Edgar Filing: BNCCORP INC

U.S. Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2006

TRANSITION REPORT UNDER 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

(State or other jurisdiction of incorporation or organization)

45-0402816

(I.R.S. Employer Identification No.)

322 East Main

Bismarck, North Dakota 58501

(Address of principal executive office)

(701) 250-3040

(Registrant’s telephone number)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the registrant’s outstanding common stock on November 3, 2006 was 3,602,340.

BNCCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2006

TABLE OF CONTENTS

	PART I. – FINANCIAL INFORMATION
ITEM 1	Financial Statements
	Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006 and 2005	4
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2005 and 2006	5
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2006 and 2005	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005	7
	Notes to Consolidated Financial Statements	8
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Comparison of Operating Results for the Three Months Ended September 30, 2006 and 2005	12
	Comparison of Operating Results for the Nine Months Ended September 30, 2006 and 2005	13
	Comparison of Financial Condition at September 30, 2006 and December 31, 2005	17
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	23
ITEM 4	Controls and Procedures	24
	PART II. – OTHER INFORMATION
ITEM 6	Exhibits	26

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)

	September 30,		December 31,
ASSETS	2006		2005
	(unaudited)
CASH AND CASH EQUIVALENTS	$	15,138	$	28,824
FEDERAL FUNDS SOLD		31,000		-
INVESTMENT SECURITIES AVAILABLE FOR SALE		194,798		227,185
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK		5,003		5,791
LOANS HELD FOR SALE		3,088		266
PARTICIPATING INTERESTS IN MORTGAGE LOANS		18,956		101,336
LOANS AND LEASES HELD FOR INVESTMENT		338,439		310,368
ALLOWANCE FOR CREDIT LOSSES		(3,374)		(3,188)
Net loans and leases		354,021		408,516
PREMISES AND EQUIPMENT, net		24,185		23,514
INTEREST RECEIVABLE		3,155		3,330
OTHER ASSETS		15,469		13,851
GOODWILL		22,744		21,839
OTHER INTANGIBLE ASSETS, net		7,378		6,900
	$	675,979	$	740,016

LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Noninterest-bearing	$	63,316	$	72,977
Interest-bearing –
Savings, interest checking and money market		253,762		260,807
Time deposits $100,000 and over		46,274		71,287
Other time deposits		146,253		143,719
Total deposits		509,605		548,790
SHORT-TERM BORROWINGS		14,512		21,416
FEDERAL HOME LOAN BANK ADVANCES		62,200		82,200
LONG-TERM BORROWINGS		2,167		3,850
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S SUBORDINATED DEBENTURES		22,484		22,648
OTHER LIABILITIES		10,057		9,500
Total Liabilities		621,025		688,404
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value – 2,000,000 shares authorized		-		-
Common stock, $.01 par value – 10,000,000 shares authorized; 3,602,640 and 3,497,445 shares issued and outstanding (excluding shares held in treasury)		36		35
Capital surplus – common stock		25,818		25,108
Retained earnings		31,420		28,504
Treasury stock (47,013 and 46,123 shares respectively)		(570)		(559)
Accumulated other comprehensive income, net of income taxes		(1,750)		(1,476)
Total stockholders’ equity		54,954		51,612
	$	675,979	$	740,016

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except share and per share data)


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2006		2005		2006		2005
INTEREST INCOME:	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Interest and fees on loans	$	7,791	$	7,202	$	22,774	$	19,424
Interest and dividends on investments -
Taxable		2,435		2,002		7,381		6,033
Tax-exempt		398		518		1,376		1,424
Dividends		65		26		189		188
Total interest income		10,689		9,748		31,720		27,069
INTEREST EXPENSE:
Deposits		4,269		3,342		11,993		8,063
Short-term borrowings		173		136		564		621
Federal Home Loan Bank advances		975		1,132		3,064		3,532
Long-term borrowings		45		142		170		395
Subordinated debentures		573		520		1,679		1,496
Total interest expense		6,035		5,272		17,470		14,107
Net interest income		4,654		4,476		14,250		12,962
PROVISION FOR CREDIT LOSSES		-		-		210		250
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		4,654		4,476		14,040		12,712
NONINTEREST INCOME:
Insurance income		4,443		4,262		14,030		14,699
Fees on loans		584		748		1,761		2,529
Net gains(losses) on sales of securities		103		-		(258)		(67)
Trust and financial services		195		162		613		455
Service charges		177		212		540		607
Brokerage income		25		112		215		286
Other		399		216		1,051		911
Total noninterest income		5,926		5,712		17,952		19,420
NONINTEREST EXPENSE:
Salaries and employee benefits		5,862		5,525		17,243		16,664
Occupancy		776		759		2,414		2,234
Depreciation and amortization		451		388		1,309		1,193
Professional services		462		582		1,315		1,609
Office supplies, telephone and postage		384		344		1,127		1,062
Marketing and promotion		273		245		805		725
Amortization of intangible assets		270		279		741		935
FDIC and other assessments		45		57		140		167
Other		1,008		953		2,848		2,850
Total noninterest expense		9,531		9,132		27,942		27,439
Income before income taxes		1,049		1,056		4,050		4,693
Income tax provision		246		305		1,134		1,243
Net income	$	803	$	751	$	2,916	$	3,450
Dividends on preferred stock		-		-		-		(29)
Income available to common stockholders	$	803	$	751	$	2,916	$	3,421
Basic Earnings per common share	$	0.23	$	0.26	$	0.84	$	1.12
Diluted earnings per common share	$	0.23	$	0.25	$	0.83	$	1.10

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(In thousands, except share data)

For the Nine Months Ended September 30, 2005


				Capital					Capital							Accumulated
				Surplus					Surplus							Other
	Preferred Stock			Preferred		Common Stock			Common		Retained		Treasury			Comprehensive
	Shares	Amount		Stock		Shares	Amount		Stock		Earnings		Stock			Income		Total
BALANCE, December 31, 2004	125	$		$	1,250	2,884,876	$	29	$	18,601	$	24,430	$	(530)		$	66	$	43,846
Net income	-		-		-	-		-		-		3,450		-			-		3,450
Other comprehensive loss	-		-		-	-		-		-		-		-			(1,159)		(1,159)
Preferred stock dividends	-		-		-	-		-		-		(29)		-			-		(29)
Repurchase of preferred stock	(125)		-		(1,250)	-		-		-		-		-			-		(1,250)
Other	-				-	606,096		6		6,173		-		(3)			-		6,176
BALANCE, September 30, 2005	-	$	-	$	-	3,490,972	$	35		24,774	$	27,851	$	(533)		$	(1,093)	$	51,034



For the Nine Months Ended September 30, 2006
				Capital					Capital							Accumulated
				Surplus					Surplus							Other
	Preferred Stock			Preferred		Common Stock			Common		Retained		Treasury			Comprehensive
	Shares	Amount		Stock		Shares	Amount		Stock		Earnings		Stock			Income		Total
BALANCE, December 31, 2005	-	$	-	$	-	3,497,445	$	35	$	25,108	$	28,504	$		(559)	$	(1,476)	$	51,612
Net income	-		-		-	-		-		-		2,916			-		-		2,916
Other comprehensive loss	-		-		-	-		-		-		-			-		(274)		(274)
Issuance of common shares	-		-		-	38,485		-		483		-			-		-		483
Impact of share based compensation	-		-		-	66,710		1		227		-			(11)		-		217
BALANCE, September 30, 2006	-	$	-	$	-	3,602,640	$	36	$	25,818	$	31,420	$		(570)	$	(1,750)	$	54,954

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)


	For the Three months Ended September 30, 2006						For the Nine Months Ended September 30, 2006
	(unaudited)						(unaudited)
NET INCOME					$	803					$	2,916
OTHER COMPREHENSIVE INCOME (LOSS) -
Unrealized holding gains (losses) arising during the period, net of income taxes			$	2,064					$	(254)
Reclassification adjustment for (gains) losses included in net income, net of income taxes				(64)						160
Beginning balance of cash flow hedging instruments	$	131					$	563
Ending balance of cash flow hedging instruments		268						268
Change in market value before taxes		137						(295)
Deferred tax on cash flow hedging instrument		(49)						115
Gain (loss) on cash flow hedging instruments, net of tax				88						(180)
OTHER COMPREHENSIVE INCOME (LOSS)						2,088						(274)

COMPREHENSIVE INCOME					$	2,891					$	2,642



	For the Three Months Ended September 30, 2005						For the Nine Months Ended September 30, 2005
	(unaudited)						(unaudited)
NET INCOME					$	751					$	3,450
OTHER COMPREHENSIVE INCOME (LOSS) -
Unrealized holding (losses) arising during the period, net of income taxes			$	(962)					$	(1,208)
Reclassification adjustment for losses included in net income, net of income taxes				-						49
Beginning balance of cash flow hedging instruments	$	-					$	-
Ending balance of cash flow hedging instruments		-						-
Change in market value before taxes		-		-				-		-
Deferred tax on cash flow hedging instrument		-						-
Gain (loss) on cash flow hedging instruments, net of tax				-						-
OTHER COMPREHENSIVE LOSS						(962)						(1,159)

COMPREHENSIVE (LOSS) INCOME					$	(211)					$	2,291

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30

(In thousands)

	2006		2005
OPERATING ACTIVITIES:	(unaudited)		(unaudited)
Net income	$	2,916	$	3,450
Adjustments to reconcile net income to net cash provided by operating activities -
Provision for credit losses		210		250
Depreciation and amortization		1,309		1,193
Amortization of intangible assets		741		935
Net amortization of premiums and discounts on investment securities and subordinated debentures		921		1,818
Proceeds from loans recovered		22		182
Change in interest receivable and other assets, net		(1,772)		(1,033)
Losses on disposals of bank premises and equipment, net		81		35
Net realized losses on sales of investment securities		258		67
Provision for deferred income taxes		207		494
Change in dividend distribution payable		(194)		(187)
Change in other liabilities, net		518		165
Originations of loans to be participated		(81,667)		(116,701)
Proceeds from participations of loans		81,667		116,701
Funding of originations of loans held for sale		(20,384)		(59,382)
Proceeds from sale of loans held for sale		17,562		84,062
Net cash provided by operating activities		2,395		32,049
INVESTING ACTIVITIES:
Purchase of Federal funds sold, net		(31,000)		(7,500)
Purchases of investment securities		(26,052)		(15,222)
Proceeds from sales of investment securities		39,154		2,572
Proceeds from maturities of investment securities		17,984		20,831
Purchases of Federal Reserve and Federal Home Loan Bank Stock		-		(5,341)
Redemptions of Federal Reserve and Federal Home Loan Bank Stock		788		6,869
Net decrease (increase) in participating interests in mortgage loans		82,380		(80,406)
Net increase in loans, excluding participating interests in mortgage loans		(28,117)		(19,685)
Additions to bank premises and equipment		(2,074)		(1,418)
Sales of bank premises and equipment		49		11
Proceeds from sale of insurance branch		305		-
Cash paid for acquisition of insurance subsidiary, net		(1,527)		-
Cash paid for insurance company earnout		(220)		(60)
Cash paid for insurance accounts		(197)		-
Net cash provided (used) by in investing activities		51,473		(99,349)
FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(39,185)		105,292
Net decrease in short-term borrowings		(6,904)		(26,668)
Repayments of Federal Home Loan Bank advances		(20,000)		(270,000)
Proceeds from Federal Home Loan Bank advances		-		260,000
Repayments of long-term borrowings		(1,682)		(713)
Proceeds from issuance of stock		-		5,839
Redemption of preferred stock		-		(1,250)
Payment of preferred stock dividends		-		(29)
Proceeds involving stock options and restricted stock, net		217		-
Other		-		337
Net cash (used) provided by financing activities		(67,554)		72,808
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(13,686)		5,508
CASH AND CASH EQUIVALENTS, beginning of period		28,824		11,881
CASH AND CASH EQUIVALENTS, end of period	$	15,138	$	17,389
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	17,566	$	13,685
Income taxes paid	$	713	$	426

BNCCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2006

NOTE 1 – BNCCORP, Inc.

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 Services, Inc., and BNC Asset Management, Inc., collectively the “Bank”). BNCCORP, through these wholly owned subsidiaries, which operate from 28 locations in Arizona, Colorado, Minnesota, North Dakota and Nevada, provides a broad range of banking, insurance, and wealth management services to individuals and small and mid-sized businesses.

The accounting and reporting policies of BNCCORP and its subsidiaries (collectively, the “Company”) conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. The consolidated financial statements included herein are for BNCCORP and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

NOTE 2 – Basis of Presentation

The accompanying interim consolidated financial statements have been prepared by the Company, in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading.

The unaudited consolidated financial statements as of September 30, 2006 and for the three-month and nine-month periods ended September 30, 2006 and 2005 include, in the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial results for the respective interim periods and are not necessarily indicative of results of operations to be expected for the entire fiscal year ending December 31, 2006.

The accompanying interim consolidated financial statements have been prepared under the presumption that users of the interim consolidated financial information have either read or have access to the audited consolidated financial statements for the year ended December 31, 2005. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2005 audited consolidated financial statements have been omitted from these interim consolidated financial statements. It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005 and the notes thereto.

NOTE 3 – Reclassifications

Certain of the 2005 amounts have been reclassified to conform to the 2006 presentations. These reclassifications had no effect on net income or stockholders’ equity.

NOTE 4 – Recently Issued or Adopted Accounting Standards

As of January 1, 2006, the Company adopted SFAS 123R, which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. The Company adopted SFAS 123R using the modified prospective transition method. In accordance with this method, the Company’s financial statements for prior periods have not been restated to reflect the impact of SFAS 123R (see Note 7).

FIN No. 48, “Accounting for Uncertainty in Income Taxes”, requires that the Company recognize in its financial statements, the impact of a tax position if that position is more likely than not of being sustained on audit based on the technical merits of the position. The provisions of FIN 48 are effective as of January 1, 2007. The adoption of the interpretation will not have a significant effect on the Company’s financial statements.

NOTE 5 – Earnings Per Share

Net Income per share was calculated as follows:

	Three months ended		Nine months ended
	September 30, 2006		September 30, 2006
Denominator for basic earnings per share:
Average common shares outstanding		3,523,470		3,478,792
Dilutive common stock options		42,323		40,095
Denominator for diluted earnings per share		3,565,793		3,518,887
Numerator: Net income attributable to common stockholders (in thousands)	$	803	$	2,916
Net income per share
Basic	$	0.23	$	0.84
Diluted	$	0.23	$	0.83

	Three months ended		Nine months ended
	September 30, 2005		September 30, 2005
Denominator for basic earnings per share:
Average common shares outstanding		2,932,588		3,054,125
Dilutive common stock options		59,696		50,829
Denominator for diluted earnings per share		2,992,284		3,104,954
Numerator: Net income attributable to common stockholders (in thousands)	$	751	$	3,421
Net income per share
Basic	$	0.26	$	1.12
Diluted	$	0.25	$	1.10

As of September 30, 2006 and 2005 options to purchase 55,800 and 57,450 shares, respectively were outstanding but were not included in the computation of diluted EPS because their exercise prices were higher than the average price of BNCCORP’s common stock for the period.

NOTE 6 – 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 wealth management services.

Banking operations provide traditional banking services to individuals and small and mid-sized businesses, such as accepting deposits and making loans. The commercial banking activities also include the origination of loans. We also sell loans to other institutions and service loans for other institutions.

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

Wealth management services provide securities brokerage, trust and other financial services to individuals and businesses. Brokerage investment options include individual equities, fixed income investments and mutual funds. Trust and financial services operations provide a wide array of trust and other financial services,

including personal trust administration services, financial, tax, business and estate planning, estate administration, agency accounts, employee benefit plan design and administration, individual retirement accounts (“IRAs”), including custodial self-directed IRAs, asset management, tax preparation, accounting and payroll services.

The accounting policies of the three segments are the same as those described in the summary of significant accounting policies included in Note 1 to the consolidated financial statements for the year ended December 31, 2005.

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.

The following tables present segment profit or loss, assets and a reconciliation of segment information as of, and for the three months ended September 30 and the nine months ended September 30, unaudited (in thousands):

	Three months ended September 30, 2006
					Wealth		Bank				Intersegment		Consolidated
	Banking		Insurance		Mgmt		Holding Co.		Totals		Elimination		Total
Net interest income	$	4,933	$	56	$	276	$	(629)	$	4,636	$	18	$	4,654
Other revenue-external customers		1,174		4,530		276		24		6,004		(78)		5,926
Segment profit (loss)		957		332		(100)		(386)		803		-		803
Segment assets		605,759		38,873		31,152		82,627		758,411		(82,432)		675,979
Efficiency Ratios		78.19%		88.14%		129.35%		(75.54)%		93.87%		-		90.09%


	Nine months ended September 30, 2006
						Wealth	Bank				Intersegment		Consolidated
		Banking	Insurance			Mgmt	Holding Co.		Totals		Elimination		Total
Net interest income	$	15,133	$	159	$	784	$	(1,877)	$	14,199	$	51	$	14,250
Other revenue-external customers		2,831		14,290		965		65		18,151		(199)		17,952
Segment profit (loss)		2,755		1,592		(164)		(1,267)		2,916		-		2,916
Segment assets		605,759		38,873		31,152		82,267		758,411		(82,432)		675,979
Efficiency Ratios		77.73%		81.98%		115.21%		(70.64)%		89.97%		-		86.77%

NOTE 7 – Share-Based Compensation

The Company has three share based plans for certain key employees and directors whereby shares of common stock have been reserved for awards in the form of stock options or restricted stock awards. Under the 1995 Stock Incentive Plan, the aggregate number of options and shares granted can not exceed 250,000 shares. Under the 2002 Stock Incentive Plan, the aggregate number of shares can not exceed 125,000 shares. Under the 2006 Stock Incentive Plan, the aggregate number of shares can not exceed 200,000 shares. Pursuant to each plan, the compensation committee may grant options at prices equal to the fair value of the stock at the grant date.

As of January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (FAS 123R), which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. The Company utilizes the Black-Scholes valuation model to determine the fair value of the stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. The Company recognized share-based compensation expense of $87,536 for the three months ended September 30, 2006, and $210,925 for the nine months ended September 30, 2006. No stock options were granted during these periods.

At September 30, 2006, the Company had $1.2 million of unamortized restricted stock compensation. At December 31, 2005 the Company had approximately $627,000 of unamortized restricted stock compensation. Restricted shares of stock issued to employees in the third quarter of 2006 have vesting and amortization periods of at least three years. At September 30, 2006 and December 31, 2005, the company had approximately $3,000 and $12,000, respectively, of unrecognized share based compensation expense related to stock options.

Prior to January 1, 2006, the company accounted for the stock options under APB 25, accounting for employee share options at intrinsic value, which provided that no compensation expense was charged for options granted at an exercise price equal to market value of the stock on the grant date. If FAS 123R had been applied for the three and nine months ended September 30, 2005, the Company’s pro forma net income and earnings per share would have been as follows:

	Three months ended		Nine months ended
	September 30, 2005		September 30, 2005
	(unaudited)		(unaudited)
Net income available to common stockholders	$	751	$	3,421
Add: total stock-based employee compensation expense included in reported net income, net of related tax effects		45		121
Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(55)		(151)
Pro forma net income	$	741	$	3,391
Earnings per share:
Basic – as reported	$	0.26	$	1.12
Basic – pro forma		0.24		1.07
Diluted – as reported		0.25		1.10
Diluted – pro forma		0.24		1.05

NOTE 8 – Derivative Activities

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

The Company’s objective in using derivatives is to add stability to interest income and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company entered into an interest rate floor agreement during the first quarter of 2006. The $50.0 million prime rate interest rate floor has an effective date of January 9, 2006 and a maturity date of January 9, 2010. The floor is designated as a cash flow hedge. The terms of the floor result in the Company receiving payments when the prime interest rate is below the strike rate of 7.00 percent. At September 30, 2006, the prime rate was 8.25 percent and the Company was not entitled to receive a payment under the terms of the agreement. The floor was used to hedge the variable cash flows associated with $50.0 million of the Company’s existing variable-rate loans.

At September 30, 2006, the fair value of the floor was $268,000, which was included in other assets. The change in net unrealized losses of $295,000 during the nine months ended September 30, 2006 for derivatives designated as a cash flow hedge is separately disclosed in the statement of changes in comprehensive income. No hedge ineffectiveness on the cash flow hedge was recognized during the quarter. The entire loss on the derivative was included in the assessment of the effectiveness.

NOTE 9 – 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 September 30, 2006 or December 31, 2005. The carrying amount of available-for-sale securities and their approximate fair values were as follows (in thousands):

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
As of September 30, 2006	Cost		Gains		Losses		Value
U.S. government agency mortgage-backed securities	$	10,999	$	48	$	(101)	$	10,946
Collateralized mortgage obligations		164,232		30		(3,808)		160,454
State and municipal bonds		22,100		1,311		(13)		23,398
	$	197,331	$	1,389	$	(3,922)	$	194,798

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
As of December 31, 2005	Cost		Gains		Losses		Value
U.S. government agency mortgage-backed securities	$	8,586	$	71	$	(107)	$	8,550
Collateralized mortgage obligations		176,065		37		(4,439)		171,663
State and municipal bonds		44,915		2,111		(54)		46,972
	$	229,566	$	2,219	$	(4,600)	$	227,185

In reaching the conclusion that the impairments disclosed in the table above are temporary, and not other-than-temporary in nature, the Company considered the nature of the securities, the associated guarantees and collateralization, the securities ratings and the level of impairment of the securities. None of the impairments was due to deterioration in credit quality that might result in the non-collection of contractual principal and interest. The cause of the impairments is, in general, attributable to changes in interest rates.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

For purposes of Items 2, 3 and 4 of Part I of this Form 10-Q, we refer to “we,” “our” 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; “BNC Insurance” when referring only to BNC Insurance Services, Inc.; and “BNC AMI” when referring only to BNC Asset Management, Inc.

Comparison of Operating Results for the Three Months Ended September 30, 2006 and 2005

General. Net income was $803,000, or $0.23 per share on a diluted basis, for the quarter ended September 30, 2006. This compared with net income for the quarter ended September 30, 2005, of $751,000, or $0.25 per diluted share.

The higher earnings for the third quarter of 2006 primarily reflected increases in net interest income and non-interest income compared to the prior-year period. These increases were offset by a rise in non-interest expense largely due to the Company’s growth initiatives, resulting in income before taxes that is virtually the same for the two periods. Net income for the third quarter of 2006 also reflected a lower provision for income taxes than in the third quarter of 2005.

Net interest income for the third quarter of 2006 was $4.7 million, an increase of 4.0% from $4.5 million in the same period of 2005. The net interest margin increased to 3.06% for the quarter ended September 30, 2006,

from 2.75% for the same period in 2005. The improved margin can be attributed to higher balances of loans held for investment, excluding participating interests in mortgage loans, and an increase in the interest earned on these assets. The net interest margin also benefited from reduced balances in high cost borrowings and brokered deposits, partially offset by higher rates paid on these liabilities. Overall, the Company’s total average interest earning assets and total average interest bearing liabilities were lower in the third quarter of 2006 compared to the same period in 2005. The decrease in interest earning assets was primarily related to a decline in participating interests in mortgage loans held for sale. The decrease in interest bearing liabilities was due to the decline in higher cost borrowings and brokered deposits, partially offset by an increase in core deposits.

Non-interest income increased by $214,000, or 3.8%, to $5.9 million for the 2006 third quarter from $5.7 million for third quarter of 2005. Within non-interest income, insurance agency revenues increased by 4.3%, or approximately $181,000, in the third quarter to $4.4 million compared to $4.3 million from the third quarter a year ago. Gains on sales of investment securities, which do not recur regularly, amounted to $103,000, and contributed to higher non-interest income in the third quarter of 2006. These increases were partially offset by a decline in brokerage revenue of $87,000 between periods, as a result of a decision to discontinue brokerage services in the Minnesota market. Overall, non-interest income represented 56.01% of gross revenues for the recent quarter, compared to 56.06% a year ago.

Non-interest expense increased by $399,000, or 4.4%, to $9.5 million for the third quarter of 2006 from $9.1 million in the same quarter of 2005. Increases in employee compensation and occupancy expenses of $354,000 can be primarily attributed to the Company’s growth initiatives.

In the third quarter of 2006 the Company’s estimated effective tax rate, and therefore its provision for income taxes, declined as a result of a higher ratio of nontaxable items to income before taxes.

Comparison of Operating Results for the Nine Months Ended September 30, 2006 and 2005

General. For the first nine months of 2006, the Company reported net income of $2.9 million, or $0.83 per diluted share, compared to net income of $3.4 million, or $1.10 per diluted share for the first nine months of 2005.

Net interest income was $14.3 million for the first nine months of 2006, an increase of 9.9% from $13.0 million in the same period of 2005. The net interest margin increased to 3.05% for the nine months ended September 30, 2006, from 2.79% for the same period in 2005. The improved margin can be attributed to higher balances of loans held for investment, excluding participating interests in mortgage loans and an increase in the interest earned on these assets. The net interest margin was also improved by lower balances in high cost borrowings and brokered deposits, partially offset by the higher rates paid on these liabilities. Overall, the Company’s total average earning assets and total average interest bearing liabilities for the nine month periods ended September 30, 2006 and 2005 are relatively flat.

Non-interest income decreased by $1.5 million, or 7.6%, to $18.0 million for the nine months ended September 30, 2006, compared to $19.4 million for same period in 2005. Insurance agency revenues decreased by $669,000, or 4.6%, in the first nine months of 2006 to $14.0 million compared to $14.7 million from the same period a year ago. Insurance agency revenues, which may vary significantly from period to period, decreased primarily as a result of a lower level of contingency income received from insurance companies. The decrease in non-interest income in the first nine months of 2006 also reflected other items that do not recur on a regular basis. Loan fees decreased versus the 2005 period due to an extremely large transaction resulting in fees of approximately $800,000 last year. The Company incurred net losses on sales of securities aggregating $258,000 in the first three quarters of 2006. The proceeds from these sales were reinvested in higher-yielding assets or used to reduce high cost liabilities. Overall, non-interest income represented 55.8% of gross revenues for the first nine months of 2006, down from 60.0% a year ago.

Non-interest expense increased by $503,000, or 1.8%, to $27.9 million for the nine month period in 2006 from $27.4 million in the same period for 2005. Increases in employee compensation and occupancy expenses of $759,000 can be primarily attributed to the Company’s growth initiatives.

Net Interest Income. The following tables present average balances; interest earned or owed; associated yields on interest-earning assets and costs on interest-bearing liabilities for the three and nine-month periods ended September 30, 2006 and 2005, as well as the changes between the periods presented, unaudited, (amounts are in thousands):

	Three Months Ended September 30,
	2006					2005					Change
			Interest		Average			Interest		Average			Interest		Average
	Average		earned		yield or	Average		earned		yield or	Average		earned		yield or
	balance		or owed		cost	balance		or owed		cost	balance		or owed		cost
Interest-earning assets
Federal funds sold/interest-bearing due from	$	38,940	$	508	5.18%	$	17,165	$	148	3.42%	$	21,775	$	360	1.76%	(a)
Investments - Taxable		171,121		1,992	4.62%		188,692		1,880	3.95%		(17,571)		112	0.67%	(b)
Investments - Tax Exempt		34,845		398	4.53%		46,972		518	4.38%		(12,127)		(120)	0.15%	(c)
Loans held for sale		892		-	0.00%		2,329		-	0.00%		(1,437)		-	0.00%
Participating interests in mortgage loans		23,477		436	7.37%		81,717		1,192	5.79%		(58,240)		(756)	1.58%	(d)
Loans and leases held for investment excluding participating interests in mortgage loans		336,756		7,355	8.67%		311,461		6,010	7.66%		25,295		1,345	1.01%	(e)
Allowance for loan losses		(3,378)		-			(3,367)		-			(11)		-
Total interest-earning assets	$	602,653		10,689	7.04%	$	644,969		9,748	6.00%	$	(42,316)		941	1.04%
Interest-bearing liabilities
Interest checking and money market accounts	$	237,657		1,890	3.16%	$	242,986		1,411	2.30%	$	(5,329)		479	0.86%
Savings		8,132		16	0.78%		8,465		17	0.80%		(333)		(1)	-0.02%
Certificates of deposit under $100,000		156,718		1,762	4.46%		119,803		900	2.98%		36,915		862	1.48%	(f)
Certificates of deposit $100,000 and over		50,087		601	4.76%		94,285		1,014	4.27%		(44,198)		(413)	0.49%	(f)
Total interest-bearing deposits		452,594		4,269	3.74%		465,539		3,342	2.85%		(12,945)		927	0.89%
Short-term borrowings		14,239		173	4.82%		15,774		137	3.45%		(1,535)		36	1.37%	(g)
Federal Home Loan Bank advances		65,641		975	5.89%		90,426		1,131	4.96%		(24,785)		(156)	0.93%	(g)
Long-term borrowings		2,301		45	7.76%		9,371		142	6.01%		(7,070)		(97)	1.75%	(g)
Subordinated debentures		22,401		573	10.15%		22,306		520	9.25%		95		53	0.90%
Total borrowings		104,582		1,766	6.70%		137,877		1,930	5.55%		(33,295)		(164)	1.15%
Total interest-bearing liabilities	$	557,176		6,035	4.30%	$	603,416		5,272	3.47%	$	(46,240)		763	0.83%
Net interest income/spread			$	4,654	2.74%			$	4,476	2.53%			$	178	0.21%
Net interest margin					3.06%					2.75%					0.31%
Notation:
Noninterest-bearing deposits	$	68,471		-		$	68,497		-		$	(26)		-
Total deposits	$	521,065	$	4,269	3.25%	$	534,036	$	3,342	2.48%	$	(12,971)	$	927	0.77%
Taxable equivalents:
Total interest-earning assets	$	602,653	$	10,894	7.17%	$	644,969	$	9,860	6.07%	$	(42,316)	$	1,034	1.10%
Net interest income/spread		-	$	4,859	2.87%		-	$	4,588	2.60%		-	$	271	0.27%
Net interest margin		-		-	3.20%		-		-	2.82%		-		-	0.38%

(a)

The average balance of federal funds sold is higher in 2006. This relates to management’s decision to shorten the duration of investments due to the flat yield curve and maintain liquidity.

(b)

The decrease in average investments were a result of management’s strategy to use the proceeds from matured or sold investments to pay down the higher cost borrowings and reinvest in loans.

(c)

The average balance of tax exempt investments has decreased due to sales. The tax equivalent yields of tax exempt securities were low relative to certain taxable securities. As a result, tax exempt securities were sold to reinvest in shorter term taxable securities.

(d)

Participating interests in mortgage loans are collateralized by mortgage loans owned by a mortgage banking counterparty. We advance funds when the counterparty closes on the loans and are repaid when the mortgage banker sells the loans. Our balance will vary depending on the level of originations and the timing of sales by the mortgage banking entity.

(e)

Loans and leases held for investment, excluding participating interests in mortgage loans held for sale, continue to increase as the Company continues to improve its ability to generate loans and its lending limit increases.

(f)

The average balance of deposits has declined as a result of managements’ decision to let higher cost brokered and national CD’s mature. We have also grown, or maintained, the balance of other core deposit accounts.

(g)

The average balance of borrowings are lower because we have used liquid assets and proceeds from matured, and sold, investments to pay down higher cost borrowings.

	Nine Months Ended September 30,
	2006					2005					Change
			Interest		Average			Interest		Average			Interest		Average
	Average		earned		yield or	Average		earned		yield or	Average		earned		yield or
	balance		or owed		cost	balance		or owed		cost	balance		or owed		cost
Interest-earning assets
Federal funds sold/interest-bearing due from	$	42,970	$	1,543	4.80%	$	5,776	$	148	3.43%	$	37,194	$	1,395	1.37%	(a)
Investments - Taxable		175,699		6,027	4.59%		197,059		6,073	4.12%		(21,360)		(46)	0.47%	(b)
Investments - Tax Exempt		40,835		1,376	4.51%		42,337		1,424	4.50%		(1,502)		(48)	0.01%	(c)
Loans held for sale		917		-	0.00%		26,133		738	3.78%		(25,216)		(738)	-3.78%
Participating interests in mortgage loans		33,093		1,703	6.88%		-52,364		-2,313	5.91%		(19,271)		(610)	0.970%	(d)
Loans and leases held for investment excluding participating interests in mortgage loans		333,750		21,071	8.44%		301,614		16,373	7.26%		32,136		4,698	1.18%	(e)
Allowance for loan losses		(3,311)		-			(3,433)		-			122		-
Total interest-earning assets	$	623,953		31,720	6.80%	$	621,850		27,069	5.82%	$	2,103		4,651	0.98%
Interest-bearing liabilities
Interest checking and money market accounts	$	244,059		5,313	2.91%	$	224,216		3,165	1.89%	$	19,843		2,148	1.02%
Savings		8,350		49	0.78%		7,832		47	0.80%		518		2	-0.02%
Certificates of deposit under $100,000		151,728		4,718	4.16%		108,124		2,394	2.96%		43,604		2,324	1.20%	(f)
Certificates of deposit $100,000 and over		56,649		1,913	4.51%		84,072		2,457	3.91%		(27,423)		(544)	0.60%	(f)
Total interest-bearing deposits		460,786		11,993	3.48%		424,244		8,063	2.54%		36,542		3,930	0.94%
Short-term borrowings		15,999		564	4.71%		27,320		621	3.04%		(11,321)		(57)	1.67%	(g)
Federal Home Loan Bank advances		76,680		3,064	5.34%		101,262		3,532	4.66%		(24,582)		(468)	0.68%	(g)
Long-term borrowings		3,066		170	7.41%		9,607		395	5.50%		(6,541)		(225)	1.91%	(g)
Subordinated debentures		22,432		1,679	10.01%		22,319		1,496	8.96%		113		183	1.05%
Total borrowings		118,177		5,477	6.20%		160,508		6,044	5.03%		(42,331)		(567)	1.17%
Total interest-bearing liabilities	$	578,963		17,470	4.03%	$	584,752		14,107	3.23%	$	(5,789)		3,363	0.80%
Net interest income/spread			$	14,250	2.77%			$	12,962	2.59%			$	1,288	0.18%
Net interest margin					3.05%					2.79%					0.26%
Notation:
Noninterest-bearing deposits	$	68,363		-		$	64,052		-		$	4,311		-
Total deposits	$	529,149	$	11,993	3.03%	$	488,296	$	8,063	2.21%	$	40,853	$	3,930	0.82%
Taxable equivalents:
Total interest-earning assets	$	623,953	$	32,429	6.95%	$	621,850	$	27,803	5.98%	$	2,103	$	4,626	0.97%
Net interest income/spread		-	$	14,959	2.92%		-	$	13,696	2.75%		-	$	1,263	0.17%
Net interest margin		-		-	3.21%		-		-	2.94%		-		-	0.27%

(a)

The average balance of federal funds sold is higher in 2006. This relates to management’s decision to shorten the duration of investments due to the flat yield curve and maintain liquidity.

(b)

The decrease in average investments were a result of management’s strategy to use the proceeds from matured or sold investments to pay down the higher cost borrowings and reinvest in loans.

(c)

The average balance of tax exempt investments has decreased due to sales. The tax equivalent yields of tax exempt securities were low relative to certain taxable securities. As a result tax exempt securities were sold to reinvest in shorter taxable securities.

(d)

(e)

(f)

The average balance of certificates of deposit 100,000 and over has declined as a result of managements’ decision to let higher cost brokered and national CD’s mature. We have also grown, or maintained, the balance of other core deposit accounts.

(g)

The average balance of borrowings are lower because we have used liquid assets and proceeds from matured, and sold, investments to pay down higher cost borrowings.

Noninterest Income. The following table presents the major categories of our noninterest income for the three and nine month periods ended September 30, 2006 and 2005 (amounts are in thousands):

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
Noninterest Income	2006		2005		$		%		2006		2005		$		%
	(unaudited)		(unaudited)						(unaudited)		(unaudited)
Insurance commissions	$	4,443	$	4,262	$	181	4	%	$	14,030	$	14,699	$	(669)	(5)	%	(a)
Fees on loans		584		748		(164)	(22)	%		1,761		2,529		(768)	(30)	%	(b)
Net gain (loss) on sales of securities		103		-		103	N/M	%		(258)		(67)		(191)	(285)	%	(c)
Trust and financial services		195		162		33	20	%		613		455		158	35	%	(d)
Service charges		177		212		(35)	(17)	%		540		607		(67)	(11)	%
Brokerage income		25		112		(87)	(78)	%		215		286		(71)	(25)	%	(e)
Other		399		216		183	85	%		1,051		911		140	15	%	(f)
Total noninterest income	$	5,926	$	5,712	$	214	4	%	$	17,952	$	19,420	$	(1,468)	(8)	%
Noninterest income as a percent of gross revenues		56.01%		56.06%						55.75%		59.97%

(a)

The insurance commissions in the third quarter are higher than 2005 because of acquisitions made in 2006. Year-to-date, insurance revenues were down as a result of a decrease in contingency income received from insurance companies.

(b)

Fees on loans will vary depending on the volume of participations sold each period. Year-to-date, the decrease is attributable to a large commercial real estate transaction consummated in the first quarter of 2005. The fees on this transaction were approximately $800,000. These types of transactions do not recur on a regular basis.

(c)

Gains and/or losses on sales of investment securities vary from period to period depending on the nature of securities transactions. In 2006, proceeds from sales are being used to reduce higher cost borrowings and reinvest in higher earning assets.

(d)

Trust and financial services income increased due to increased trust assets under management.

(e)

Brokerage revenue decreased because brokerage services in the Minnesota market have been discontinued.

(f)

Other income increased due to an increase in misc. banking services fee income.

Noninterest Expense. The following table presents the major categories of our noninterest expense for the three and nine month periods ended September 30, 2006 and 2005 (amounts are in thousands):

	Three Months Ended									Nine Months Ended
	September 30,					Change				September 30,			Change
Noninterest Expense	2006		2005			$	%		2006		2005			$	%
	(unaudited)		(unaudited)						(unaudited)		(unaudited)
Salaries and employee benefits	$	5,862	$	5,525	$	337	6	%	$	17,243	$	16,664	$	579	3	%	(a)
Occupancy		776		759		17	2	%		2,414		2,234		180	8	%	(b)
Depreciation and amortization		451		388		63	16	%		1,309		1,193		116	10	%
Professional services		462		582		(120)	(21)	%		1,315		1,609		(294)	(18)	%	(c)
Office supplies, telephone and postage		384		344		40	12	%		1,127		1,062		65	6	%
Marketing and promotion		273		245		28	11	%		805		725		80	11	%
Amortization of intangible assets		270		279		(9)	(3)	%		741		935		(194)	(21)	%	(d)
FDIC and other assessments		45		57		(12)	(21)	%		140		167		(27)	(16)	%
Other		1,008		953		55	6	%		2,848		2,850		(2)	0	%
Total noninterest expense	$	9,531	$	9,132	$	399	4	%	$	27,942	$	27,439	$	503	2	%
Efficiency ratio		90.09%		89.63%						86.78%		84.73%

(a)

Salary and benefit expenses are higher due to the addition of senior management personnel and other employees associated with our growth initiatives.

(b)

Occupancy costs are higher due to our growth initiatives.

(c)

Professional service fees are lower in 2006 because legal fees have been reduced as a result of the successful conclusion of a legal proceeding in early 2006.

(d)

In 2006 certain intangible assets became fully amortized.

Income Tax Provision. Our provision for income taxes for the quarter ended September 30, 2006 was $246,000 as compared to $305,000 the same period in 2005. The estimated effective tax rates for the three-month periods ended September 30, 2006 and 2005 were 23.5% and 28.8%, respectively. The effective tax rate was lower in the third quarter of 2006 because the estimated annual ratio of nontaxable items to income before taxes was higher than in 2005.The provision for income taxes for the nine-month period ended September 30, 2006 and 2005 was $1,134 and $1,243, respectively. The estimated effective tax rates for the nine-month periods ended September 30, 2006 and 2005 were 28.0% and 26.5%, respectively.

Comparison of Financial Condition at September 30, 2006 and December 31, 2005

Assets. Total assets were $676.0 million at September 30, 2006, declining from $740.0 million at December 31, 2005. This was primarily due to the $82.4 million decrease in participating interests in mortgage loans, which vary according to the volume of mortgage loans originated by the Company’s mortgage banking counterparty. Total loans held for investment at September 30, 2006 were $357.4 million compared to $411.7 million at December 31, 2005. However, loans held for investment increased to $338.4 million at September 30, 2006, from $310.4 million at December 31, 2005, if participating interests in mortgage loans are excluded. Investment securities available for sale declined to $194.8 million at September 30, 2006, compared to $227.2 million at December 31, 2005, as a result of the Company’s asset-liability management strategies.

The following table presents our assets by category as of September 30, 2006 and December 31, 2005, as well as the amount and percent of change between the two dates (amounts are in thousands):

	September 30,		December 31,		Change
Assets	2006		2005		$		%
	(unaudited)
Cash and due from banks	$	15,138	$	28,824	$	(13,686)	(47)	%	(a)
Federal funds sold		31,000		-		31,000	100	%	(b)
Investment securities available for sale		194,798		227,185		(32,387)	(14)	%	(c)
Federal Reserve Bank and Federal Home Loan Bank stock		5,003		5,791		(788)	(14)	%
Loans held for sale		3,088		266		2,822	1,061	%
Participating interests in mortgage loans		18,956		101,336		(82,380)	(81)	%	(d)
Loans and leases held for investment, net		335,065		307,180		27,885	9	%
Premises and equipment, net		24,185		23,514		671	3	%
Interest receivable		3,155		3,330		(175)	(5)	%
Other assets		15,469		13,851		1,618	12	%	(e)
Goodwill		22,744		21,839		905	4	%
Other intangible assets, net		7,378		6,900		478	7	%
Total assets	$	675,979	$	740,016	$	(64,037)	(9)	%

(a)

These balances typically vary significantly on a daily basis. The higher balance at December 31, 2005 is attributable to large cash wires received late on that day.

(b)

The balance of fed funds sold is higher in 2006 as a result of management’s decision to shorten the duration of investments due to the flat yield curve and maintain liquidity in order to have the ability to repay higher cost liabilities.

(c)

The decrease in investments was the result of management’s decision to use the proceeds from matured or sold investments to pay down higher cost borrowings and reinvest in loans.

(d)

Participating interests in mortgage loans are collateralized by a portfolio of mortgage loans owned by a mortgage banking entity. We advance funds to the mortgage banking entity when they close on loans and are repaid whenever the mortgage banking entity sells loans. Our investment in the participation will vary depending on the volume of business at the mortgage banking entity.

(e)

Other assets have increased at September 30, 2006 compared to December 31, 2005 due to higher earnings on bank owned life insurance and higher prepaid expenses.

Allowance for Credit Losses. The following table sets forth information regarding changes in our allowance for credit losses for the three and nine month periods ending September 30, 2006 and 2005 (amounts are in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Balance, beginning of period	$	3,387	$	3,538	$	3,188	$	3,335
Provision for credit losses		-		-		210		250
Loans charged off		(15)		(358)		(46)		(555)
Loans recovered		2		32		22		182
Balance, end of period	$	3,374	$	3,212	$	3,374	$	3,212

	As of September 30,
	2006		2005
	(unaudited)		(unaudited)
Total loans held for investment	$	357,395	$	427,865
Loans held for investment, excluding participating interests in mortgage loans	$	338,439	$	312,944
Allowance for credit losses as a percentage of total loans held for investment		0.94%		0.75%
Allowance for credit losses as a percentage of total loans held for investment, excluding participating interests in mortgage loans		1.00%		1.03%

As of September 30, 2006, our allowance for credit losses was 0.94 percent of total loans held for investment compared to 0.77 percent as of December 31, 2005. Our allowance for credit losses was 1.00 percent of loans held for investment, excluding participating interests in mortgage loans, as of September 30, 2006 compared to 1.03 percent at December 31, 2005.

Net charge offs as a percentage of loans held for investment:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2006	2005	2006	2005
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Ratio of net recoveries (charge-offs) to average total loans held for investment	(0.004)%	(0.083)%	(0.007)%	(0.105)%
Ratio of net recoveries(charge-offs) to average total loans held for investment, excluding participating interests in mortgage loans	(0.004)%	(0.105)%	(0.007)%	(0.124)%
Ratio of net recoveries(charge-offs) to average total loans held for investment, annualized	(0.016)%	(0.332)%	(0.009)%	(0.140)%
Ratio of net recoveries(charge-offs) to average total loans held for investment, excluding participating interests in mortgage loans, annualized	(0.017)%	(0.419)%	(0.010)%	(0.165)%

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:

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

Reserves for Homogeneous Loan Pools. 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, which 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.

Qualitative Reserve. Our senior lending management also allocates reserves for special situations, which are unique to the measurement period. These include, among other things, prevailing economic trends, such as economic conditions in certain geographic or industry segments of our portfolio, management’s assessment of credit risk inherent in the loan portfolio, delinquency trends, and historical loss experience.

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 our allowance for credit losses on a timely basis. Management also considers 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 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.

Nonperforming Assets. The following table sets forth information concerning our nonperforming assets as of the dates indicated (amounts are in thousands):

	September 30,		December 31,
	2006		2005
Nonperforming loans:	(unaudited)		(unaudited)
Nonaccrual loans		108		143
Total nonperforming loans		108		143
Total nonperforming assets	$	108	$	143
Allowance for credit losses	$	3,374	$	3,188

	September 30,		December 31,
	2006		2005
	(unaudited)		(unaudited)
Ratio of total nonperforming loans to total loans held for investment		0.03%		0.03%
Ratio of total nonperforming loans to total loans held for investment, excluding participating interests in mortgage loans		0.03%		0.05%
Ratio of total nonperforming assets to total assets		0.02%		0.02%
Ratio of allowance for credit losses to nonperforming loans		3,123%		2,229%

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.

Other real estate owned and repossessed assets represent 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 $1,000 of other real estate owned and repossessed assets at September 30, 2006 and no other real estate owned and repossessed at December 31, 2005.

Liabilities. The following table presents our liabilities by category as of September 30, 2006 and December 31, 2005 as well as the amount and percent of change between the two dates (amounts are in thousands):

	September 30,		December 31,		Change
Liabilities	2006		2005		$		%
	(unaudited)
Deposits:
Noninterest-bearing	$	63,316	$	72,977	$	(9,661)	(13)	%	(a)
Interest-bearing -
Savings, interest checking and money market		253,762		260,807		(7,045)	(3)	%
Time deposits $100,000 and over		46,274		71,287		(25,013)	(35)	%	(b)
Other time deposits		146,253		143,719		2,534	2	%	(b)
Short-term borrowings		14,512		21,416		(6,904)	(32)	%	(c)
FHLB advances		62,200		82,200		(20,000)	(24)	%	(c)
Long-term borrowings		2,167		3,850		(1,683)	(44)	%	(c)
Guaranteed preferred beneficial interests in Company’s subordinated debentures		22,484		22,648		(164)	(1)	%
Other liabilities		10,057		9,500		557	6	%
Total liabilities	$	621,025	$	688,404	$	(67,379)	(10)	%

(a)

These accounts fluctuate daily due to the cash management activities of our customers, particularly our business customers.

(b)

The balances of deposits has declined as a result of managements’ decision to let higher cost brokered and national CD’s mature. We have also grown, or maintained, other core deposit accounts.

(c)

The balances of borrowings are lower because we have used liquid assets and proceeds from matured, and sold, investments to pay down higher cost borrowings.

Stockholders’ Equity. Our stockholders’ equity increased $3.3 million between December 31, 2005 and September 30, 2006. The increase to stockholder’s equity was a result of earnings and shares issued to facilitate an acquisition partially offset by an increase in deferred compensation.

Capital Adequacy 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 upon the amount and composition of assets recorded on the balance sheet, the amount and composition of off-balance-sheet items, and the amount of capital. As of September 30, 2006, BNCCORP and the Bank exceeded capital adequacy requirements and the Bank was considered “well-capitalized” under prompt corrective action provisions. The following table includes the risk-based and leverage capital ratios of the Company and the Bank as of September 30, 2006:

	Tier 1 Risk-	Total Risk-	Tier 1 Leverage
	Based Ratio	Based Ratio	Ratio
As of September 30, 2006
BNCCORP, consolidated	9.40%	10.83%	6.90%
BNC National Bank	10.38%	11.07%	7.62%

As of September 30, 2005
BNCCORP, consolidated	8.08%	9.72%	5.79%
BNC National Bank	9.63%	10.27%	6.90%

Liquidity. 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.

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 on terms ranging from overnight to 10 years and beyond. Advances from the FHLB are collateralized by the Bank’s mortgage loans and various investment securities. We have also obtained funding through the issuance of subordinated notes, subordinated debentures and long-term borrowings.

The following table sets forth a summary of our major sources and (uses) of funds. The summary information is derived from the consolidated statements of cash flows included under Item 1 (amounts are in thousands):

	For the Nine Months Ended September 30,
Major Sources and (Uses) of Funds	2006		2005
	(unaudited)		(unaudited)
Net decrease (increase) in participating interest mortgage loans	$	82,380	$	(80,406)
Originations paid on loans to be participated		(81,667)		(116,701)
Proceeds received from participations of loans		81,667		116,701
Net (decrease) increase in deposits		(39,185)		105,292
Proceeds from sales of investment securities		39,154		2,572
Purchase of Federal funds sold, net		(31,000)		(7,500)
Net increase in loans, excluding participating interests in mortgage loans		(28,117)		(19,685)
Purchases of investment securities		(26,052)		(15,222)
Repayments of Federal Home Loan Bank Advances		(20,000)		(270,000)
Proceeds from Federal Home Loan Bank Advances		-		260,000
Originations of loans held for sale		(20,384)		(59,382)
Proceeds from sale of loans held for sale		17,562		(84,062)
Proceeds from maturities of investment securities		17,984		20,831
Net decrease in short-term borrowings		(6,904)		(26,668)

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

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

As of September 30, 2006, the Bank had established federal funds purchase programs with three banks, totaling $17.5 million. At September 30, 2006, the Bank had purchased no federal funds under these programs. The federal funds purchase programs, if advanced upon, mature daily with interest rates that float at the Federal funds rate. The Bank has also been approved for repurchase agreement lines of up to $100.0 million with a major financial institution. The lines, if utilized, would be collateralized by investment securities.

Application of Critical Accounting Policies

The following critical accounting policies are dependent of estimates that are particularly susceptible to significant change. The Company considers the following accounting policies and related estimates to be the most critical in their potential effect on its financial position or results of operations:

Allowance for Credit Losses

Goodwill Impairment

Interest Income Recognition

Income Taxes

For detailed information regarding these policies, refer to the 2005 10-K.

Forward-Looking Statements

Statements included in Item 2, “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 of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (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.

Item 3. 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, caps, and interest rate swaps, 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.

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 September 30, 2006 levels. Cash flows from a given account are reinvested back into the same account so as to keep the month-end balance constant at its September 30, 2006 level. The static balance sheet assumption is made so as to project the interest rate risk to net interest income embedded in the existing balance sheet. With knowledge of the balance sheet’s existing net interest income profile, more informed strategies and tactics may be developed as it relates to the structure/mix of growth.

We monitor the results of net interest income simulation on a quarterly basis at regularly scheduled ALCO meetings. Each quarter net interest income is generally simulated for the upcoming 12-month horizon in seven interest scenarios. The scenarios generally modeled are parallel interest ramps of +/- 100bp, 200bp, and 300bp along with a rates unchanged scenario. The parallel movement of interest rates means all projected market interest rates move up or down by the same amount. A ramp in interest rates means that the projected change in market interest rates occurs over the 12-month horizon on a pro-rata basis. For example, in the +100bp scenario, the projected prime rate will increase from its starting point at September 30, 2006 of 8.25 percent to 9.25 percent 12 months later. The prime rate in this example will increase 1/12^th of the overall increase of 100 basis points each month. As the yield curve has inverted over the course of the past several months with short-term rates increasing more than long-term rates, the parallel movement of interest rates takes the level of the 10-year U.S. Treasury note yield in the -300bp scenario to 1.63 percent. This is nearly 148bp below the June 13, 2003 low for the 10-year U.S. Treasury note yield of 3.11 percent. Therefore, the level of mortgage prepayment

activity built into the model is significantly less than the record levels experienced during the 2003 lows in mortgage rates. The net interest income simulation results for the 12-month horizon is shown below:

Net Interest Income Simulation

(amounts are in thousands)

Movement in interest rates		-300bp		-200bp		-100bp		Unchanged		+100bp		+200bp		+300bp
Projected 12-month net interest income	$	17,118	$	17,785	$	18,486	$	18,771	$	18,906	$	18,958	$	18,747
Dollar change from unchanged scenario	$	(1,653)	$	(986)	$	(285)		-	$	135	$	187	$	(24)
Percentage change from unchanged scenario		(8.80)%		(5.25)%		(1.52)%		-		0.72%		1.00%		(0.13)%
Policy guidelines (decline limited to)		(15.00)%		(10.00)%		(5.00)%		-		(5.00)%		(10.00)%		(15.00)%

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 percentage reduction in net interest income resulting from changes in interest rates over the 12-month period. It is no less important, however, to give attention to the absolute dollar level of projected net interest income over the 12-month period.

Our general policy is to limit the percentage decrease in projected net interest income to 5, 10 and 15 percent from the rates unchanged scenario for the +/- 100bp, 200bp, and 300bp interest rate ramp scenarios, respectively. A targeted level of net interest income is established and approved by the Board of Directors and ALCO. This target is reevaluated and reset at each quarterly ALCO meeting.

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 September 30, 2006 (without forward adjustments for planned growth and anticipated business activities) and do not contemplate any actions we might undertake in response to changes in market interest rates.

Item 4. Controls and Procedures

Quarterly evaluation of the Company’s Disclosure Controls and Internal Controls. As of the end of the period covered by this quarterly report on Form 10-Q, 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 quarterly 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 quarterly 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 quarterly 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, 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, 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 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 of America.

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 quarterly 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 goal of these various evaluation activities is 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.

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 of America. 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 II – Other Information

Item 1. Legal Proceedings

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 6. Exhibits

(a)

Exhibit 31.1 Chief Executive Officer’s Certification Under Rule 13a-14(a) of the Exchange Act

Exhibit 31.2 Chief Financial Officer’s Certification Under Rule 13a-14(a) of the Exchange Act

Exhibit 32.1 Chief Executive Officer and Chief Financial Officer Certifications Under Rule 13a-14(b) of the Exchange Act

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BNCCORP, Inc.

Date:	November 3, 2006	By	/s/ Gregory K. Cleveland
			Gregory K. Cleveland
			President and Chief Executive Officer

		By	/s/ Timothy J. Franz
			Timothy J. Franz
			Chief Financial Officer