future bank site.
Capital  expenditures  expected in 2004 include the  completion of renovation of
the Golden Valley  facility and could include  purchase or leasing of additional
facilities in our various  market areas should such  facilities or properties be
deemed to add additional franchise value.

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

Commitments  to Extend  Credit.  Commitments  to extend credit are agreements to
lend to a  customer  provided  there is no  violation  of any  condition  in the
contract.  Commitments  to extend credit are legally  binding and generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. The contractual  amount represents our exposure to credit loss in the event
of default by the  borrower;  however,  at December 31,  2003,  based on current
information,  no losses were  anticipated as a result of these  commitments.  We
manage this  credit  risk by using the same  credit  policies we apply to loans.
Collateral is generally  required to secure the loans covered by the commitments
based on  management's  credit  assessment of the borrower.  The  collateral may
include marketable securities, real estate and other types of business assets of
the borrower such as accounts receivable, inventory, equipment, deposit accounts
and  general  intangibles.  Since we expect  some of the  commitments  to expire
without being drawn, total commitment  amounts do not necessarily  represent our
future liquidity requirements related to such commitments.

Commitments to extend credit are important to us in that they provide sources of
liquidity  to our  customers.  Our  liquidity is impacted to the extent that the
customer  draws upon the  commitments.  Our  revenues are impacted to the extent
advances of funds are made and  interest is earned on such  advances of funds or
we charge a fee for extending or maintaining  the commitment.  Such  commitments
don't typically result in material expenses for us, but rather, result in normal
operating  expenses  involved  with  processing,  approval and other  activities
associated with the extension and administration of such credit facilities.  Our
cash flow is  impacted  to the  extent  the  commitments  are drawn  upon by our
customers.  There  are  no  retained  interests,   securities  issued  or  other
indebtedness  incurred  by us in  connection  with these  commitments  to extend
credit,  and,  other than the obligation to honor the commitment if drawn by the
customer,  there are no other obligations or liabilities,  including  contingent
obligations or liabilities,  arising from such commitments. At the present time,
other than the passage of time or the  nonperformance  of customers  under these
commitments,  there is no known event, demand, commitment,  trend or uncertainty
that will result in or is  reasonably  likely to result in  termination  of such
commitments to a material extent.  The contractual  amount of our commitments to
extend credit totaled $94.1 million at December 31, 2003.

Commercial Letters of Credit.  Commercial letters of credit are issued on behalf
of  customers  to  ensure  payment  or  collection  in  connection   with  trade
transactions.  In the event of a  customer's  nonperformance,  our  credit  loss
exposure  is the  same  as in  any  extension  of  credit,  up to  the  letter's
contractual amount; however, at December 31, 2003, based on current information,
no losses  were  anticipated  as a result of these  commitments.  We assess  the
borrower's  credit to  determine  the  necessary  collateral,  which may include
marketable  securities,  real estate and other  types of business  assets of the
borrower such as accounts receivable, inventory, equipment, deposit accounts and
general intangibles. Since the conditions requiring us to fund letters of credit
may not occur, our liquidity requirements related to such letters of credit will
likely be less than the total outstanding commitments.

Commercial  letters of credit are an  important  service  provided  by us to our
commercial customers. Our liquidity is impacted only to the extent we must honor
a commercial letter of credit due to nonperformance of the commercial  customer.
Our revenues  are  impacted to the extent we are  required to perform  under the
letter of credit and earn interest  income on the advanced  funds or we charge a
fee for  issuing or  maintaining  the letter of credit.  Such  letters of credit
typically don't result in material expenses for us, but rather, result in normal
operating  expenses  involved  with  processing,  approval and other  activities
associated with the extension and  administration of such letters of credit. Our
cash flow is impacted to the extent the  nonperformance of the customer requires
us to  advance  under the  letter of credit.  There are no  retained  interests,
securities issued or other indebtedness  incurred by us in connection with these
letters of credit, and, other than the obligation to honor the letter of credit,
there are no other obligations or liabilities,  including contingent obligations
or liabilities,  arising from such letters of credit. At the present time, other
than the passage of time or  nonperformance  of customers under their letters of
credit, there is no known event, demand,  commitment,  trend or uncertainty that
will result or is reasonably  likely to result in termination of such letters of
credit to a material extent. The contractual amount of our commercial letters of
credit totaled $10.6 million at December 31, 2003.

Performance and Financial Standby Letters of Credit. Performance standby letters
of credit are  irrevocable  obligations  to the  beneficiary on our part to make
payment on account of any default by the account party in the  performance  of a
nonfinancial or commercial  obligation.  Under these arrangements,  we could, in
the event of the account party's nonperformance, be required to pay a maximum of
the amount of issued letters of credit.  Under the agreements,  we have recourse
against  the account  party up to and  including  the amount of the  performance
standby letter of credit. We evaluate each account party's creditworthiness on a
case-by-case basis and the amount of collateral  obtained varies and is based on
our credit  evaluation  of the account  party.  As of December 31, 2003,  we had
outstanding $641,000 of performance standby letters of credit.
<PAGE>

Financial  standby  letters  of  credit  are  irrevocable   obligations  to  the
beneficiary  on our part to repay  money  borrowed  by or advanced to or for the
account of the account  party or to make payment on account of any  indebtedness
undertaken  by the account  party,  in the event that the account party fails to
fulfill its obligation to the beneficiary.  Under these arrangements,  we could,
in the event of the account party's nonperformance, be required to pay a maximum
of the  amount of issued  letters  of  credit.  Under  the  agreements,  we have
recourse  against  the  account  party up to and  including  the  amount  of the
financial   standby  letter  of  credit.   We  evaluate  each  account   party's
creditworthiness  on a case-by-case basis and the amount of collateral  obtained
varies  and is  based on our  credit  evaluation  of the  account  party.  As of
December 31, 2003, we had outstanding $43.8 million of financial standby letters
of credit.  $34.1 million of these letters of credit were  participated to other
financial institutions.

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

Interest  Rate Swaps,  Caps and Floors.  Interest  rate swaps are  contracts  to
exchange  fixed  and  floating  rate  interest  payment  obligations  based on a
notional  principal  amount.  From time to time we may enter into swaps to hedge
our balance sheet against fluctuations in interest rates. Interest rate caps and
floors are used to protect  our  balance  sheet from  unfavorable  movements  in
interest rates while allowing benefit from favorable movements.  The credit risk
related to interest rate contracts is that  counterparties may be unable to meet
the contractual  terms of the agreements.  This risk is estimated by calculating
the  present  value  of the  cost to  replace  outstanding  contracts  in a gain
position at current market rates, reported on a net basis by counterparties.  We
manage  the  credit  risk  of our  interest  rate  contracts  through  bilateral
collateral  agreements,  credit  approvals,  limits and  monitoring  procedures.
Additionally,  we reduce the assumed  counterparty  credit risk  through  master
netting  agreements  that permit us to settle  interest rate  contracts with the
same counterparty on a net basis. At December 31, 2003, we held $40.0 million of
interest  rate caps.  These caps are  reflected in the December 31, 2003 balance
sheet at their combined fair value of $56,000.

Interest rate swaps,  caps and floors can be an effective way to hedge  interest
rate  risk.  Due to the fact that they are  purchased  at fair  value,  which is
generally  significantly  less than the notional amount of the  instrument,  our
liquidity  is not  generally  materially  affected  by the  origination  of such
instruments. The amount of revenues or expenses associated with such instruments
is dependent upon the accounting methodology selected for the instruments (i.e.,
whether such  instruments are officially  designated as hedges under  applicable
accounting  standards).  Our current interest rate caps are not accounted for as
hedges. Therefore, increases in their fair value are presented as a reduction to
interest  expense  while  decreases  in their  fair  value are  presented  as an
increase in interest expense.  Cash flow is not affected under these instruments
other than at the time of purchase  and,  during their life,  if interest  rates
move in such a fashion that payments  under the interest rate caps are received.
There  are no  retained  interests,  securities  issued  or  other  indebtedness
incurred by us in connection  with these  interest rate caps,  and, there are no
other   obligations  or  liabilities,   including   contingent   obligations  or
liabilities,  arising from such interest rate caps.  The interest rate caps will
terminate  upon their maturity dates ($20.0 million in May and June 2004 and the
remaining  $20.0  million  in May and  June  2006).  Until  such  time as  those
contracts mature,  there are no known events,  demands,  commitments,  trends or
uncertainties  that  will  result  in or  is  reasonably  likely  to  result  in
termination  of the  contracts.  We do have the option to sell the  contracts at
their fair value at any time.
<PAGE>

Contingent Consideration in Business Combinations.  Pursuant to the terms of the
agreement  related to the  acquisition of Milne Scali in April 2002,  additional
consideration of up to $6.2 million may be payable to the former shareholders of
Milne Scali,  subject to Milne Scali  achieving  certain  financial  performance
targets.  In accordance with current accounting  standards,  there is no current
carrying amount associated with this contractual obligation. Additionally, there
are no recourse  provisions  associated  with this  contractual  obligation that
would enable us to recover from third  parties any of the amounts paid under the
contractual  obligation  and there are no assets held either as collateral or by
third parties that,  upon the  occurrence of any  triggering  event or condition
under the contractual obligation, we could obtain to liquidate to recover all or
a portion of the amounts paid under the guarantee.

Pursuant to the terms of the agreement  related to the IASW asset acquisition in
December  2003,  additional  consideration  of up to $480,000  may be payable to
IASW,  subject  to  the  operation  of the  acquired  assets  achieving  certain
financial  performance targets. In accordance with current accounting standards,
there is no current carrying amount associated with this contractual obligation.
Additionally,  there are no recourse  provisions  associated with this guarantee
that would enable us to recover from third parties any of the amounts paid under
the  guarantee  and there are no assets  held either as  collateral  or by third
parties that, upon the occurrence of any triggering event or condition under the
guarantee,  we could  obtain and  liquidate  to recover  all or a portion of the
amounts paid under the guarantee.

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

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

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

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

Contractual Obligations, Contingent Liabilities and Commitments.

As  disclosed in the Notes to the  Consolidated  Financial  Statements  included
under Item 8, we have certain contractual  obligations,  contingent  liabilities
and  commitments.  Certain  of these  commitments  have  been  discussed  in the
sections  above.  At December 31, 2003,  the aggregate  contractual  obligations
(excluding  bank  deposits),  contingent  liabilities  and  commitments  were as
follows (in thousands):
<TABLE>
<CAPTION>
                                                        Payments due by period
                             --------------------------------------------------------------------------

                              Less than       1 to 3         3 to 5         After 5
                                1 year         years          years          years           Total
 Contractual Obligations:    -----------    ------------   ------------   -------------   -------------

<S>                            <C>             <C>                           <C>             <C>
Total borrowings............   $ 54,883        $ 35,140       $     --       $  84,597       $ 174,620
Annual rental commitments
 under non-cancelable
 operating leases...........      1,113           1,641          1,133             435           4,322
                             -----------    ------------   ------------   -------------   -------------
Total.......................   $ 55,996        $ 36,781       $  1,133       $  85,032       $ 178,942
                             ===========    ============   ============   =============   =============

                                             Amount of Commitment - Expiration by Period
                             --------------------------------------------------------------------------

                              Less than       1 to 3         3 to 5         After 5          Total
 Other  Commitments:            1 year         years          years          years
                             -----------    ------------   ------------   -------------   -------------

Commitments to lend.........   $ 79,319        $ 11,121       $  3,320       $     377       $  94,137
Standby and commercial
 letters of credit..........      1,138           9,421             --              --          10,559
                             -----------    ------------   ------------   -------------   -------------
Total.......................   $ 80,457        $ 20,542       $  3,320       $     377       $ 104,696
                             ===========    ============   ============   =============   =============
</TABLE>

Liquidity, Market and Credit Risk

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

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

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

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

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

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

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

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

                                                             For the Years Ended December 31,
                                                     --------------------------------------------------
                                                           2003           2002               2001
                                                     -------------    --------------    ---------------
                                                                        (in thousands)
<S>                                                     <C>            <C>               <C>
Proceeds from FHLB advances..........................   $175,300       $        --       $         --
Proceeds from sales of investment securities.........     76,652           100,651            119,394
Proceeds from maturities of investment securities....     56,598            50,984             86,414
Net (increase) decrease in loans.....................     50,419           (35,144)           (53,132)
Net increase (decrease) in short-term borrowings.....      3,263            27,360            (32,467)
Net increase (decrease) in long-term borrowings......        279             8,548            (13,000)
Net increase (decrease) in deposits..................     (2,303)           21,293             45,505
Purchases of investment securities...................   (193,653)         (146,985)          (162,321)
Repayments of FHLB advances..........................   (160,300)          (20,000)                --
Additions to premises and equipment..................     (9,012)           (2,974)            (1,965)
Cash paid for acquisition of insurance subsidiary....       (260)          (13,964)                --
Proceeds from issuance of preferred stock............         --             1,500                 --
Proceeds from issuance of subordinated debentures....         --                --             14,429
Disposition of discontinued Fargo branch.............         --            (4,365)                --
</TABLE>


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

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

As of December 31, 2003, we had established three additional  revolving lines of
credit with banks,  totaling $16.5  million.  At December 31, 2003, we had drawn
$2.5 million on one of those lines leaving $14.0 million  available  under these
revolving lines of credit.  The lines, if drawn upon, mature daily with interest
rates that float at the Federal  funds rate.  At December 31, 2003,  we also had
the ability to draw  additional  FHLB  advances of $83.1  million based upon the
mortgage loans and securities  that were then pledged,  subject to a requirement
to purchase additional FHLB stock.

Forward-Looking Statements

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

Effects of Inflation

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

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

Recently Issued and Adopted Accounting Pronouncements

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

Critical Accounting Policies

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

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

     Specific Reserves.  The amount of specific reserves is determined through a
     loan-by-loan  analysis of problem loans over a minimum size that  considers
     expected future cash flows,  the value of collateral and other factors that
     may impact the  borrower's  ability to make payments when due.  Included in
     this  group  are  those  nonaccrual  or  renegotiated  loans  that meet the
     criteria as being "impaired" under the definition in Statement of Financial
     Accounting  Standards No. 114, "Accounting by Creditors for Impairment of a
     Loan," ("SFAS 114"). A loan is impaired when, based on current  information
     and events,  it is probable  that a creditor  will be unable to collect all
     amounts  due  according  to the  contractual  terms of the loan  agreement.
     Problem  loans  also  include  those  credits  that  have  been  internally
     classified as credits  requiring  management's  attention due to underlying
     problems in the borrower's business or collateral concerns. Under SFAS 114,
     any allowance on impaired loans is generally based on one of three methods.
     The accounting  standard requires that impaired loans be measured at either
     the present value of expected cash flows at the loan's  effective  interest
     rate,  the  loan's  observable  market  price  or  the  fair  value  of the
     collateral of the loan.  Specific reserves totaled $2.0 million at December
     31, 2003.

     Reserves for Homogeneous Loan Pools. We make a significant  number of loans
     and leases  that,  due to their  underlying  similar  characteristics,  are
     assessed for loss as "homogeneous" pools. Included in the homogeneous pools
     are consumer loans and commercial loans under a certain size that have been
     excluded from the specific  reserve  allocation  previously  discussed.  We
     segment  the  pools  by type of loan or lease  and  using  historical  loss
     information estimate a loss reserve for each pool. Reserves for homogeneous
     loan pools totaled $2.6 million at December 31, 2003.

     Qualitative  Reserve. Our senior lending management also allocates reserves
     for special  situations  that are unique to the measurement  period.  These
     include,  among other things,  prevailing and anticipated  economic trends,
     such as economic  conditions in certain  geographic or industry segments of
     the  portfolio  and  economic   trends  in  the  retail   lending   sector,
     management's  assessment  of credit risk  inherent  in the loan  portfolio,
     delinquency trends, historical loss experience and peer-group loss history.
     Our qualitative reserve totaled $185,000 at December 31, 2003.

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

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

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

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

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

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

While our methodology utilizes historical and other objective  information,  the
establishment of the allowance for credit losses and the classification of loans
is, to some extent,  based on our judgment and  experience.  We believe that the
allowance for credit losses is adequate, as of December 31, 2003, to cover known
and inherent risks in the loan and lease portfolio.  However,  future changes in
circumstances,  economic  conditions or other factors could cause us to increase
or decrease the allowance for credit losses as necessary.

Allowance  for Credit  Losses - Impact on  Earnings.  As  indicated  above,  the
determined  level  of the  allowance  for  credit  losses  involves  assumptions
underlying our estimates that reflect  highly  uncertain  matters in the current
period.  Additionally,  a  different  estimate  that could have been used in the
current period could have had a material impact on reported financial  condition
or  results of  operations.  We are not aware,  at this time,  of known  trends,
commitments, events or other uncertainties reasonably likely to occur that would
materially affect our methodology or the assumptions  used,  although changes in
the qualitative and quantitative factors noted above could occur at any time and
such changes  could be of a material  nature.  We have used our  assumptions  to
arrive at the level of the allowance for credit losses that we consider adequate
to provide for an estimate of probable losses related to specifically identified
loans as well as probable  losses in the remaining loan and lease portfolio that
have been incurred as of December 31, 2003.  The  qualitative  and  quantitative
factors noted above can  reasonably be expected to impact the estimates  applied
and cause such estimates to change from period to period.

Our allowance for credit losses of approximately $4.8 million  necessitated that
a  provision  for  credit  losses of  approximately  $1.5  million be charged to
operations  for the year ended  December  31,  2003.  Should our  analysis  have
resulted  in the need for a higher or lower  allowance  for  credit  losses,  an
additional or reduced  amount would have been charged to  operations  during the
period.  For  example,  should  our  analysis  have  indicated  the  need for an
allowance for credit losses of $5.3 million,  an additional  $500,000 would have
been  charged  to the  provision  for loan  losses  resulting  in net  income of
approximately $3.5 million as compared to the $3.8 million recorded for the year
ended  December 31, 2003.  Had our analysis  indicated the need for an allowance
for credit  losses of $4.3  million,  the provision for credit losses would have
been reduced by $500,000  resulting in net income of approximately  $4.2 million
as compared to the $3.8 million recorded for the period.

In the  past  three  years  there  have  been  changes  in the  qualitative  and
quantitative  factors noted above.  From period to period,  economic  situations
change,  credits may deteriorate or improve and the other factors we consider in
arriving  at our  estimates  may  change.  However,  our basic  methodology  for
determining an appropriate  allowance for credit losses has remained  relatively
stable. This methodology has resulted in allowance levels of $4.8, $5.0 and $4.3
million at each of December  31,  2003,  2002 and 2001,  respectively.  As noted
above,  the amount of the provision  for credit losses  charged to operations is
directly related to our estimates of the appropriate  level of the allowance for
credit losses.  Charge-offs  and recoveries  during the applicable  periods also
impact the level of the allowance for credit losses resulting in a provision for
credit  losses that could be higher or lower in order to bring the allowance for
credit losses in line with our estimates.

Income Taxes. We file consolidated Federal and unitary state income tax returns.

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

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


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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

Our primary tool for measuring  and managing  interest rate risk is net interest
income simulation. This exercise includes our assumptions regarding the level of
interest rates and their impact on our current balance sheet. Interest rate caps
and floors are  included to the extent that they are  exercised  in the 12-month
simulation  period.   Additionally,   changes  in  prepayment  behavior  of  the
residential  mortgage,  CMOs, and mortgage-backed  securities portfolios in each
rate environment are captured using industry  estimates of prepayment speeds for
various  coupon  segments of the  portfolio.  For  purposes of this  simulation,
projected  month-end  balances of the various  balance  sheet  accounts are held
constant at their  December  31, 2003 levels.  Cash flows from a given  planning
account are  reinvested  back into the same  planning  account so as to keep the
month-end  balance  constant at its December 31, 2003 level.  The static balance
sheet assumption is made so as to project the interest rate risk to net interest
income  embedded in the existing  balance  sheet.  With knowledge of the balance
sheet's  existing net interest  income  profile,  more informed  strategies  and
tactics may be developed as it relates to the structure/mix of growth.

We monitor the results of net interest income simulation on a quarterly basis at
regularly scheduled ALCO meetings. Each quarter net interest income is generally
simulated for the upcoming  12-month  horizon in seven interest  scenarios.  The
scenarios generally modeled are parallel interest ramps of +/- 100bp, 200bp, and
300bp along with a rates unchanged  scenario.  The parallel movement of interest
rates  means all  projected  market  interest  rates move up or down by the same
amount.  A ramp in  interest  rates  means that the  projected  change in market
interest rates occurs over the 12-month horizon projected.  For example,  in the
-100bp scenario,  the projected prime rate will decrease from its starting point
at December 31, 2003 of 4.00 percent to 3.00 percent 12 months later.  The prime
rate in this example will decrease  1/12th of the overall  decrease of 100 basis
points each month.  Given the historically low absolute level of market interest
rates as of December 31, 2003, the declining rate scenario  analysis was limited
to -100bp for the summary table presented below and a +400bp scenario was added.
<PAGE>

The net interest income  simulation  result for the 12-month horizon that covers
the  calendar  year of 2004 is shown  below.  The impact of each  interest  rate
scenario on  projected  net interest  income is  displayed  before and after the
impact of the $20.0 million  cumulative  notional original  three-year  interest
rate cap positions on three-month LIBOR with a 4.50 percent strike and the $20.0
million  cumulative  notional original  five-year interest rate cap positions on
three-month LIBOR with a 5.50 percent strike. The impact of the cap positions is
calculated  by  determining  the fair value of the  contracts  at the end of the
12-month  horizon using an interest rate option  valuation  model. The change in
fair value plus any expected  cash flow in the various rate  scenarios is summed
to determine the total net  benefit/(cost) of the portfolio of interest rate cap
contracts.  See Notes 1 and 17 to the Consolidated Financial Statements included
under Item 8 of Part II for further discussion related to our interest rate caps
and accounting policies related to these derivative instruments.
<TABLE>
<CAPTION>

                         Net Interest Income Simulation
                             (amounts in thousands)

Movement in interest rates                      -100bp     Unchanged    +100bp      +200bp      +300bp     +400bp
                                               ---------   ---------   ---------   ---------   ---------  ---------
<S>       <C>                                   <C>         <C>         <C>        <C>         <C>         <C>
Projected 12-month net interest income......... $13,561     $14,513     $14,536    $ 14,324    $ 13,933    $ 13,425
Dollar change from rates unchanged scenario.... $ (952)          --     $    23    $  (189)    $  (580)    $(1,088)
Percentage change from rates unchanged
   scenario.................................... (6.56)%          --       0.16%     (1.30)%     (4.00)%     (7.50)%

Net benefit/(cost) of cumulative $40.0
   million interest rate caps (1).............. $  (56)     $  (50)     $  (28)    $     18    $     98    $    217

Total net interest income impact with caps..... $13,505     $14,463     $14,508    $ 14,342    $ 14,031    $ 13,642
Dollar change from unchanged w/caps............ $ (958)          --     $    45    $  (121)    $  (432)    $  (821)
Percentage change from unchanged w/caps........ (6.62)%          --       0.31%     (0.84)%     (2.99)%     (5.68)%
Policy guidelines (decline limited to).........   5.00%          --       5.00%      10.00%      15.00%      20.00%
<FN>

(1) In May and June 2001,  we  purchased  four  interest  rate cap  contracts on
three-month  LIBOR  with  strikes  at 4.50  percent  each in the  amount of $5.0
million  notional with original terms of three years for total notional of $20.0
million.  These  contracts  will expire in May and June 2004. We also  purchased
four  interest  rate cap  contracts  on  three-month  LIBOR with strikes at 5.50
percent each in the amount of $5.0 million  notional with original terms of five
years for total  notional of $20.0 million.  These  contracts will expire in May
and June of 2006. See Notes 1 and 17 to the  Consolidated  Financial  Statements
included under Item 8 for further  information on accounting policies related to
derivative financial investments.
</FN>
</TABLE>

Our rate  sensitivity  position  over the projected  12-month  horizon is fairly
stable to slightly  liability  sensitive.  This is  evidenced  by the  projected
decrease in net interest income in most of the rising interest rate scenarios.

Because one of the  objectives  of  asset/liability  management is to manage net
interest income over a one-year planning  horizon,  policy guidelines are stated
in terms of maximum  potential  reduction in net interest income  resulting from
changes in interest  rates over the 12-month  period.  It is no less  important,
however,  to give  attention  to the  absolute  dollar  level of  projected  net
interest income over the 12-month period. For example, even though in the -100bp
scenario,  net interest  income  declines  $958,000,  or 6.62 percent,  from the
unchanged  scenario,  the level of net interest  income of $13.5 million is only
0.95 percent  above the $13.4 million  recorded for the year ended  December 31,
2003.

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

Static gap  analysis  is another  tool that may be used for  interest  rate risk
measurement.  The net  differences  between  the amount of assets,  liabilities,
equity and off-balance-sheet  instruments repricing within a cumulative calendar
period is  typically  referred  to as the "rate  sensitivity  position"  or "gap
position." The following  table sets forth our rate  sensitivity  position as of
December  31,  2003.  Assets and  liabilities  are  classified  by the  earliest
possible repricing date or maturity, whichever occurs first:
<PAGE>
<TABLE>
<CAPTION>
                        Interest Sensitivity Gap Analysis

                                                               Estimated maturity or repricing at December 31, 2003
                                                     -------------------------------------------------------------------------
                                                         0-3             4-12           1-5           Over
                                                        months          months         years         5 years         Total
                                                     -------------   -------------  ------------   ------------   ------------
                                                                              (dollars in thousands)
Interest-earning assets:
<S>                                                   <C>            <C>             <C>            <C>            <C>
     Interest-bearing deposits with banks...........  $       --     $        --     $      --      $      --      $      --

     Investment securities (1)......................      10,597          25,265        91,415        135,291        262,568
     FRB and FHLB Stock.............................       7,596              --            --             --          7,596
     Fixed rate loans (2)...........................       7,805          17,738        34,851         14,081         74,475
     Floating rate loans (2)........................     205,875             324         3,389             --        209,588
                                                     -------------   -------------  ------------   ------------   ------------
        Total interest-earning assets...............  $  231,873     $    43,327     $ 129,655      $ 149,372      $ 554,227
                                                     =============   =============  ============   ============   ============

Interest-bearing liabilities:
     Interest checking and money market accounts....  $  208,914     $        --     $      --      $      --      $ 208,914

     Savings........................................       6,611              --            --             --          6,611
     Time deposits under $100,000...................      16,171          47,314        25,012            626         89,123
     Time deposits $100,000 and over................      10,108          27,974         8,487             --         46,569
     Borrowings.....................................      41,383          13,500        35,140         84,597        174,620
                                                     -------------   -------------  ------------   ------------   ------------
        Total interest-bearing liabilities..........  $  283,187     $    88,788     $  68,639      $  85,223      $ 525,837
                                                     =============   =============  ============   ============   ============
Interest rate gap...................................  $  (51,314)    $   (45,461)    $  61,016      $  64,149      $  28,390
                                                     =============   =============  ============   ============   ============
Cumulative interest rate gap at December 31, 2003...  $  (51,314)    $   (96,775)    $ (35,759)     $  28,390
                                                     =============   =============  ============   ============
Cumulative interest rate gap to total assets........      (8.26)%        (15.57)%       (5.75)%          4.57%
<FN>
--------------------

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

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

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

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

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

Since there are  limitations  inherent in any  methodology  used to estimate the
exposure to changes in market interest rates, these analyses are not intended to
be a forecast of the actual effect of changes in market  interest  rates such as
those indicated above on the Company.  Further,  these analyses are based on our
assets and liabilities as of December 31, 2003 (without forward  adjustments for
planned growth and anticipated  business  activities) and do not contemplate any
actions we might undertake in response to changes in market interest rates.
<PAGE>

Item 8. Financial Statements and Supplementary Data

<TABLE>
<CAPTION>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<S>                                                             <C>
Consolidated Financial Statements:                                Page

Independent Auditors' Report....................................   62

Consolidated Balance Sheets as of
  December 31, 2003 and 2002....................................   63

Consolidated Statements of Income for the
  years ended December 31, 2003, 2002 and 2001..................   64

Consolidated Statements of Comprehensive Income
  for the years ended December 31, 2003, 2002, and 2001.........   66

Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 2003, 2002, and 2001.................   67

Consolidated Statements of Cash Flows for the years ended
  December 31, 2003, 2002, and 2001.............................   68

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

                          Independent Auditors' Report


The Board of Directors and Stockholders
BNCCORP, Inc.:

We have audited the accompanying  consolidated  balance sheets of BNCCORP,  Inc.
and subsidiaries as of December 31, 2003 and 2002, and the related  consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the years in the three-year  period ended  December 31, 2003.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of BNCCORP,  Inc. and
subsidiaries  as of  December  31 2003  and  2002,  and  the  results  of  their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2003, in conformity  with  accounting  principles  generally
accepted in the United States of America.


KPMG LLP


Minneapolis, Minnesota
January 29, 2004

<PAGE>
<TABLE>
<CAPTION>

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

                    ASSETS                                 2003         2002
                                                      ------------  ------------
<S>                                                   <C>           <C>
CASH AND DUE FROM BANKS.............................  $    12,520   $    16,978
INTEREST-BEARING DEPOSITS WITH BANKS................           --           159
                                                      ------------  ------------
     Cash and cash equivalents......................       12,520        17,137
INVESTMENT SECURITIES AVAILABLE FOR SALE............      262,568       208,072
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN
   BANK STOCK.......................................        7,596         7,071
LOANS AND LEASES, net...............................      283,555       335,794
ALLOWANCE FOR CREDIT LOSSES.........................       (4,763)       (5,006)
                                                      ------------  ------------
     Net loans and leases...........................      278,792       330,788
PREMISES AND EQUIPMENT, net.........................       18,570        11,100
INTEREST RECEIVABLE.................................        2,462         2,856
OTHER ASSETS........................................       15,507         4,119
GOODWILL............................................       15,089        12,210
OTHER INTANGIBLE ASSETS, net........................        8,373         8,875
                                                      ------------  ------------
                                                      $   621,477   $   602,228
                                                      ============  ============
       LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
     Noninterest-bearing............................  $    44,725   $    44,362
     Interest-bearing -
         Savings, interest checking and
           money market.............................      215,525       187,531
         Time deposits $100,000 and over............       46,569        64,905
         Other time deposits........................       89,123       101,447
                                                      ------------  ------------
     Total deposits.................................      395,942       398,245
SHORT-TERM BORROWINGS...............................       31,383        28,120
FEDERAL HOME LOAN BANK ADVANCES.....................      112,200        97,200
LONG-TERM BORROWINGS................................        8,640         8,561
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
  COMPANY'S SUBORDINATED DEBENTURES.................       22,397        22,326
OTHER LIABILITIES...................................       10,729        10,053
                                                      ------------  ------------
              Total liabilities.....................      581,291       564,505

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $.01 par value - 2,000,000
         shares authorized; 150 shares issued
         and outstanding............................         --             --
     Capital surplus - preferred stock..............       1,500          1,500
     Common stock, $.01 par value - 10,000,000
         shares authorized; 2,749,196 and
         2,700,929 shares issued and outstanding
         (excluding 42,880 shares held in
         treasury)..................................          28             27
     Capital surplus - common stock.................      17,074         16,614
     Retained earnings..............................      21,119         17,395
     Treasury stock (42,880 shares).................        (513)          (513)
       Accumulated other comprehensive income,
         net of income taxes........................         978          2,700
                                                      ------------  ------------
              Total stockholders' equity............      40,186         37,723
                                                      ------------  ------------
                                                      $  621,477    $   602,228
                                                      ============  ============
<FN>
                     See accompanying notes to consolidated
                             financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

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

                                                      2003           2002          2001
                                                   ------------  ------------  ------------
<S>                                                <C>           <C>           <C>
INTEREST INCOME:
   Interest and fees on loans.....................  $  19,297     $   20,778    $   23,991
   Interest and dividends on investments -
     Taxable......................................      7,545          9,774        12,354
     Tax-exempt...................................      1,535            977           829
     Dividends....................................        259            223           362
   Other..........................................         10             66            50
                                                   ------------  ------------  ------------
              Total interest income...............     28,646         31,818        37,586
                                                   ------------  ------------  ------------
INTEREST EXPENSE:
   Deposits.......................................      7,438         10,242        14,253
   Short-term borrowings..........................        382            141           441
   Federal Home Loan Bank advances................      5,333          6,214         7,185
   Long-term borrowings...........................        387            310           777
   Subordinated debentures........................      1,728          1,829         1,377
                                                   ------------  ------------  ------------
              Total interest expense..............     15,268         18,736        24,033
                                                   ------------  ------------  ------------
              Net interest income.................     13,378         13,082        13,553
PROVISION FOR CREDIT LOSSES.......................      1,475          1,202         1,699
                                                   ------------  ------------  ------------
NET INTEREST INCOME AFTER PROVISION
  FOR CREDIT LOSSES...............................     11,903         11,880        11,854
                                                   ------------  ------------  ------------
NONINTEREST INCOME:
   Insurance commissions..........................     14,568          8,981         1,891
   Fees on loans..................................      2,022          2,169         1,936
   Trust and financial services...................      1,009            751           899
   Net gain on sales of securities................        968          1,870         1,396
   Service charges................................        909            755           636
   Brokerage income...............................        420          1,094         1,407
   Rental income..................................        212             89            54
   Other..........................................        704            587           495
                                                   ------------  ------------  ------------
              Total noninterest income............     20,812         16,296         8,714
                                                   ------------  ------------  ------------
NONINTEREST EXPENSE:
   Salaries and employee benefits.................     16,478         14,723         9,911
   Occupancy......................................      2,306          2,235         1,661
   Depreciation and amortization..................      1,458          1,320         1,123
   Office supplies, telephone and postage.........      1,214          1,106           940
   Professional services..........................      1,146          1,495         1,326
   Amortization of intangible assets..............      1,063            881           482
   Marketing and promotion........................        803            749           709
   FDIC and other assessments.....................        201            214           193
   Repossessed and impaired asset
     expenses/write-offs..........................         40            142            40
   Other..........................................      2,581          2,464         1,797
                                                   ------------  ------------  ------------
              Total noninterest expense...........     27,290         25,329        18,182
                                                   ------------  ------------  ------------
Income from continuing operations
   before income taxes............................      5,425          2,847         2,386
Income tax provision..............................      1,581            822           691
                                                   ------------  ------------  ------------
Income from continuing operations.................      3,844          2,025         1,695
                                                   ------------  ------------  ------------
<FN>
          See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

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

                                                         2003            2002          2001
                                                     ------------    ------------  ------------
<S>                                                   <C>            <C>           <C>
Discontinued Operations:
 Gain (loss) from operations of
   discontinued Fargo branch
   (including net loss on sale
   of $49 for 2002), net of income
   taxes of $6 and $(83)............................         --             14          (203)
                                                     ------------    -----------  ------------
 Income before nonoperating item
   and cumulative effect of
    change in accounting principle..................      3,844          2,039         1,492
 Nonoperating item - loss on early
    extinguishment of debt, net
    of income taxes of  $(70).......................         --             --          (134)
Cumulative effect of change in
    accounting principle, net
    of income taxes of $(66) .......................         --             --          (113)
                                                     ------------    -----------  ------------
NET INCOME..........................................  $   3,844       $  2,039     $   1,245
                                                     ============    ===========  ============

Dividends on preferred stock........................  $    (120)      $    (79)    $      --
                                                     ------------    -----------  ------------
Income available to common stockholders.............  $   3,724       $  1,960     $   1,245
                                                     ============    ===========  ============

BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations...................  $    1.38       $   0.74     $    0.71

Gain (loss) from discontinued Fargo
    branch, net of income taxes.....................         --           0.01         (0.08)
Nonoperating item - loss on early
    extinguishment of debt, net
    of income taxes.................................         --             --         (0.06)
Cumulative effect of change in
    accounting principle, net of income taxes.......         --             --         (0.05)

                                                     ------------    -----------  ------------
Basic earnings per common share.....................  $    1.38       $   0.75     $    0.52
                                                     ============    ===========  ============

DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations...................  $    1.35       $   0.74     $    0.70

Gain (loss) from discontinued Fargo branch,
    net of income taxes............................          --           0.01         (0.08)
Nonoperating item - loss on early extinguishment
    of debt, net of income taxes...................          --             --         (0.06)
Cumulative effect of change in accounting
    principle, net of income taxes.................          --             --         (0.05)
                                                     ------------    -----------  ------------
Diluted earnings per common share...................  $    1.35       $   0.75     $    0.51
                                                     ============    ===========  ============
<FN>
          See accompanying notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


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

                                                         2003            2002         2001
                                                     ------------    -----------  ------------

<S>                                                  <C>             <C>          <C>
NET INCOME........................................   $    3,844      $   2,039    $    1,245
OTHER COMPREHENSIVE INCOME (LOSS) -
 Unrealized gains (losses) on securities:
    Unrealized holding gains (losses)
    arising during the period, net of
    income taxes of $(668), $1,197, and $283......       (1,122)         2,381           885


    Less: reclassification adjustment for gains
    included in net income, net of income taxes...         (600)        (1,330)         (942)
                                                     ------------    -----------  ------------

OTHER COMPREHENSIVE INCOME (LOSS).................       (1,722)         1,051           (57)
                                                     ------------    -----------  ------------

COMPREHENSIVE INCOME..............................   $    2,122      $   3,090    $    1,188
                                                     ============    ===========  ============

<FN>

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


<PAGE>
<TABLE>
<CAPTION>
                         BNCCORP, INC. AND SUBSIDIARIES
                 Consolidated Statement of Stockholders' Equity
                        (In thousands, except share data)

                                              Capital                          Capital                       Accumulated
                         Preferred Stock      Surplus       Common Stock       Surplus                          Other
                        ------------------   Preferred   -------------------   Common    Retained  Treasury  Comprehensive
                         Shares    Amount      Stock      Shares     Amount     Stock    Earnings   Stock      Income        Total
                        -------- ---------  -----------  --------- ---------  ---------  --------  --------- ------------- ---------
<S>                     <C>      <C>        <C>          <C>       <C>        <C>        <C>       <C>       <C>           <C>
BALANCE,
 December 31, 2000......   --    $    --    $    --      2,437,910   $  24    $ 14,050   $ 14,190  $  (513)    $   1,706   $ 29,457
  Net income............   --         --         --            --       --          --      1,245       --            --      1,245
   Other comprehensive
     loss -
    Change in
     unrealized
     holding gains
     on securities
     available for
     sale, net of
     income taxes and
     reclassification
     adjustment.........   --         --         --            --       --          --         --        --          (57)       (57)
   Other................   --         --         --          4,140      --          34         --        --           --         34
                        -------- ---------  -----------  --------- ---------  ---------  --------  --------- ------------- ---------
BALANCE,
 December 31, 2001......   --         --         --      2,442,050      24      14,084     15,435      (513)       1,649     30,679
  Net income............   --         --         --            --       --          --      2,039        --           --      2,039
   Other comprehensive
    income -
    Change in
     unrealized
     holding gains
     on securities
     available for
     sale, net of
     income taxes and
     reclassification
     adjustment.........   --         --         --            --       --          --         --        --        1,051      1,051
  Issuance of
   preferred stock......  150         --      1,500            --       --          --         --        --           --      1,500
  Preferred stock
   dividends............   --         --         --            --       --          --        (79)       --           --        (79)
  Issuance of common
   stock................   --         --         --        297,759       3       2,497         --        --           --      2,500
  Other ................   --         --         --          4,000      --          33         --        --           --         33
                        -------- ---------  -----------  --------- ---------  ---------  --------  --------- ------------- ---------

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

BALANCE,
 December 31, 2003......  150    $    --    $ 1,500      2,792,076   $  28    $ 17,074   $ 21,119  $  (513)    $    978    $ 40,186
                        ======== =========  ===========  ========= =========  =========  ========  ========= ============= =========
<FN>
                     See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                         BNCCORP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                         For the Years Ended December 31
                                 (In thousands)
                                                                                  2003             2002            2001
                                                                              ------------     ------------     ------------
OPERATING ACTIVITIES:
<S>                                                                            <C>              <C>              <C>
   Net income.............................................................     $   3,844        $    2,039       $    1,245
    Adjustments to reconcile net income to net cash provided by (used
     in) operating activities -
       Provision for credit losses........................................         1,475             1,202            1,699
       Depreciation and amortization......................................         1,458             1,489            1,364
       Amortization of intangible assets..................................         1,063               881              482
       Net premium amortization on investment securities..................         4,116             2,966            2,144
       Proceeds from loans recovered......................................           102               136              303
       Write down of other real estate owned and repossessed assets.......            40               142               40
       Change in interest receivable and other assets, net................       (13,261)            2,308              541
       Loss on sale of bank premises and equipment........................            17                 5                5
       Net realized gains on sales of investment securities...............          (968)           (1,870)          (1,396)
       Deferred income taxes..............................................           874              (269)            (342)
       Change in dividend distribution payable............................           (15)               (4)             413
       Change in other liabilities, net...................................            71            (2,965)          (1,233)
       Originations of loans to be sold...................................       (81,706)          (92,004)        (122,180)
       Proceeds from sale of loans........................................        81,706            92,004          122,180
                                                                              ------------     ------------     ------------
             Net cash provided by (used in) operating activities..........        (1,184)            6,060            5,265
                                                                              ------------     ------------     ------------
INVESTING ACTIVITIES:
   Purchases of investment securities.....................................      (193,653)         (146,985)        (162,321)
   Proceeds from sales of investment securities...........................        76,652           100,651          119,394
   Proceeds from maturities of investment securities......................        56,598            50,984           86,414
   Purchases of FRB and FHLB stock........................................        (3,007)               --               --
   Proceeds from sales of FRB and FHLB stock..............................         2,482                --               --
   Net (increase) decrease in loans.......................................        50,419           (35,144)         (53,132)
   Additions to premises and equipment....................................        (9,012)           (2,974)          (1,965)
   Proceeds from sale of premises and equipment...........................           108               161               66
   Cash paid for acquisition of insurance subsidiary......................          (260)          (13,964)              --
   Disposition of discontinued Fargo branch...............................            --            (4,365)              --
                                                                              ------------     ------------     ------------
             Net cash used in investing activities........................       (19,673)          (51,636)         (11,544)
                                                                              ------------     ------------     ------------
  FINANCING ACTIVITIES:
   Net increase in demand, savings, interest checking and money
       market accounts....................................................        28,357            36,723           12,824
   Net increase (decrease) in time deposits...............................       (30,660)          (15,430)          32,681
   Net increase (decrease) in short-term borrowings.......................         3,263            27,360          (32,467)
   Repayments of FHLB advances............................................      (160,300)          (20,000)              --
   Proceeds from FHLB advances............................................       175,300                --               --
   Repayments of long-term borrowings.....................................           (62)              (62)         (13,000)
   Proceeds from long-term borrowings.....................................           141             8,610               --
   Amortization of discount on subordinated notes.........................            --                --              371
   Proceeds from issuance of subordinated debentures......................            --                --           14,429
   Proceeds from issuance of preferred stock..............................            --             1,500               --
   Payment of preferred stock dividends...................................          (120)              (79)              --
   Amortization of discount on subordinated debentures....................            86                86              (50)
   Other, net.............................................................           235                33             (120)
                                                                              ------------     -------------     ------------
             Net cash provided by financing activities....................        16,240            38,741           14,668
                                                                              ------------     ------------     ------------
NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS.....................        (4,617)           (6,835)           8,389
CASH AND CASH EQUIVALENTS, beginning of year..............................        17,137            23,972           15,583
                                                                              ------------     ------------     ------------
CASH AND CASH EQUIVALENTS, end of year....................................     $  12,520        $   17,137       $   23,972
                                                                              ------------     ------------     ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid..........................................................     $  15,693        $   19,481       $   24,601
                                                                              ------------     ------------     ------------
   Income taxes paid......................................................     $     817        $      912       $      920
                                                                              ============     ============     ============
<FN>
          See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>

                         BNCCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 2003 and 2002


1. Description of Business and Summary of Significant Accounting Policies

Description of Business.  BNCCORP, Inc. ("BNCCORP") is a registered bank holding
company incorporated under the laws of Delaware. It is the parent company of BNC
National Bank (together with its wholly-owned subsidiaries, BNC Insurance, Inc.,
Milne Scali & Company, Inc. ("Milne Scali") and BNC Asset Management,  Inc., the
"Bank"). BNCCORP, through these wholly owned subsidiaries, which operate from 22
locations  in Arizona,  Minnesota  and North  Dakota,  provides a broad range of
banking, insurance,  brokerage, trust and other financial services to small- and
mid-sized businesses and individuals.

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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


Other Significant Accounting Policies

Business Combinations.  Business combinations that have been accounted for under
the  purchase  method of  accounting  include the results of  operations  of the
acquired  businesses from the date of  acquisition.  Net assets of the companies
acquired  were  recorded  at  their  estimated  fair  value  as of the  date  of
acquisition.  Effective  with the issuance of Statement of Financial  Accounting
Standards  No.  141,   "Business   Combinations"   ("SFAS  141"),  all  business
combinations are required to be accounted for by the purchase method.  Note 2 to
these  consolidated  financial  statements  includes a summary  of all  business
combinations completed during the three-year period ended December 31, 2003.
<PAGE>

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

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

Investment  Securities.  Investment  and  mortgage-backed  securities  that  the
Company  intends  to  hold  for  indefinite  periods  of  time  as  part  of its
asset/liability strategy, or that may be sold in response to changes in interest
rates,  changes in prepayment risk, the need to increase  regulatory  capital or
similar  factors  are  classified  as  available  for  sale.  Available-for-sale
securities are carried at market value. Net unrealized gains and losses,  net of
deferred income taxes, on investments and mortgage-backed  securities  available
for sale are  reported as a separate  component  of  stockholders'  equity until
realized (see "Comprehensive Income"). All securities, other than the securities
of the Federal  Reserve Bank  ("FRB") and the Federal  Home Loan Bank  ("FHLB"),
were  classified  as  available  for sale as of  December  31,  2003  and  2002.
Investment and mortgage-backed securities that the Company intends to hold until
maturity  are  carried  at cost,  adjusted  for  amortization  of  premiums  and
accretion of  discounts  using a method that  approximates  level yield over the
period to maturity.  The Company did not have any securities  classified as held
to maturity as of December 31, 2003 or 2002.

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

Declines in the fair value of individual  available-for-sale or held-to-maturity
securities below their cost, which are deemed other than temporary, could result
in a charge to earnings and the corresponding  establishment of a new cost basis
for the  security.  Such  write-downs,  should they occur,  would be included in
noninterest  income as realized losses.  There were no such  write-downs  during
2003, 2002 or 2001. Note 4 to these consolidated financial statements includes a
summary of  investment  securities in a loss position at December 31, 2003 along
with the length of time that  individual  securities  have been in a  continuous
unrealized loss position and a discussion concerning such securities.

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

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

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

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

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

Mortgage  Servicing and Transfers of Financial Assets.  The Bank regularly sells
loans to others on a  non-recourse  basis.  Sold loans are not  included  in the
accompanying  consolidated  balance sheets. The Bank generally retains the right
to service  the loans as well as the right to receive a portion of the  interest
income on the loans. At December 31, 2003 and 2002, the Bank was servicing loans
for the benefit of others with aggregate unpaid principal balances of $147.0 and
$194.7 million, respectively.  Many of the loans sold by the Bank are commercial
lines of  credit  for which  balances  and  related  payment  streams  cannot be
reasonably  estimated  in order to  determine  the fair  value of the  servicing
assets or liabilities  and/or future  interest income retained by the Bank. Upon
sale, any unearned net loan fees or costs are recognized in noninterest  income.
Gains on sales of loans were  $9,000,  $0 and $22,000  for 2003,  2002 and 2001,
respectively,  and are  included in  noninterest  income as fees on loans in the
consolidated statements of income.

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

Other Real Estate Owned and  Repossessed  Property.  Real estate  properties and
other assets acquired  through,  or in lieu of, loan foreclosure are included in
other  assets in the  balance  sheets,  and are stated at the lower of  carrying
amount or fair value less  estimated  costs to sell,  at the date of transfer to
other real estate owned or repossessed property.  When an asset is acquired, the
excess of the recorded  investment  in the asset over fair value less  estimated
costs to sell, if any, is charged to the allowance for credit losses. Management
performs valuations periodically.  Fair value is generally determined based upon
appraisals of the assets  involved.  Subsequent  declines in the estimated  fair
value,  net operating  results and gains and losses on  disposition of the asset
are included in other  noninterest  expense.  The  Company's  investment in such
assets at December 31, 2003 and 2002 was $0 and $8,000, respectively.

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

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

Impairment  of  Long-Lived   Assets.  The  Company  reviews  long-lived  assets,
including property and equipment,  certain identifiable intangibles and goodwill
for  impairment  periodically  or  whenever  events or changes in  circumstances
indicate that the carrying amount of any such asset may not be  recoverable.  If
impairment  is  identified,  the  assets  are  written  down to their fair value
through a charge to noninterest expense. No such impairment losses were recorded
during 2003, 2002 or 2001.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stock-Based Compensation.  At December 31, 2003, the Company had two stock-based
employee  compensation plans, which are described more fully in Note 28 to these
consolidated  financial  statements.  The Company  applies the  recognition  and
measurement   principles  of  Accounting   Principles   Board  Opinion  No.  25,
"Accounting   for  Stock   Issued  to   Employees"   ("APB   25")  and   related
interpretations   in  accounting  for  those  plans.  No  stock-based   employee
compensation  expense is reflected in net income for stock options granted under
the plans as all options  granted under those plans had an exercise  price equal
to the  market  value of the  underlying  common  stock  on the  date of  grant.
Compensation  expense is reflected in net income for the periods presented below
for  restricted  stock  issued  under the stock  plans and its net effect on net
income is reflected in the table below.


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


                                                                   2003                2002               2001
                                                              ---------------     ---------------    ----------------
<S>                                                             <C>                 <C>                 <C>
Net income, as reported...............................          $ 3,844,000         $ 2,039,000         $ 1,245,000
Add: total stock-based employee compensation expense
   included in reported net income, net of related tax
   effects............................................               96,000               6,000               6,000
Deduct: total stock-based employee compensation expense
   determined under fair value method for all awards,
   net of related tax effects.........................             (147,000)            (40,000)           (106,000)
                                                              ---------------     ---------------    ----------------
Pro forma net income..................................          $ 3,793,000         $ 2,005,000         $ 1,145,000
                                                              ===============     ===============    ================
Earnings per share:

  Basic - as reported.................................          $      1.38         $      0.75         $      0.52
  Basic - pro forma...................................                 1.30                0.72                0.45
  Diluted - as reported...............................                 1.35                0.75                0.51
  Diluted - pro forma.................................                 1.27                0.72                0.44
</TABLE>

Recently Issued and Adopted Accounting Pronouncements

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

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

In April 2002, the FASB issued Statement of Financial  Accounting  Standards No.
145,  "Rescission  of  FASB  Statements  No.  4, 44 and  64,  Amendment  of FASB
Statement No. 13, and  Technical  Corrections"  ("SFAS 145").  SFAS 145 rescinds
FASB Statement No. 4, "Reporting Gains and Losses from  Extinguishment of Debt,"
and an amendment of that Statement,  FASB Statement No. 64,  "Extinguishments of
Debt Made to Satisfy  Sinking-Fund  Requirements."  SFAS 145 also  rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." Finally,
SFAS 145 amends FASB  Statement  No. 13,  "Accounting  for Leases," to eliminate
inconsistency  between the required  accounting for sale-leaseback  transactions
and the required  accounting for certain lease  modifications that have economic
effects  that are  similar  to  sale-leaseback  transactions  and  amends  other
existing  authoritative  pronouncements to make various  technical  corrections,
clarify meanings, or describe their applicability under changed conditions.  The
provisions of SFAS 145 related to the  rescission of FASB Statement No. 4 are to
be applied in fiscal years beginning after May 15, 2002 (January 1, 2003 for the
Company) with any gain or loss on  extinguishment of debt that was classified as
an extraordinary item in prior periods presented that does not meet the criteria
in  APB  Opinion  30  for   classification   as  an  extraordinary   item  being
reclassified.  The  provisions of SFAS 145 related to FASB Statement No. 13 that
relate to  modifications  of a capital  lease  that make it an  operating  lease
became  effective for  transactions  occurring  after May 15, 2002.  The Company
adopted this standard on January 1, 2003. A loss on early extinguishment of debt
incurred during 2001,  previously  classified as an extraordinary  item, has now
been  reclassified  as a  nonoperating  item  in  these  consolidated  financial
statements.

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

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

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

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

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

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

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

Regulatory Environment.  BNCCORP and its subsidiaries are subject to regulations
of certain state and Federal agencies,  including periodic examinations by those
regulatory agencies. BNCCORP and the Bank are also subject to minimum regulatory
capital  requirements.  At December 31, 2003,  capital levels  exceeded  minimum
capital requirements (see Note 18 to these consolidated financial statements).

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


2. Acquisitions and Divestitures:

The following  acquisitions  and divestitures  transpired  during the three-year
period ended December 31, 2003:

On December 31,  2003,  in order to further grow its  insurance  segment,  Milne
Scali  acquired  the assets and assumed  certain  liabilities  of The  Insurance
Alliance of the Southwest ("IASW"),  a Tucson,  Arizona-based  insurance agency,
for 12,701 shares of newly issued  BNCCORP common stock (valued at $227,000) and
$256,000 in cash.  Subsequent  payments  of $156,000 in cash and BNCCORP  common
stock  valued at  $233,000  will be made on each of the first and second  annual
anniversaries of the transaction.  Acquisition of insurance  agencies  generally
result in the recognition of goodwill due to the service nature of the business,
the lack of tangible  assets  acquired  and the  profitability  of the  acquired
agency. Of the total $1.3 million purchase price,  $601,000 was allocated to the
net assets acquired (including  intangible assets) and the excess purchase price
of approximately  $659,000 over the fair value of the net assets was recorded as
goodwill. Additional consideration of up to $480,000 is payable to IASW, subject
to the insurance operation achieving certain performance  targets. In accordance
with purchase method accounting  requirements,  such payments would increase the
cost of the  transaction  in future periods and are not reflected as liabilities
in the Company's current consolidated balance sheet. The goodwill,  all of which
is  attributable  to the  Company's  insurance  segment,  will be evaluated  for
possible  impairment under the provisions of SFAS 142. Other acquired intangible
assets related to personal and commercial  insurance lines books of business and
totaling   approximately   $562,000  will  be  amortized  using  a  method  that
approximates the anticipated useful life of the associated customer lists, which
will cover a period of 10 years.  The  results  of  operations  of the  acquired
assets are being  included in the Company's  consolidated  financial  statements
effective January 1, 2004.

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

On September 30, 2002,  the Company sold its Fargo,  North Dakota branch largely
due to the fact that the branch did not achieve critical mass for the Company in
the Fargo  marketplace  and the sale  allowed the Company to redirect  assets to
markets where they can be more productively and profitably employed. Pursuant to
a definitive  branch purchase and assumption  agreement dated July 26, 2002, the
Company  sold the  assets  of the Fargo  branch,  including  the bank  building,
furniture,  fixtures and  equipment  totaling  $6.0 million and $19.5 million of
loans. The Company also sold $31.0 million in deposits. Prior to the application
of the Company's direct costs incurred in the sale of the branch ($56,000),  the
transaction resulted in a net gain on sale of $7,000. These amounts are included
in the line item "Gain  (loss) from  operations  of  discontinued  Fargo  branch
(including  net loss on sale of $49,000 for 2002),  net of income  taxes" in the
consolidated  statements of income.  The Fargo branch's  profit or loss, for the
periods presented, is also reflected in this line item.  Additionally,  included
in this line item are the following amounts of net interest income for the Fargo
branch  for the 12  months  ended  December  31,  2002 and  2001,  respectively:
$973,000 and  $726,000.  The Fargo branch had  previously  been  reported in the
banking operations segment of the Company's segment disclosures.

On April 16, 2002, in order to further grow its insurance  segment,  the Company
acquired 100 percent of the voting equity  interests of Milne Scali,  a Phoenix,
Arizona-based  insurance agency, for 297,759 shares of newly issued common stock
(valued  at $2.5  million)  and  $15.5  million  in cash.  Acquisitions  of such
agencies  generally  result in the  recognition  of goodwill  due to the service
nature  of  the  business,   the  lack  of  tangible  assets  acquired  and  the
profitability  of the acquired agency.  To effect the  transaction,  the Company
incurred $8.5 million in long-term  debt.  Of the total $18.0  million  purchase
price,  $7.2  million  was  allocated  to the  net  assets  acquired  (including
intangible assets) and the excess purchase price of approximately  $10.8 million
over the fair value of net  assets  was  recorded  as  goodwill.  As part of the
transaction,  deferred tax liabilities of $2.3 million were initially  recorded,
which also increased goodwill by the same amount. Subsequent to the acquisition,
the Company and Milne Scali made an Internal  Revenue  Code  Section  338(h)(10)
election  to step up the  basis  in the  acquired  assets.  Upon  the  election,
goodwill  was  reduced by $1.8  million,  deferred  taxes  were  reduced by $2.3
million and a liability for the resulting income taxes in the amount of $590,000
was recorded. Under the Section 338(h)(10) election, all of the goodwill related
to the  acquisition  will be deductible for tax purposes.  An earnout payment of
$2.3  million was made during 2003 (see Note 21).  This  payment  increased  the
goodwill associated with the acquisition. Additional consideration of up to $6.2
million is payable to the former  shareholders of Milne Scali,  subject to Milne
Scali  achieving  certain  financial  performance  targets.  In accordance  with
purchase method accounting  requirements,  such payments would increase the cost
of the transaction in future periods and are not reflected as liabilities in the
Company's  current  consolidated  balance sheet.  The goodwill,  all of which is
attributable  to the  Company's  insurance  segment,  is evaluated  for possible
impairment  under the provisions of SFAS 142. Other acquired  intangible  assets
related to  personal  and  commercial  insurance  lines  books of  business  and
totaling  approximately  $8.0  million are being  amortized  using a method that
approximates the anticipated useful life of the associated customer lists, which
cover a period of 9.8 to 12.5 years.  Milne Scali's  results of operations  have
been  included in the  Company's  consolidated  financial  statements  since the
acquisition date of April 16, 2002.

The following is a condensed  balance sheet  indicating  the amount  assigned to
each major asset and liability caption of Milne Scali as of the acquisition date
(in thousands):
<TABLE>
<CAPTION>
Assets -
<S>                                                <C>
  Cash......................................       $   1,536
  Accounts receivable.......................           1,305
  Fixed assets..............................             412
  Intangible assets, books of business......           8,018
  Goodwill..................................          13,096
  Other.....................................             104
                                                 -------------
Total assets................................       $  24,471
                                                 =============

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

The  following  pro  forma  information  has  been  prepared  assuming  that the
acquisition  of  Milne  Scali  had  been  consummated  at the  beginning  of the
respective  periods.  The pro forma  financial  information  is not  necessarily
indicative  of the  results  of  operations  as they  would  have  been  had the
transaction been consummated on the assumed dates (amounts are in thousands):
<TABLE>
<CAPTION>
                                          12 Months Ended December 31
                                     ---------------------------------------
                                            2002                 2001
                                     ------------------   ------------------
<S>                                      <C>                 <C>
Net interest income.................     $  14,761           $   14,251
Noninterest income..................        19,553               18,131
Noninterest expense.................        28,032               26,215

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


Basic earnings per common share.....     $    0.79           $     0.65
Diluted earnings per common share...     $    0.79           $     0.64
</TABLE>

3. Restrictions on Cash and Due From Banks:

The Bank is required to  maintain  reserve  balances in cash on hand or with the
FRB under the Federal  Reserve Act and Federal  Reserve  Board's  Regulation  D.
Required  reserve balances were $25,000 and $3.6 million as of December 31, 2003
and 2002, respectively. The Bank's required reserve balance declined during 2003
due to the implementation of an account reclassification program.

4. Investment Securities Available For Sale:

Investment  securities have been classified in the  consolidated  balance sheets
according to management's  intent.  The Company had no securities  designated as
trading or  held-to-maturity  in its portfolio at December 31, 2003 or 2002. The
carrying  amount of  available-for-sale  securities and their  approximate  fair
values were as follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
                                                                      Gross             Gross           Estimated
                                                   Amortized        Unrealized        Unrealized           Fair
                                                     Cost             Gains             Losses            Value
                                                ----------------  ---------------   ---------------   ---------------
                     2003
<S>                                              <C>               <C>                <C>               <C>
U.S. government agency mortgage-
     backed securities.......................     $      14,374     $        389       $       (8)       $    14,755
U.S. government agency securities............               961              122               --              1,083
Collateralized mortgage obligations..........           210,760            1,451           (2,535)           209,676
State and municipal bonds....................            32,909            2,264             (117)            35,056
Corporate debt securities....................             1,939               59               --              1,998
                                                ----------------  ---------------   ---------------   ---------------
                                                  $     260,943     $      4,285       $   (2,660)       $   262,568
                                                ================  ===============   ===============   ===============


                                                                      Gross            Gross            Estimated
                                                   Amortized        Unrealized       Unrealized            Fair
                    2002                              Cost            Gains            Losses             Value
                                               ----------------  ----------------  ---------------  ----------------
U.S. government agency mortgage-
     backed securities.......................     $      47,072     $        547       $      (43)       $    47,576
U.S. government agency securities............             4,608              595               --              5,203
Collateralized mortgage obligations..........           122,795            2,527             (842)           124,480
State and municipal bonds....................            27,276            1,589              (50)            28,815
Corporate debt securities....................             1,938               60               --              1,998
                                                ----------------  ----------------  ---------------  ----------------
                                                  $     203,689     $      5,318       $     (935)       $   208,072
                                                ================  ================  ===============  ================
</TABLE>
<PAGE>
The  amortized  cost and  estimated  fair  market  value  of  available-for-sale
securities classified according to their contractual  maturities at December 31,
2003, were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                   Estimated
                                                   Amortized          Fair
                                                      Cost           Value
                                                ---------------  ---------------
<S>                                                <C>              <C>
Due in one year or less.......................     $       --       $       --
Due after one year through five years.........           2,592            2,742
Due after five years through ten years........          23,636           23,932
Due after ten years...........................         234,715          235,894
                                                ---------------  ---------------
     Total....................................     $   260,943      $   262,568
                                                ===============  ===============
</TABLE>

Securities  carried at  approximately  $234.0 and $177.8 million at December 31,
2003 and 2002,  respectively,  were pledged as  collateral  for public and trust
deposits  and  borrowings,  including  borrowings  with the FHLB and  repurchase
agreements with customers.

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

                                   2003            2002            2001
                              --------------  --------------   --------------
<S>                             <C>             <C>            <C>
Sales proceeds................  $   76,652      $  100,651     $  119,394
Gross realized gains..........       1,573           2,003          1,530
Gross realized losses.........         605             133            134
</TABLE>

The following table shows the Company's investments' gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at December 31,
2003 (amounts are in thousands):
<TABLE>
<CAPTION>

                                  Less than 12 months                   12 months or more                       Total
                           ----------------------------------  -------------------------------  ------------------------------------
                                  Fair       Unrealized               Fair    Unrealized                 Fair     Unrealized
Description of Securities    #    Value        Loss       %      #   Value       Loss      %      #      Value       Loss        %
                           ---- ---------- ------------ -----  ---- --------  ---------- -----  ---- ----------- ------------ ------
<S>                        <C>   <C>        <C>         <C>    <C>   <C>        <C>       <C>   <C>   <C>          <C>          <C>
U.S. government agency
 mortgage-backed
 securities...............  1   $    661    $    (3)    .5      2   $   354    $   (5)   1.4     3   $   1,015    $     (8)     .8
Collateralized mortgage
 obligations..............  19    116,673     (2,176)   1.9      3    10,942      (359)   3.3    22     127,615       (2,535)   2.0
State and municipal bonds    7      3,043       (117)   3.8     --        --        --     --     7       3,043         (117)   3.8
                           ---- ---------- ----------- -----   ----  -------- ---------- -----  ---- ----------- ------------ ------
Total temporarily
 impaired securities......  27   $120,377    $(2,297)   1.9      5   $11,296    $ (364)   3.2    32   $ 131,673    $  (2,660)   2.0
                           ==== ========== =========== =====   ====  ======== ========== =====  ==== =========== ============ ======
</TABLE>

The Company considered the following information in reaching the conclusion that
the   impairments   disclosed  in  the  table  above  are   temporary   and  not
other-than-temporary  impairments.  The  nature of the  investments  with  gross
unrealized losses as of December 31, 2003 was as follows: U.S. government agency
mortgage-backed   securities  (3  positions  issued  and  guaranteed  by  GNMA);
collateralized  mortgage obligations (19 positions issued and guaranteed by FNMA
or FHLMC and 3 non-agency  collateralized mortgage obligations each carrying two
AAA ratings from a combination of Fitch, Moody's or S & P) - the duration of the
3 collateralized  mortgage  obligation  positions that have been in a continuous
unrealized  loss position for 12 months or more as of December 31, 2003 was only
15  months;  and  state and  municipal  bonds (7  insured,  AAA  rated,  general
obligation  bonds).  Therefore,  none of the impairments in the above table were
due to a  deterioration  in the credit  quality of any of the issues  that might
result in the noncollection of contractual principal and interest.  The cause of
the impairments is due to changes in interest rates.
<PAGE>

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

The carrying amounts of FRB and FHLB stock, which approximate their fair values,
consisted of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
                                               2003                2002
                                          ----------------    ----------------
<S>                                         <C>                   <C>
Federal Reserve Bank Stock, at cost......   $  1,236              $   1,236

Federal Home Loan Bank Stock, at cost....      6,360                  5,835
                                          ----------------    ----------------
  Total..................................   $  7,596              $   7,071
                                          ================    ================
</TABLE>

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

6. Loans and Leases:

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

                                                    2003               2002
                                               ---------------    --------------
<S>                                                <C>               <C>
Commercial and industrial.....................     $  73,001         $  94,075
Real estate:
   Mortgage...................................       129,443           147,825
   Construction...............................        60,056            62,926
Agricultural..................................        12,529            18,023
Consumer......................................         6,188             7,948
Lease financing...............................         2,757             5,554
Other.........................................            89               309
                                               ---------------    --------------
     Total....................................       284,063           336,660
Less:
   Unearned income and net unamortized
     deferred fees and costs..................          (508)             (866)
                                               ---------------    --------------
   Loans and leases, net......................       283,555           335,794
   Allowance for credit losses................        (4,763)           (5,006)
                                               ---------------    --------------
         Net loans and leases.................     $ 278,792         $ 330,788
                                               ===============    ==============

</TABLE>

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

<TABLE>
<CAPTION>
                                           2003              2002
                                        ----------        ----------
<S>                                         <C>               <C>
North Dakota.......................         31%               32%
Arizona............................         29                26
Minnesota..........................         28                30
South Dakota.......................          8                 7
Other..............................          4                 5
                                        ----------        ----------
         Totals....................        100%              100%
                                        ==========        ==========
</TABLE>
<PAGE>
Commercial  loan  borrowers  are generally  small- and  mid-sized  corporations,
partnerships  and sole  proprietors  in a wide variety of  businesses.  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 $129.4 and $147.8  million of real
estate mortgages as of December 31, 2003 and 2002, respectively,  many are loans
made to commercial  customers  where the collateral for the loan is, among other
things,  the real estate occupied by the business of the customer.  Accordingly,
certain loans  categorized as real estate mortgage loans could be  characterized
as commercial  loans that are secured by real estate.  Single- and  multi-family
residential  mortgage loans totaling $8.3 and $10.1 million at December 31, 2003
and  2002,  respectively,  were  pledged  as  collateral  for  FHLB  borrowings.
Commercial loans totaling $43.4 and $38.5 million at December 31, 2003 and 2002,
respectively,  were  pledged  as  collateral  for  borrowings,   including  FHLB
borrowings.

Concentrations   of   Credit.    The   Company's   credit   policies   emphasize
diversification  of risk among industries,  geographic areas and borrowers.  The
only concentrations of loans exceeding 10 percent of total loans at December 31,
2003 were real estate  loans,  such as loans to  non-residential  and  apartment
building  operators and lessors of real property ($62.7 million),  loans related
to hotels and other lodging places ($42.2 million) and construction loans ($34.9
million).  Loans within these categories are diversified  across different types
of borrowers,  geographically  dispersed, and secured by many different types of
real estate and other collateral.

Impaired Loans. As of December 31, the Company's recorded investment in impaired
loans and the related valuation allowance was as follows (in thousands):
<TABLE>
<CAPTION>
                                                            2003                                  2002
                                              ---------------------------------     ---------------------------------
                                                 Recorded          Valuation           Recorded          Valuation
                                                Investment         Allowance          Investment         Allowance
                                              ---------------    --------------     --------------    ---------------
Impaired loans -
<S>                                                <C>               <C>                <C>                <C>
     Valuation allowance required.........         $  10,996         $   2,245          $  13,412          $   2,210
     No valuation allowance required......                --                --                 10                 --
                                              ---------------    --------------     --------------    ---------------
         Total impaired loans.............         $  10,996         $   2,245          $  13,422          $   2,210
                                              ===============    ==============     ==============    ===============
</TABLE>

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

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


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

<TABLE>
<CAPTION>
                                          2003          2002           2001
                                       ------------  ------------   ------------
<S>                                      <C>           <C>             <C>
Average recorded investment
 in impaired loans....................    $ 13,415     $ 13,135         $ 9,101
                                       ============  ============   ============
Interest income recognized
 on impaired loans....................    $    758     $    658         $   761
                                       ============  ============   ============
Average recorded investment
 in impaired loans as a
 percentage of average total loans....        4.4%         4.0%            2.9%
                                       ============  ============   ============
</TABLE>
<PAGE>

Past Due,  Nonaccrual and Restructured  Loans. As of December 31, 2003 and 2002,
the Company had $38,000  and $5.1  million,  respectively,  of loans past due 90
days or more and still accruing interest.  As of December 31, 2003 and 2002, the
Company had $7.9 and $2.5  million,  respectively,  of  nonaccrual  loans and no
restructured  loans  (included as impaired  loans above).  The  following  table
indicates the effect on income if interest on such loans  outstanding at yearend
had been recognized at original contractual rates during the year ended December
31 (in thousands):
<TABLE>
<CAPTION>
                                       2003            2002            2001
                                   ------------    -----------    -------------
<S>                                  <C>             <C>             <C>
Interest income that would
 have been recorded...............   $   121         $   237         $   87

Interest income recorded..........        56               1              3
                                   ------------    -----------    -------------
Effect on interest income.........   $    65         $   236         $   84
                                   ============    ===========    =============
</TABLE>

As of December 31, 2003 the Company had no commitments to lend additional  funds
to  borrowers  with  loans  whose  terms  had been  modified  in  troubled  debt
restructurings.

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

Leases.  The Company  extends  credit to borrowers  under direct  finance  lease
obligations.   The  direct  finance  lease   obligations  are  stated  at  their
outstanding principal amount net of unearned income and net unamortized deferred
fees and costs. At December 31, 2003 the total minimum annual lease payments for
direct finance lease  obligations  with remaining terms of greater than one year
were as follows (in thousands):
<TABLE>

        <S>                                           <C>
        2004...................................       $    608
        2005...................................            478
        2006...................................            354
        2007...................................            166
        2008...................................             --
        Thereafter.............................             --
                                                   ----------------
        Total future minimum lease payments....          1,606
        Unguaranteed residual values...........            525
                                                   ----------------
        Total all payments.....................          2,131
        Unearned income........................           (248)
                                                   ----------------
        Net outstanding principal amount.......       $  1,883
                                                   ================
</TABLE>
The Company also extends financing to lease companies, securing the loan with an
assignment of lease payments and a security filing against the underlying  asset
of the lease.  These loans are classified  above as lease  financing but are not
direct finance lease obligations.


7. Allowance for Credit Losses:

Transactions  in the  allowance  for credit losses were as follows for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
                                       2003           2002            2001
                                   -------------  --------------  -------------
<S>                                 <C>              <C>            <C>
Balance, beginning of year......    $   5,006        $  4,325       $  3,588
  Provision for credit losses..         1,475           1,202          1,699
  Loans charged off............        (1,820)           (657)        (1,265)
  Loans recovered..............           102             136            303
                                   -------------  --------------  -------------
Balance, end of year...........     $   4,763        $  5,006       $  4,325
                                   =============  ==============  =============
</TABLE>
<PAGE>

8. Premises and Equipment

Premises and equipment consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
                                                      2003            2002
                                                  -------------   -------------
<S>                                                  <C>             <C>
Land and improvements............................    $  3,142        $  1,857
Buildings and improvements.......................      11,873           6,002
Leasehold improvements...........................       1,796           1,418
Furniture, fixtures and equipment................       9,638           8,873
                                                  -------------   -------------
     Total cost..................................      26,449          18,150
Less accumulated depreciation and
 amortization....................................      (7,879)         (7,050)
                                                  -------------   -------------
     Net premises, leasehold improvements
      and equipment..............................    $ 18,570        $ 11,100
                                                  =============   =============
</TABLE>

Depreciation  and  amortization  expense on premises  and  equipment  charged to
continuing  operations totaled approximately $1.5, $1.3 and $1.1 million for the
years ended December 31, 2003, 2002 and 2001, respectively.

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

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

Since  January  1,  2002,  goodwill  has been  assessed  for  impairment  at the
reporting unit and qualifying  subsidiary levels by applying a  fair-value-based
test at least annually or if impairment  indicators are present. The Company has
$437,000 of unamortized goodwill related to five separate transactions completed
prior to July 1, 2001 and $14.7  million of  goodwill  related  to  transactions
completed during 2002 and 2003.  Pursuant to SFAS 142, the Company completed its
annual  goodwill  impairment  assessment  during the second  quarter of 2003 and
concluded  that  goodwill was not impaired as of June 30,  2003.  No  subsequent
events have occurred that would change the conclusion reached.

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

Adjusted Earnings - SFAS 142 Transitional Disclosure. Effective January 1, 2002,
the  Company  discontinued  all  goodwill  amortization.  The  following  tables
reconcile income from continuing operations, income before nonoperating item and
cumulative  effect  of change  in  accounting  principle,  net  income  and EPS,
adjusted to exclude  amortization expense recognized in those periods related to
goodwill for the years ended December 31 (amounts are in thousands):
<PAGE>
<TABLE>
<CAPTION>
                                                                          2003             2002             2001
                                                                     --------------    ------------    -------------
<S>                                                                     <C>                <C>              <C>
     Reported income from continuing operations..................... $   3,844          $ 2,025          $ 1,695
     Add back: goodwill amortization, net of income taxes...........        --               --               51
                                                                     --------------    ------------    -------------
     Adjusted income from continuing operations..................... $   3,844          $ 2,025          $ 1,746
                                                                     ==============    ============    =============

     Reported income before nonoperating item and cumulative
         effect of change in accounting principle................... $   3,844          $ 2,039          $ 1,492
     Add back: goodwill amortization, net of income taxes...........        --               --               51
                                                                     --------------    ------------    -------------
     Adjusted income before nonoperating item and cumulative
         effect of change in accounting principle................... $   3,844          $ 2,039          $ 1,543
                                                                     ==============    ============    =============

     Reported net income ........................................... $   3,844          $ 2,039          $ 1,245
     Add back: goodwill amortization, net of income taxes...........        --               --               51
                                                                     --------------    ------------    -------------
     Adjusted net income ........................................... $   3,844          $ 2,039          $ 1,296
                                                                     ==============    ============    =============

     Basic earnings per common share:

        Reported net income ........................................ $    1.38          $  0.75          $  0.52
          Goodwill amortization, net of income taxes................        --               --             0.02
                                                                     --------------    ------------    -------------
     Adjusted net income ........................................... $    1.38          $  0.75          $  0.54
                                                                     ==============    ============    =============

     Diluted earnings per common share:
        Reported net income ........................................ $    1.35          $  0.75          $  0.51
          Goodwill amortization, net of income taxes................        --               --             0.02
                                                                     --------------    ------------    -------------
     Adjusted net income ........................................... $    1.35          $  0.75          $  0.53
                                                                     ==============    ============    =============
</TABLE>

Intangible  Assets.  The gross  carrying  amount of  intangible  assets  and the
associated  accumulated  amortization  at December  31, 2003 is presented in the
table below (in thousands):
<TABLE>
<CAPTION>

                                       Gross                         Net
                                      Carrying    Accumulated      Carrying
                                       Amount     Amortization      Amount
                                    ------------  ------------   -------------
<S>                                    <C>           <C>           <C>
Intangible assets:
 Core deposit intangibles...........   $  3,497      $ 2,934       $   563
 Insurance books of business
   intangibles......................      8,579        1,137         7,442
 Other..............................        874          506           368
                                    ------------  ------------   -------------
       Total........................   $ 12,950      $ 4,577       $ 8,373
                                    ============  ============   =============
</TABLE>

<PAGE>
One intangible  asset included in the "other"  category above has a net carrying
value of $271,000 but is not being amortized  because it has an indefinite life.
Amortization  expense  for  intangible  assets was $1.1  million,  $881,000  and
$482,000 for the years ended December 31, 2003, 2002 and 2001, respectively.


The following table shows the estimated  amortization expense, for the next five
years,  for  amortized  intangible  assets  existing on the  Company's  books at
December 31, 2003 (in thousands).  Projections of amortization expense are based
on existing asset balances as of December 31, 2003. Actual amortization  expense
may differ significantly depending upon changes in market conditions:

<TABLE>
<CAPTION>
                                       Insurance
                                    Commercial and
                        Core        Personal Books
                      Deposit        of Business
                    Intangibles      Intangibles         Other         Total
                  ---------------  ----------------  ------------  -------------
<S>                      <C>             <C>             <C>         <C>
Year ended
 December 31,
   2004...........       350              722             48         1,120
   2005...........       213              722             48           983
   2006...........        --              722             --           722
   2007...........        --              722             --           722
   2008...........        --              722             --           722
</TABLE>

Goodwill.  The  following  table  shows the  change in  goodwill,  by  reporting
segment, between January 1, 2003 and December 31, 2003 (in thousands):
<TABLE>
<CAPTION>
                                                                                       Segment
                                                           -----------------------------------------------------------------
                                                             Banking          Insurance          Other            Total
                                                           -------------    --------------    -------------    -------------
<S>                                                           <C>              <C>                <C>            <C>
Balance, January 1, 2003..............................         $   212          $ 11,821           $   177        $ 12,210
Goodwill attributable to purchase acquisition.........              --               663                --             663
Goodwill attributable to earnout payment..............              --             2,315                --           2,315
Other.................................................              --               (99)               --             (99)
                                                           -------------    --------------    -------------    -------------
Balance, December 31, 2003............................         $   212          $ 14,700           $   177        $ 15,089
                                                           =============    ==============    =============    =============
</TABLE>

10. Deposits:

The scheduled maturities of time deposits as of December 31, 2003 are as follows
(in thousands):

<TABLE>

        <S>                                   <C>
        2004...........................       $ 101,567
        2005...........................          23,553
        2006...........................           6,007
        2007...........................           2,739
        2008...........................           1,200
        Thereafter.....................             626
                                           ----------------
                                              $ 135,692
                                           ================
</TABLE>

At  December  31,  2003  and  2002,  the  Bank  had  $12.9  and  $27.3  million,
respectively, of time deposits that had been acquired in the national market and
$18.6 and $31.4 million,  respectively,  of time deposits that had been acquired
through a broker.

At December 31, 2003 collateralized mortgage obligations and state and municipal
bonds with an  amortized  cost of  approximately  $18.8  million were pledged as
collateral  for certain  deposits and $7.9 million of bank  depository  guaranty
bonds from a bankers  surety  company were pledged as  additional  collateral on
Bank deposits.

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

11. Short-Term Borrowings:

The following table sets forth selected  information  for short-term  borrowings
(borrowings  with an original  maturity of less than one year) as of December 31
(in thousands):
<TABLE>
<CAPTION>
                                                  2003             2002
                                              -------------    -------------
<S>                                             <C>               <C>
  Federal funds purchased and
   U. S. Treasury tax and loan
   note option accounts (1)..................     $ 17,114         $ 15,000
  Repurchase agreements with customers,
   renewable daily, interest payable
   monthly, rates at 1.50%, secured
   by government agency collateralized
   mortgage obligations (1)..................       14,269           13,120
                                              -------------    -------------
                                                  $ 31,383         $ 28,120
                                              =============    =============
</TABLE>

(1) The weighted average interest rate on short-term  borrowings  outstanding as
of December 31, 2003 and 2002 was 1.41% and 1.48%, respectively.

Customer  repurchase  agreements  are used by the  Bank to  acquire  funds  from
customers  where the  customers  are  required  or desire  to have  their  funds
supported by collateral  consisting of  government,  government  agency or other
types of  securities.  The  repurchase  agreement  is a  promise  to sell  these
securities to a customer at a certain price and repurchase them at a future date
at that same price plus interest  accrued at an agreed upon rate.  The Bank uses
customer repurchase agreements in its liquidity plan as well as an accommodation
to  customers.  At December 31, 2003,  $14.3  million of  securities  sold under
repurchase agreements,  with a weighted average interest rate of 1.75%, maturing
in 2004,  were  collateralized  by  government  agency  collateralized  mortgage
obligations  having a carrying value of $25.4  million,  a market value of $25.4
million and unamortized principal balances of $25.4 million.

The Company had established two additional revolving lines of credit with banks,
totaling $16.5 million. At December 31, 2003, the Company had drawn $2.5 million
on one of these lines  leaving  $14.0 million  available  under these  revolving
lines of credit. The lines, if drawn upon, mature daily with interest rates that
float at the Federal funds rate.

12. Federal Home Loan Bank Advances:

FHLB  advances  consisted  of the  following  at  December  31  (amounts  are in
thousands):
<TABLE>
<CAPTION>

                               2003                            2002
                   ----------------------------   ------------------------------
                                    Weighted                        Weighted
Year of Maturity       Amount     Average Rate        Amount       Average Rate
                   ------------- --------------   --------------  --------------
     <S>             <C>               <C>           <C>                <C>
     2003..........  $      --           --          $  15,000          4.56%
     2004..........      15,000         4.77%           15,000          4.77
     2005..........      15,000         2.30             5,000          3.84
     2006..........      20,000         2.06                --            --
     2009..........      10,000         5.64            10,000          5.64
     2010..........      52,200         6.09            52,200          6.09
                   ------------- --------------   --------------  --------------
                     $  112,200         4.65%        $  97,200          5.49%
                   ============= ==============   ==============  ==============
</TABLE>

Some of the advances  listed above have call  provisions  that allow the FHLB to
request  that the  advance  be paid back or  refinanced  at the rates then being
offered by the FHLB.  As of December 31, 2003,  the Company had $62.2 million of
callable FHLB advances all callable quarterly during the first quarter of 2004.

At December 31,  2003,  the advances  from the FHLB were  collateralized  by the
Bank's mortgage loans with unamortized principal balances of approximately $53.9
million resulting in a FHLB collateral equivalent of $32.9 million. In addition,
the advances from the FHLB were  collateralized  by securities with  unamortized
principal balances of approximately  $176.7 million. The Bank has the ability to
draw  additional  advances of $83.1  million  based upon the mortgage  loans and
securities  that are currently  pledged,  subject to a  requirement  to purchase
additional FHLB stock.
<PAGE>

13. Long Term Borrowings:

The following  table sets forth selected  information  for long-term  borrowings
(borrowings  with an original  maturity of greater than one year) as of December
31 (in thousands):
<TABLE>
<CAPTION>
                                                    2003             2002
                                                ------------     ------------
<S>                                               <C>              <C>
  Note payable to the Bank of North Dakota,
    principal due April 1, 2004, interest
    payable quarterly at 30-day LIBOR plus
    3.20%, secured by the stock of
    BNC National Bank .........................    $  8,500         $  8,500
  Other .......................................         140               61
                                                ------------     ------------
                                                   $  8,640         $  8,561
                                                ============     ============
</TABLE>
The $8.5 million loan from the Bank of North Dakota includes  various  covenants
that are primarily  operational  rather than financial in nature. As of December
31, 2003, the Company was in compliance with these covenants.

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

During 2001,  BNCCORP  purchased and retired  $82,000 of the Notes at a discount
using cash generated from the sale of its asset-based  lending  subsidiary,  BNC
Financial  Corporation,  Inc.  On August 31,  2001,  the  Company  redeemed  the
remaining  $12.6  million of the Notes at par through  exercise of the option of
BNCCORP  discussed above. The remaining $12.6 million of the Notes were redeemed
using a portion  of the cash  generated  from  issuing  subordinated  debentures
through  the  establishment  of BNC  Statutory  Trust  II (see  Note 14 to these
consolidated financial statements). The transactions and redemption of the Notes
resulted in a nonoperating  loss of $134,000 ($0.06 per diluted  share),  net of
income taxes of ($70,000).

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

In July 2001,  BNCCORP  established a special purpose trust, BNC Statutory Trust
II, for the purpose of issuing $15.0  million of floating  rate trust  preferred
securities.  The  floating  rate trust  preferred  securities  were issued at an
initial rate of 7.29 percent and adjust quarterly to a rate equal to three-month
LIBOR  plus 3.58  percent.  The  interest  rate at  December  31,  2003 was 4.74
percent.  Prior to July 31, 2011,  the rate shall not exceed 12.5  percent.  The
proceeds from the issuance,  together with the proceeds of the related  issuance
of $464,000 of common securities of the trust, were invested in $15.5 million of
junior subordinated deferrable interest debentures of BNCCORP. The floating rate
junior  subordinated  deferrable  interest  debentures were issued at an initial
rate of 7.29 percent and adjust  quarterly to a rate equal to three-month  LIBOR
plus 3.58  percent.  The interest  rate at December  31, 2003 was 4.74  percent.
Prior to July 31, 2011, the rate shall not exceed 12.5 percent.  Concurrent with
the  issuance  of the  preferred  securities  by the  trust,  BNCCORP  fully and
unconditionally  guaranteed all obligations of the special purpose trust related
to the trust  preferred  securities.  The  trust  preferred  securities  provide
BNCCORP  with a more  cost-effective  means  of  obtaining  Tier 1  capital  for
regulatory purposes than if BNCCORP itself were to issue preferred stock because
BNCCORP is allowed to deduct,  for income tax purposes,  amounts paid in respect
of the  debentures  and  ultimately  distributed  to the  holders  of the  trust
preferred  securities.  The sole  assets of the  special  purpose  trust are the
debentures.  BNCCORP owns all of the common  securities of the trust. The common
securities and debentures, along with the related income effects, are eliminated
within the consolidated financial statements. The preferred securities issued by
the  trust  rank  senior  to the  common  securities.  For  presentation  in the
consolidated  balance sheet, the securities are shown net of discount and direct
issuance costs.
<PAGE>

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

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

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

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

15. Stockholders' Equity:

BNCCORP and the Bank are subject to certain  minimum capital  requirements  (see
Note 18 to these consolidated financial statements).  BNCCORP is also subject to
certain  restrictions  on the amount of dividends it may declare  without  prior
regulatory  approval in  accordance  with the Federal  Reserve Act. In addition,
certain  regulatory  restrictions  exist  regarding  the  ability of the Bank to
transfer funds to BNCCORP in the form of cash dividends.  Approval of the Office
of the Comptroller of the Currency ("OCC"), the Bank's principal  regulator,  is
required  for the Bank to pay  dividends  to BNCCORP in excess of the Bank's net
profits from the current year plus  retained net profits for the  preceding  two
years.  At December 31, 2003  approximately  $12.3 million of retained  earnings
were available for bank dividend declaration without prior regulatory approval.

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

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

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

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

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

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

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

16. Segment Disclosures:

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

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

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

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

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

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

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

                                                    2003                                              2003
                        -------------------------------------------------------- --------------------------------------------------
                                                Brokerage/
                                                  Trust/                         Reportable             Intersegment   Consolidated
                           Banking  Insurance   Financial   Other (a)   Totals    Segments   Other (a)   Elimination      Total
                        ----------  ----------  ----------  ---------  --------  ----------  ---------  -------------  ------------
<S>                      <C>         <C>         <C>        <C>        <C>        <C>        <C>          <C>           <C>
 Net interest income.....$  15,378   $     69    $    --    $ (2,121)  $ 13,326   $ 15,447   $ (2,121)    $    52       $  13,378
 Other revenue-external
  customers..............    6,189     14,712      1,457         118     22,476     22,358        118      (1,664)         20,812
 Other revenue-from
  other segments.........      124         --         64         651        839        188        651        (839)            --
 Depreciation and
  amortization...........    1,629        865         12          15      2,521      2,506         15          --           2,521
 Equity in the net
  income of investees....    2,208         --         --       5,325      7,533      2,208      5,325      (7,533)            --
 Other significant
  noncash items:
   Provision for
    credit losses........    1,475         --         --          --      1,475      1,475         --          --           1,475
 Segment profit (loss)
   from continuing
   operations............    3,787      3,709        372      (2,443)     5,425      7,868     (2,443)         --           5,425
 Income tax provision
   (benefit).............      960      1,438        144        (961)     1,581      2,542       (961)         --           1,581
 Segment profit (loss)...    2,827      2,271        228      (1,482)     3,844      5,326     (1,482)         --           3,844
 Segment assets..........  616,998     30,063      1,180      71,225    719,466    648,241     71,225     (97,989)        621,477

<FN>
---------------------------------
(a)  The  financial  information  in the "other"  column is for the bank holding
     company.
</FN>
</TABLE>
<TABLE>
<CAPTION>
                                                   2002                                                 2002
                        -------------------------------------------------------- --------------------------------------------------
                                                Brokerage/
                                                  Trust/                         Reportable             Intersegment   Consolidated
                           Banking  Insurance   Financial   Other (a)   Totals    Segments   Other (a)   Elimination      Total
                        ----------  ----------  ----------  ---------  --------- ----------  ---------  -------------  ------------
<S>                       <C>           <C>      <C>       <C>         <C>        <C>        <C>         <C>             <C>
Net interest income......$  15,089   $     41    $    --    $ (3,931)   $ 11,199   $ 15,130   $ (3,931)   $  1,883        $ 13,082
Other revenue-external
  customers..............    6,272      9,191      1,934         115      17,512     17,397        115      (1,216)         16,296
Other revenue-from other
  segments...............       99         --         55         648         802        154        648        (802)             --
Depreciation and
  amortization...........    1,518        633         33          17       2,201      2,184         17          --           2,201
Equity in the net
  income of investees....      639         --         --       3,620       4,259        639      3,620      (4,259)             --
Other significant
  noncash items:
 Provision for credit
  losses.................    1,202         --         --          --       1,202      1,202         --          --           1,202
Segment profit (loss)
  from continuing
  operations.............    4,502      1,461       (677)     (2,439)      2,847      5,286     (2,439)         --           2,847
Income tax provision
  (benefit)..............    1,505        430       (255)       (858)        822      1,680       (858)         --             822
Income from discontinued
  Fargo branch, net of
  income taxes...........       49         --         --          --          49         49         --          --              49
Loss on sale of
  discontinued Fargo
  branch, net of income
  taxes..................      (35)        --         --          --         (35)       (35)        --          --             (35)
Segment profit (loss)....    3,011      1,031       (422)     (1,581)      2,039      3,620     (1,581)         --           2,039
Segment assets...........  599,415     26,364      1,307      66,931     694,017    627,086     66,931     (91,789)        602,228
<FN>
--------------------------
(a)  The  financial  information  in the "other"  column is for the bank holding
     company.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                    2001                                                 2001
                        -------------------------------------------------------- --------------------------------------------------
                                                 Brokerage/
                                                  Trust/                         Reportable             Intersegment   Consolidated
                           Banking  Insurance   Financial   Other (a)   Totals    Segments   Other (a)   Elimination      Total
                        ----------  ----------  ----------  ---------  --------  ----------  ---------  -------------  ------------
<S>                       <C>        <C>        <C>         <C>        <C>        <C>        <C>          <C>           <C>
Net interest income......$  15,380   $     18   $     --    $ (3,262)  $ 12,136   $ 15,398   $ (3,262)    $  1,417      $ 13,533

Other revenue-external
 customers...............    5,204      1,952      2,176          70      9,402      9,332         70         (688)        8,714
Other revenue-from
 other segments..........       62         --         69         703        834        131        703         (834)           --
Depreciation and
 amortization............    1,368         96         84          57      1,605      1,548         57           --         1,605
Equity in the net
 income (loss)
 of investees............     (384)        --         --       2,820      2,436       (384)     2,820       (2,436)           --
Other significant
 noncash items:
  Provision for
   credit losses.........    1,699         --         --          --      1,699      1,699         --           --         1,699
Segment profit (loss)
  from continuing
  operations.............    5,032        140       (655)     (2,131)     2,386      4,517     (2,131)          --         2,386

Income tax provision
  (benefit)..............    1,757         (9)      (367)       (690)       691      1,381       (690)          --           691
Loss from discontinued
  Fargo branch, net
  of income taxes........     (203)        --         --          --       (203)      (203)        --           --          (203)
Nonoperating item -
  loss on early
  extinguishment of
  debt, net of income
  taxes..................       --         --         --        (134)      (134)        --       (134)          --          (134)
Cumulative effect of
  change in accounting
  principle, net of
   income taxes..........     (113)        --         --         --        (113)      (113)        --           --          (113)
Segment profit (loss)....    2,959        149       (288)     (1,575)     1,245      2,820     (1,575)          --         1,245
Segment assets, from
  continuing operations..  558,175      2,026      1,976      52,475    614,652    562,177     52,475      (58,685)      555,967
Segment assets...........  587,265      2,026      1,976      52,475    643,742    591,267     52,475      (58,685)      585,057
<FN>
----------------------------------
(a)  The  financial  information  in the "Other"  column is for the bank holding
     company.
</FN>
</TABLE>

17. Derivatives:

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

During May and June 2001, the Company purchased, for $1.2 million, interest rate
cap contracts with notional amounts totaling $40.0 million to mitigate  interest
rate risk in rising-rate scenarios.  The referenced interest rate is three-month
LIBOR with $20.0 million of 4.50 percent  contracts having  three-year  original
maturities and $20.0 million of 5.50 percent contracts having five-year original
maturities.  The  contracts,  classified as other  assets,  are reflected in the
Company's  December 31, 2003  consolidated  balance sheet at their then combined
fair value of $56,000. The contracts are not being accounted for as hedges under
SFAS 133.  As a result,  the impact of marking the  contracts  to fair value has
been, and will continue to be, included in net interest income. During the years
ended  December 31, 2003,  2002 and 2001, the impact of marking the contracts to
market (reflected as an increase in interest expense) was $80,000,  $779,000 and
$331,000, respectively.
<PAGE>

18. Regulatory Capital:

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

Quantitative  measures established by the regulations to ensure capital adequacy
require  BNCCORP and the Bank to maintain  minimum amounts and ratios (set forth
in the  tables  that  follow)  of total and Tier 1 capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 capital (as
defined)  to average  assets  (as  defined).  Management  believes  that,  as of
December 31, 2003, BNCCORP and the Bank met all capital adequacy requirements to
which they are subject.

Under current regulatory capital regulations,  BNCCORP's subordinated debentures
qualify as Tier 1 capital for purposes of the consolidated  capital calculations
up to 25 percent of Tier 1 capital prior to the deduction of intangible  assets.
The remainder of the subordinated  debentures qualify as Tier 2 capital provided
that the total of Tier 2 capital does not exceed Tier 1 capital.  As of December
31,  2003,  $13.1  million of the  subordinated  debentures  qualified as Tier 1
capital with the  remaining  $9.3 million  qualifying  as Tier 2 capital.  As of
December 31, 2002,  $11.7 million of the  subordinated  debentures  qualified as
Tier 1 capital with the remaining  $10.6  million  qualifying as Tier 2 capital.
These amounts are reflected in the consolidated capital amounts presented in the
table below.

As of December 31, 2003, the most recent  notifications from the OCC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total  risk-based,  Tier 1 risk-based and Tier 1 leverage  ratios as set
forth in the table that  follows.  There are no  conditions or events since that
notification that management believes have changed the institution's category.

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

<TABLE>
<CAPTION>
                                                                                                    To be Well Capitalized Under
                                                                        For Capital Adequacy         Prompt Corrective Action
                                                  Actual                      Purposes                      Provisions
                                          ------------------------    -------------------------    ------------------------------
                                             Amount       Ratio         Amount         Ratio         Amount           Ratio
                                          -------------  ---------    ------------   ----------    ------------   ---------------
                     2003
<S>                                           <C>          <C>          <C>              <C>         <C>              <C>
Total Capital (to risk-weighted assets):
     Consolidated.........................    $ 42,905      10.63 %     $  32,296         8.0 %           N/A           N/A
     BNC National Bank....................      48,074      11.92          32,260         8.0        $ 40,325         10.0 %
Tier 1 Capital (to risk-weighted assets):
     Consolidated.........................      28,815       7.14          16,148         4.0             N/A           N/A
     BNC National Bank....................      43,311      10.74          16,130         4.0          24,195          6.0
Tier 1 Capital (to average assets):
     Consolidated.........................      28,815       4.90          23,545         4.0             N/A           N/A
     BNC National Bank....................      43,311       7.37          23,522         4.0          29,403          5.0

                     2002

Total Capital (to risk-weighted assets):
     Consolidated.........................    $ 41,270       9.53 %     $  34,641         8.0 %           N/A           N/A
     BNC National Bank....................      45,142      10.45          34,562         8.0        $ 43,202         10.0 %
Tier 1 Capital (to risk-weighted assets):
     Consolidated.........................      25,613       5.92          17,321         4.0             N/A           N/A
     BNC National Bank....................      40,137       9.29          17,281         4.0          25,921          6.0
Tier 1 Capital (to average assets):
     Consolidated.........................      25,613       4.46          22,948         4.0             N/A           N/A
     BNC National Bank....................      40,137       7.00          22,923         4.0          28,654          5.0

</TABLE>

<PAGE>

19. Fair Value of Financial Instruments:

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

                                                                    2003                              2002
                                                      ---------------------------------  --------------------------------
                                                         Carrying            Fair           Carrying           Fair
                                                          Amount            Value            Amount           Value
                                                      ----------------  ---------------  ---------------- ---------------
Assets:
<S>                                                        <C>              <C>               <C>             <C>
     Cash and due from banks.........................      $   12,520       $   12,520        $   17,137      $   17,137
     Investment securities available
        for sale.....................................         262,568          262,568           208,072         208,072
     Federal Reserve Bank and Federal Home
        Loan Bank stock..............................           7,596            7,596             7,071           7,071
     Loans and leases, net...........................         278,792          277,548           330,788         331,034
     Accrued interest receivable.....................           2,462            2,462             2,856           2,856
     Derivative financial instruments................              56               56               136             136
                                                      ----------------   ---------------  --------------- ----------------
                                                              563,994       $  562,750           566,060      $  566,306
                                                                        ===============                   ===============
     Other assets....................................          57,483                             36,168
                                                      ----------------                   ----------------
                                                           $  621,477                         $  602,228
                                                      ================                   ================
Liabilities and Stockholders' Equity:
     Deposits, noninterest-bearing...................      $   44,725       $   44,725        $   44,362      $   44,362
     Deposits, interest-bearing......................         351,217          352,771           353,883         356,736
     Borrowings and advances.........................         152,223          158,439           133,881         142,393
     Accrued interest payable........................           1,183            1,183             1,608           1,608
     Guaranteed preferred beneficial interests in
         Company's subordinated debentures...........          22,397           23,795            22,326          23,926
                                                      ----------------  ---------------  ---------------- ---------------
                                                              571,745       $  580,913           556,060      $  569,025
                                                                        ===============                   ===============
     Other liabilities...............................           9,546                              8,445

     Stockholders' equity............................          40,186                             37,723
                                                      ----------------                   ----------------
                                                           $  621,477                         $  602,228
                                                      ================                   ================

Financial instruments with off-balance-sheet risk:
       Commitments to extend credit..................                       $      155                        $      351
       Standby and commercial letters of credit .....                              106                                89
                                                                        ---------------                   ---------------
                                                                            $      261                        $      440
                                                                        ===============                   ===============
</TABLE>

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

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

Commitments  to Extend  Credit.  Commitments  to extend credit are agreements to
lend to a  customer  provided  there is no  violation  of any  condition  in the
contract.  Commitments  to extend credit are legally  binding and generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. The contractual  amount represents the Company's exposure to credit loss in
the event of default by the borrower;  however,  at December 31, 2003,  based on
current   information,   no  losses  were  anticipated  as  a  result  of  these
commitments.  The  Company  manages  this  credit  risk by using the same credit
policies it applies to loans. Collateral is obtained to secure commitments based
on management's  credit  assessment of the borrower.  The collateral may include
marketable securities,  receivables, inventory, equipment and real estate. Since
the Company expects many of the commitments to expire without being drawn, total
commitment  amounts do not necessarily  represent the Company's future liquidity
requirements related to such commitments.
<PAGE>

Standby  and  Commercial  Letters  of  Credit.  Standby  letters  of credit  are
conditional  commitments issued by the Company to guarantee the performance of a
customer to a third party.  Commercial letters of credit are issued on behalf of
customers to ensure payment or collection in connection with trade transactions.
In the event of a customer's nonperformance,  the Company's credit loss exposure
is the  same as in any  extension  of  credit,  up to the  letter's  contractual
amount;  however, at December 31, 2003, based on current information,  no losses
were  anticipated  as a result of these  commitments.  Management  assesses  the
borrower's  credit to  determine  the  necessary  collateral,  which may include
marketable securities, real estate, accounts receivable and inventory. Since the
conditions  requiring  the Company to fund letters of credit may not occur,  the
Company expects its liquidity  requirements related to such letters of credit to
be less than the total outstanding commitments.

The  contractual  amounts of these financial  instruments  were as follows as of
December 31 (in thousands):
<TABLE>
<CAPTION>
                                                            2003                                  2002
                                              ---------------------------------     ---------------------------------
                                              Fixed Rate         Variable Rate        Fixed Rate      Variable Rate
                                              ---------------    --------------     --------------    ---------------
<S>                                                <C>               <C>                <C>                <C>
 Commitments to extend credit.............         $   6,547         $  87,590          $  11,322          $  91,694
 Standby and commercial letters of credit.               833             9,726                188              8,730
</TABLE>

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

The notional amounts of these financial instruments were as follows as of
December 31 (in thousands):
<TABLE>
<CAPTION>
                                            2003               2002
                                      --------------     --------------
<S>                                     <C>                <C>
        Interest rate caps............. $  40,000          $  40,000

</TABLE>

21. Guarantees

As of December 31, 2003,  the Company had entered into the  following  guarantee
arrangements:

Contingent  Consideration in Business Combination.  Pursuant to the terms of the
agreement  related to the  acquisition of Milne Scali in April 2002,  additional
consideration of up to $6.2 million may be payable to the former shareholders of
Milne Scali,  subject to Milne Scali  achieving  certain  financial  performance
targets.  In  accordance  with SFAS 141,  there is no  current  carrying  amount
associated with this guarantee.  Additionally,  there are no recourse provisions
associated  with this  guarantee  that would  enable the Company to recover from
third  parties  any of the  amounts  paid under the  guarantee  and there are no
assets held either as collateral or by third parties that,  upon the  occurrence
of any  triggering  event or condition  under the  guarantee,  the Company could
obtain and  liquidate  to recover all or a portion of the amounts paid under the
guarantee.

Contingent Consideration in a Purchase Acquisition. Pursuant to the terms of the
agreement  related to the IASW asset  acquisition in December  2003,  additional
consideration of up to $480,000 may be payable to IASW, subject to the operation
of the acquired assets  achieving  certain  financial  performance  targets.  In
accordance with SFAS 141, there is no current  carrying  amount  associated with
this guarantee.  Additionally,  there are no recourse provisions associated with
this  guarantee  that would enable the Company to recover from third parties any
of the amounts paid under the  guarantee  and there are no assets held either as
collateral or by third parties that, upon the occurrence of any triggering event
or condition  under the  guarantee,  the Company  could obtain and  liquidate to
recover all of a portion of the amounts paid under the guarantee.
<PAGE>

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

Performance  Standby  Letters of Credit.  As of December 31, 2003 and 2002,  the
Bank had outstanding $641,000 and $642,000,  respectively of performance standby
letters  of  credit.  Performance  standby  letters  of credit  are  irrevocable
obligations  to the  beneficiary  on the  part of the  Bank to make  payment  on
account of any default by the account party in the performance of a nonfinancial
or commercial obligation. Under these arrangements, the Bank could, in the event
of the  account  party's  nonperformance,  be  required  to pay a maximum of the
amount of issued letters of credit. Under the agreements,  the Bank has recourse
against  the account  party up to and  including  the amount of the  performance
standby   letter  of  credit.   The  Bank   evaluates   each   account   party's
creditworthiness  on a case-by-case basis and the amount of collateral  obtained
varies and is based on management's  credit  evaluation of the account party. As
of December 31, 2002,  under accounting  standards then effective,  there was no
carrying amount  associated with these  guarantees.  Effective  January 1, 2003,
such  guarantees  are required to be  recognized  as  liabilities  at their fair
values as they are modified or entered into, in accordance with FIN 45.

Financial  Standby Letters of Credit. As of December 31, 2003 and 2002, the Bank
had outstanding  $43.8 and $7.9 million of financial  standby letters of credit.
Of the $43.8  million of  financial  standby  letters of credit  outstanding  at
December  31,  2003,   $34.1  million  was   participated   to  other  financial
institutions. Financial standby letters of credit are irrevocable obligations to
the  beneficiary  on the part of the Bank to repay money borrowed by or advanced
to or for the account of the account  party or to make payment on account of any
indebtedness  undertaken  by the  account  party,  in the event that the account
party  fails  to  fulfill  its  obligation  to  the  beneficiary.   Under  these
arrangements,   the  Bank   could,   in  the  event  of  the   account   party's
nonperformance,  be required to pay a maximum of the amount of issued letters of
credit. Under the agreements, the Bank has recourse against the account party up
to and including the amount of the financial standby letter of credit.  The Bank
evaluates each account party's  creditworthiness on a case-by-case basis and the
amount  of  collateral  obtained  varies  and is  based on  management's  credit
evaluation  of the account  party.  As of December  31, 2002,  under  accounting
standards then  effective,  there was no carrying  amount  associated with these
guarantees.  Effective  January 1, 2003,  such  guarantees  are  required  to be
recognized as  liabilities  at their fair values as they are modified or entered
into, in accordance with FIN 45.

Between January 1, 2003 and December 31, 2003, the Bank  originated  performance
and financial standby letters of credit totaling $146.9 million. Of that amount,
$107.5 million was participated to other financial institutions.  The balance of
performance and financial  standby  letters of credit  outstanding on the Bank's
books as of December 31, 2003 was $10.3 million.  These  outstanding  guarantees
were  recognized  as  liabilities  on the Bank's  balance sheet at their current
estimated combined fair value of approximately $99,000.

22. Related-Party/Affiliate Transactions:

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

In the  normal  course of  business,  loans are  granted  to, and  deposits  are
received  from,  executive  officers,  directors,   principal  stockholders  and
associates  of such  persons.  The  aggregate  dollar  amount  of  these  loans,
exclusive of loans to any such  persons  which in the  aggregate  did not exceed
$60,000, were $1.1 and $1.0 million at December 31, 2003 and 2002, respectively.
During 2003,  $620,000 of new loans were made and repayments  totaled  $434,000.
The total  amount of  deposits  received  from these  parties  was $6.5 and $3.1
million at December  31,  2003 and 2002,  respectively.  Loans to, and  deposits
received  from,  these  parties  were  made on  substantially  the  same  terms,
including  interest rates and  collateral,  as those  prevailing at the time for
comparable  transactions with unrelated persons and do not involve more than the
normal risk of collection.

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

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

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

The  Federal  Reserve  Act  limits  amounts  of,  and  requires  collateral  on,
extensions of credit by the Bank to BNCCORP,  and with certain  exceptions,  its
non-bank affiliates. There are also restrictions on the amounts of investment by
the Bank in stocks and other  subsidiaries  of BNCCORP and such  affiliates  and
restrictions  on the  acceptance of their  securities as collateral for loans by
the Bank. As of December 31, 2003, BNCCORP and its affiliates were in compliance
with these requirements.

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

The Company recorded write downs to estimated net realizable value of other real
estate owned and repossessed  assets, and related collection and other expenses,
of $40,000, $142,000 and $40,000 for the years ended December 31, 2003, 2002 and
2001, respectively. There were no repossessed assets recorded as of December 31,
2003.

24. Income Taxes:

The provision (benefit) for income taxes consists of the following for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
                                               2003         2002         2001
                                           -----------  -----------  -----------
Continuing Operations -
<S>                                         <C>          <C>            <C>
 Current:
    Federal...............................   $   805     $   800        $  657
    State.................................       241         218           376
    Prior year state refunds
      from change in filing position......      (339)         --            --
                                           -----------  -----------  -----------
                                                 707       1,018         1,033
                                           -----------  -----------  -----------
 Deferred:
    Federal...............................       726        (250)         (218)
    State.................................       148          54          (124)
                                           -----------  -----------  -----------
                                                 874        (196)         (342)
                                           -----------  -----------  -----------
    Total from continuing operations......   $ 1,581     $   822        $  691
                                           ===========  ===========  ===========

Discontinued Operations -
  Current:
   Federal................................   $    --     $     5        $  (77)
   State..................................        --           1            (6)
                                           -----------  -----------  -----------
  Total from discontinued
   operations.............................   $    --     $     6        $  (83)
                                           ===========  ===========  ===========
</TABLE>
<PAGE>
The provision for Federal  income taxes  expected at the statutory  rate differs
from the  actual  provision  as  follows  for the years  ended  December  31 (in
thousands):
<TABLE>
<CAPTION>
                                               2003        2002          2001
                                           -----------  -----------  -----------
<S>                                         <C>         <C>            <C>
Tax at 34% statutory rate.................   $ 1,845     $  967         $   811

  Prior year state refunds
   (net of Federal benefit)...............      (229)        --              --
  State taxes (net of Federal benefit)....       266        108              85
  Tax-exempt interest.....................      (473)      (289)           (250)
  Other, net..............................       172         36              45
                                           -----------  -----------  -----------
                                             $ 1,581     $  822         $   691
                                           ===========  ===========  ===========

</TABLE>

Temporary  differences  between the financial statement carrying amounts and tax
bases of assets and  liabilities  that  result in  significant  portions  of the
Company's  deferred tax assets and  liabilities are as follows as of December 31
(in thousands):
<TABLE>
<CAPTION>
                                                2003          2002
                                             -----------   -----------
<S>                                          <C>            <C>
Deferred tax asset:
  Loans, primarily due to
   differences in accounting
   for credit losses.......................  $  1,737        $  1,809
  Difference between book and
   tax amortization of branch
   premium acquisition costs...............       373             312
     Other.................................       245             902
                                             -----------   -----------
              Deferred tax asset...........     2,355           3,023
                                             -----------   -----------
Deferred tax liability:
  Unrealized gain on securities
   available for sale......................       605           1,666
  Leases, primarily due to
   differences in accounting
   for leases..............................       706             594
  Difference between book and
   tax amortization of acquired
   intangibles.............................       490             171
  Premises and equipment,
   primarily due to differences
   in original cost basis and
   depreciation............................       677             902
                                             -----------   -----------
   Deferred tax liability..................     2,478           3,333
                                             -----------   -----------
   Net deferred tax liability..............  $   (123)       $   (310)
                                             ===========   ===========
</TABLE>

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

25. Earnings Per Share:

The  following  table shows the amounts used in computing  EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances:
<TABLE>
<CAPTION>
                                                       Net
                                                  Income (Loss)            Shares              Per-Share
                                                   (Numerator)         (Denominator)            Amount
                                                  ---------------    -------------------    ----------------
                           2003
          Basic earnings per common share:
<S>                                                  <C>                   <C>                <C>
Income from continuing operations................    $ 3,844,000
Less: Preferred stock dividends..................       (120,000)
                                                  ---------------
Income attributable to common stockholders.......    $ 3,724,000           2,705,602          $     1.38
                                                  ===============                           ================
Effect of dilutive shares -
    Options and contingent stock.................                             59,214
                                                                     -------------------
          Diluted earnings per common share:
Income from continuing operations................    $ 3,844,000
Less: Preferred stock dividends..................       (120,000)
                                                  ---------------
Income attributable to common stockholders.......    $ 3,724,000           2,764,816          $     1.35
                                                  ===============                           ================

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

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

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

                                      2003          2002         2001
                                 ------------  ------------  ------------

<S>                                 <C>           <C>          <C>
Quarter ended March 31...........    77,185        97,508       101,570
Quarter ended June 30............    63,500        96,145        97,177
Quarter ended September 30.......    62,027       103,498        95,508
Quarter ended December 31........     3,250        91,989       101,649
</TABLE>

26. Benefit Plans:

BNCCORP has a qualified,  tax-exempt  401(k) savings plan covering all employees
of BNCCORP and its subsidiaries who meet specified age and service requirements.
The BNCCORP 401(k) savings plan was merged with the plan of Milne Scali on April
1, 2003. Under the BNCCORP plan,  eligible employees may elect to defer up to 50
percent of compensation  each year not to exceed the dollar limit set by law. At
their discretion, BNCCORP and its subsidiaries provide matching contributions of
up to 50 percent of employee deferrals up to a maximum employer  contribution of
five percent of employee compensation.  Generally, all participant contributions
and earnings are fully and  immediately  vested.  The Company makes its matching
contribution  during the first calendar  quarter  following the last day of each
calendar year and an employee must be employed by the Company on the last day of
the calendar year in order to receive the current  year's  employer  match.  The
anticipated  matching  contribution  is expensed  monthly over the course of the
calendar year based on employee  contributions  made  throughout  the year.  The
Company made matching contributions of $341,000, $261,000 and $207,000 for 2003,
2002 and 2001,  respectively.  Under the investment  options available under the
401(k)  savings plan,  employees  may elect to invest their salary  deferrals in
BNCCORP common stock. At December 31, 2003, the assets in the plan totaled $10.6
million and included $3.3 million  (183,034  shares)  invested in BNCCORP common
stock.

27. Commitments and Contingencies:

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

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

In conjunction with its 1998 business combination with Lips & Lahr, Inc., ("Lips
& Lahr") the Company assumed five-year  employment  agreements with two officers
of Lips & Lahr (the "Officers").  The agreements,  which originally provided for
salaries based upon a percentage of all net annual commissions  received by Lips
& Lahr on business written by the Officers,  were amended to provide for minimum
annual  salaries  through the remainder of the contract term,  which ran through
December  31,  2000.  Additionally,  the  agreements  provide for the payment of
deferred  compensation for a term of 10 years commencing on February 1, 2001 and
continuing monthly until paid in full.  Finally,  as separate  consideration for
the release of all present and future claims to the Officers'  books of business
at the end of the term of the  employment  contract  and for other  terms of the
contract  involving  confidentiality,   nonpiracy  and  a  restrictive  covenant
covering a period of five years after the term of the agreement,  the agreements
provide for 120  monthly  payments  also  commencing  on  February 1, 2001.  The
deferred  compensation  payments  have been accrued for as of December 31, 2003.
Both of the  Officers  resigned  and the  Company  remains  obligated  under the
deferred  compensation  and  non-compete  provisions of the original  employment
agreements.
<PAGE>

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

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

Leases.  The Company has entered into  operating  lease  agreements  for certain
facilities  and  equipment  used in its  operations.  Rent expense for the years
ended  December  31, 2003,  2002 and 2001,  was $1.0  million,  $1.2 million and
$675,000,  respectively,  for  facilities,  and  $107,000,  $94,000 and $94,000,
respectively,  for  equipment and other items.  At December 31, 2003,  the total
minimum annual base lease payments for operating leases were as follows (amounts
are in thousands):
<TABLE>

        <S>                                  <C>
        2004........................          $  1,113
        2005........................               889
        2006........................               752
        2007........................               715
        2008........................               418
        Thereafter..................               435
</TABLE>

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

28. Stock-Based Compensation:

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

As of December 31, 2003,  48,973  restricted  shares issued under the 1995 Stock
Plan were  outstanding.  30,973 of the shares were fully vested.  The balance of
the shares vest  incrementally  between now and December  31, 2006.  The Company
records the compensation  expense related to restricted stock on a straight-line
basis  over  the  applicable  service  period.   Compensation  cost  charged  to
operations was $136,000, $9,000 and $9,000 in 2003, 2002 and 2001, respectively.
The Company  issued 24,500 shares of restricted  stock during 2003 and no shares
of restricted stock during 2002 and 2001.

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

The Company  applies APB 25 and related  interpretations  in accounting for both
the Stock Plans and the Directors' Plan.  Accordingly,  no compensation cost has
been recognized for the options issued under the plans in 2003, 2002 or 2001. As
of December 31,  2003,  191,876  options had been  awarded  under the 1995 Stock
Plan. 21,841 of them had been exercised and 170,035 remained outstanding.  3,250
options  awarded under the Directors' Plan remained  outstanding.  No awards had
been made under the 2002 Stock Plan. Had  compensation  cost been  determined on
the basis of fair value pursuant to SFAS 123, net income and EPS would have been
reduced as follows for the years ended December 31:
<TABLE>
<CAPTION>

                                     2003            2002          2001
                                -------------  -------------  -------------
        <S>                      <C>            <C>             <C>
        Net Income:
            As Reported......... $ 3,844,000    $ 2,039,000     $1,245,000
            Pro Forma...........   3,793,000      2,005,000      1,145,000
        Basic EPS:
            As Reported.........        1.38           0.75           0.52
            Pro Forma...........        1.30           0.72           0.45
        Diluted EPS:
            As Reported.........        1.35           0.75           0.51
            Pro Forma...........        1.27           0.72           0.44
</TABLE>

Following is a summary of stock option transactions for the years ended December
31:
<TABLE>
<CAPTION>
                                                2003                          2002                          2001
                                    --------------------------   --------------------------    --------------------------
                                      Options       Weighted       Options      Weighted        Options        Weighted
                                        To           Average         to          Average           to           Average
                                     Purchase       Exercise      Purchase      Exercise        Purchase       Exercise
                                      Shares          Price        Shares         Price          Shares         Price
                                    -----------    -----------   -----------    -----------    -----------    -----------
<S>                                    <C>            <C>           <C>           <C>            <C>           <C>
Outstanding, beginning of year....     173,935        $ 10.48       208,408       $10.37         118,148       $ 13.84
Granted...........................      17,500           7.00         2,500         7.51         109,840          6.16
Exercised.........................     (11,066)          6.79        (4,000)        6.03          (4,840)         5.94
Forfeited.........................      (7,084)          9.31       (32,973)       10.12         (14,740)         8.21
                                    -----------                  ------------                  -----------
Outstanding, end of year..........     173,285          10.41       173,935        10.48         208,408         10.37
                                    ===========                  ============                  ===========
Exercisable, end of year..........     110,702          12.71        92,248        12.87         106,948         12.88
                                    ===========                  ============                  ===========
Weighted average fair value
  of options:
    Granted.......................    $   3.76                      $  3.35                      $  2.91
                                    ===========                  ============                  ===========
    Exercised.....................    $   3.14                      $  2.91                      $  2.83
                                    ===========                  ============                  ===========
    Forfeited.....................    $   4.23                      $  4.61                      $  3.88
                                    ===========                  ============                  ===========


</TABLE>

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

                                     2003             2002              2001
                               -------------    --------------    -------------
Weighted average -
<S>                                   <C>               <C>              <C>
   Dividend yield.............        0.00%             0.00%            0.00%
   Risk-free interest
    rate - seven-year
    treasury yield............        3.66%             3.35%            5.00%
   Volatility.................       36.39%            36.73%           35.36%
   Expected life..............    7.0 years         7.0 years        7.0 years
</TABLE>
<PAGE>

Following  is a summary of the status of options  outstanding  at  December  31,
2003:
<TABLE>
<CAPTION>

                                                      Outstanding Options                              Exercisable Options
                                   -----------------------------------------------------------    -------------------------------
                                                                                   Weighted                           Weighted
                                                        Weighted Average            Average                            Average
                                                      Remaining Contractual        Exercise                           Exercise
                                      Number                  Life                   Price            Number            Price
                                   --------------    ------------------------     ------------    ---------------    ------------
Options with exercise prices
ranging from:
<S>                                     <C>                <C>                      <C>                  <C>           <C>
          $17.00 to $17.75                61,850            4.0 years                $  17.04             61,850        $  17.04
          $5.88 to $10.00                111,435            6.6 years                    6.73             48,852            7.22
                                   --------------                                                 ---------------
                                         173,285                                                         110,702
                                   ==============                                                 ===============


</TABLE>


29. Condensed Financial Information-Parent Company Only:

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

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

                                                                                 2003              2002
                                                                             --------------    --------------
Assets:
<S>                                                                             <C>               <C>
     Cash and cash equivalents..........................................        $  2,977          $  3,871
     Investment in subsidiaries.........................................          68,300            64,518
     Receivable from subsidiaries.......................................             259                95
     Deferred charges and intangible assets, net........................             154               154
     Other..............................................................             513               993
                                                                             --------------    --------------
                                                                                $ 72,203          $ 69,631
                                                                             ==============    ==============
Liabilities and stockholders' equity:
     Subordinated debentures............................................        $ 22,570          $ 22,484
     Long term note.....................................................           8,500             8,500
     Accrued expenses and other liabilities.............................             947               924
                                                                             --------------    --------------
                                                                                  32,017            31,908
                                                                             --------------    --------------
     Preferred stock, $.01 par value - 2,000,000 shares
         authorized; 150 shares issued and outstanding..................              --                --
     Capital surplus - preferred stock..................................           1,500             1,500
     Common stock, $.01 par value - 10,000,000 shares authorized;
         2,749,196 and 2,700,929 shares issued and outstanding
         (excluding 42,880 shares held in treasury).....................              28                27
     Capital surplus - common stock.....................................          17,074            16,614
     Retained earnings..................................................          21,119            17,395
     Treasury stock (42,880 shares).....................................            (513)             (513)
     Accumulated other comprehensive income, net of income taxes........             978             2,700
                                                                             --------------    --------------
     Total stockholders' equity.........................................          40,186            37,723
                                                                             --------------    --------------
                                                                                $ 72,203          $ 69,631
                                                                             ==============    ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


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

                                                          2003             2002            2001
                                                      --------------   --------------  -------------
Income:
<S>                                                       <C>            <C>              <C>
     Management fee income...........................     $   650        $     649        $   703
     Interest........................................          36               83            322
     Other...........................................         120              114             70
                                                      --------------   --------------  -------------
         Total income................................         806              846          1,095
                                                      --------------   --------------  -------------
Expenses:
     Interest........................................       2,156            2,185          2,207
     Personnel expense...............................         530              521            512
     Legal and other professional....................         216              210            144
     Depreciation and amortization...................          14               17             57
     Other...........................................         332              352            307
                                                      --------------   --------------  -------------
         Total expenses..............................       3,248            3,285          3,227
                                                      --------------   --------------  -------------
Loss before income tax benefit and equity in
  undistributed income of subsidiaries...............      (2,442)          (2,439)        (2,132)
Income tax benefit...................................         961              858            691
                                                      --------------   --------------  -------------
Loss before equity in undistributed income of
  subsidiaries.......................................      (1,481)          (1,581)        (1,441)
Equity in undistributed income of subsidiaries.......       5,325            3,606          3,023
                                                      --------------   --------------  -------------
Income from continuing operations....................       3,844            2,025          1,582
Equity in undistributed income (loss) from
  operations of discontinued branch..................          --               14           (203)
                                                      --------------   --------------  -------------
Income before nonoperating item......................       3,844            2,039          1,379

Nonoperating item - loss on early extinguishment
  of debt, net of income taxes.......................          --               --           (134)
                                                      --------------   --------------  -------------
         Net income..................................    $  3,844        $   2,039        $ 1,245
                                                      ==============   ==============  =============
</TABLE>



<PAGE>
<TABLE>
<CAPTION>

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

                                                                         2003           2002            2001
                                                                     -------------- --------------  --------------
Operating activities:
<S>                                                                     <C>            <C>             <C>
     Net income....................................................     $  3,844       $  2,039        $   1,245
     Adjustments to reconcile net income to net cash
       used in operating activities -
         Depreciation and amortization.............................           14             18               43
         Equity in undistributed income of subsidiaries............       (5,325)        (3,620)          (2,820)
         Change in prepaid expenses and other receivables..........          300            265             (111)
         Change in accrued expenses and other liabilities..........           23           (123)             332
         Other.....................................................           (2)          (482)             386
                                                                     -------------- --------------  --------------
              Net cash used in operating activities................       (1,146)        (1,903)            (925)
                                                                     -------------- --------------  --------------
Investing activities:
     Net decrease in loans.........................................           --              5               11
     Increase in investment in subsidiaries .......................         (181)       (13,000)          (3,464)
     Additions to premises and equipment, net......................            5            (21)              12
                                                                     -------------- --------------  --------------
              Net cash used in investing activities................         (176)       (13,016)          (3,441)
                                                                     -------------- --------------  --------------
Financing activities:
     Repayments of long-term borrowings............................           --             --          (13,172)
     Proceeds from long-term borrowings............................           --          8,500               --
     Amortization of discount on subordinated notes................           --             --              371
     Amortization of deferred charges..............................           --             --               14
     Proceeds from issuance of subordinated debentures.............           --             --           14,893
     Proceeds from issuance of preferred stock.....................           --          1,500               --
     Proceeds from issuance of common stock........................          462          2,524               --
     Amortization of discount on subordinated debentures...........           86             86               53
     Payment of preferred stock dividends..........................         (120)           (79)              --
     Other, net....................................................           --              9              (86)
                                                                     -------------- --------------  --------------
              Net cash provided by financing activities............          428         12,540            2,073
                                                                     -------------- --------------  --------------
Net decrease in cash and cash equivalents..........................         (894)        (2,379)          (2,293)
Cash and cash equivalents, beginning of year.......................        3,871          6,250            8,543
                                                                     -------------- --------------  --------------
Cash and cash equivalents, end of year.............................     $  2,977       $  3,871        $   6,250
                                                                     ============== ==============  ==============
Supplemental cash flow information:
     Interest paid.................................................     $  2,172       $  2,050        $   2,143
                                                                     ============== ==============  ==============

     Income tax payments received from subsidiary
       bank(s), net of income taxes paid..........................      $   903        $  1,563        $     652
                                                                     ============== ==============  ==============
</TABLE>

<PAGE>


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

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

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

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

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

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

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

<PAGE>
                                                                            2002
                                              -----------------------------------------------------------------
                                                 First            Second            Third            Fourth
                                                Quarter           Quarter          Quarter          Quarter
                                              -------------    --------------    -------------    -------------
Interest income.............................      $  7,581         $  7,825         $  8,431          $ 7,981
Interest expense............................         4,568            4,993            4,811            4,364
                                              -------------    --------------    -------------    -------------
Net interest income.........................         3,013            2,832            3,620            3,617
Provision for credit losses.................           217              185              400              400
                                              -------------    --------------    -------------    -------------
Net interest income after provision
 for credit losses..........................         2,796            2,647            3,220            3,217

Noninterest income..........................         2,345            4,119            5,123            4,709
Noninterest expense.........................         4,917            6,732            6,891            6,789
                                              -------------    --------------    -------------    -------------
Income before income taxes..................           224               34            1,452            1,137
Income tax provision (benefit)..............            94              (30)             430              328
                                              -------------    --------------    -------------    -------------
Income from continuing operations...........           130               64            1,022              809
Gain (loss) from discontinued Fargo
 branch, net of income taxes................            60               38              (69)             (15)
                                              -------------    --------------    -------------    -------------
Net income..................................      $    190         $    102         $    953          $   794
                                              =============    ==============    =============    =============

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

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

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

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

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


<PAGE>

Item 9A. Controls and Procedures

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

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

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

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

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

Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in our Internal Controls
which are reasonably likely to adversely affect our ability to record,  process,
summarize and report  financial  information,  or whether we had  identified any
acts of fraud, whether or not material,  involving management or other employees
who have a  significant  role in our Internal  Controls.  This  information  was
important both for the Controls  Evaluation  generally and because item 5 in the
Rule  13a-14  Certifications  of the CEO and CFO  require  that  the CEO and CFO
disclose that  information to our Board's audit committee and to our independent
auditors and to report on related  matters in this section of the annual report.
In the professional auditing literature, "significant deficiencies" are referred
to as  "reportable  conditions."  These are  control  issues  that  could have a
significant  adverse  effect on the ability to record,  process,  summarize  and
report  financial  data in the financial  statements.  A "material  weakness" is
defined  in  the  auditing  literature  as  a  particularly  serious  reportable
condition  where the internal  control does not reduce to a relatively low level
the risk that  misstatements  caused by error or fraud may occur in amounts that
would be material in relation to the  financial  statements  and not be detected
within a timely  period by employees in the normal  course of  performing  their
assigned  functions.  We also sought to deal with other controls  matters in the
Controls Evaluation, and in each case if a problem was identified, we considered
what  revision,  improvement  and/or  correction to make in accordance  with our
ongoing procedures.

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


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information  concerning our directors and officers  called for by this item will
be included in our definitive  Proxy  Statement  prepared in connection with the
2004 Annual Meeting of Stockholders and is incorporated herein by reference.


Item 11. Executive Compensation

Information  concerning the  compensation  of our executives  called for by this
item will be included in our definitive  Proxy Statement  prepared in connection
with the 2004  Annual  Meeting of  Stockholders  and is  incorporated  herein by
reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information  concerning  security  ownership  of certain  beneficial  owners and
management  called for by this item will be  included  in our  definitive  Proxy
Statement  prepared in connection  with the 2004 Annual Meeting of  Stockholders
and is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions called for
by this item will be  included in our  definitive  Proxy  Statement  prepared in
connection  with the 2004 Annual  Meeting of  Stockholders  and is  incorporated
herein by reference.

Item 14. Principal Accounting Fees and Services

Information  concerning  fees to, and  services  provided  by,  our  independent
auditor  called  for by this  item  will be  included  in our  definitive  Proxy
Statement  prepared in connection  with the 2004 Annual Meeting of  Stockholders
and is incorporated herein by reference.


                                     PART IV

Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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

     (b)  Reports on Form 8-K.
          On October 17, 2003, we filed a Form 8-K, furnishing under Item 7, our
          earnings press release for the quarter ended September 30, 2003.



<PAGE>



                                   Signatures

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned; thereunto duly authorized, on March 19, 2004.

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


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated, on March 19, 2004.


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

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

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


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

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

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

 /s/ Gaylen Ghylin
---------------------------------
     Gaylen Ghylin                                   Director

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

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


<PAGE>


                                  EXHIBIT INDEX

  Exhibit
    No.                        Exhibit Description
------------- ------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          21.1 Subsidiaries of Company.

          23.1 Consent of Independent Auditors.

          31.1 Chief Executive Officer's  Certification Under Section 302 of the
               Sarbanes-Oxley Act of 2002.

          31.2 Chief Financial Officer's  Certification Under Section 302 of the
               Sarbanes-Oxley Act of 2002.

          32.1 Certification  Under  Section  906 of the  Sarbanes-Oxley  Act of
               2002.