Edgar Filing: BNCCORP INC

Form 10-Q for period ended 3-31-07

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 March 31, 2007

[ ]

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 45-0402816

(State or other jurisdiction of incorporation or organization) (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 [ ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]

Accelerated filer [ ]

Non-accelerated filer [x]

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

The number of shares of the registrant’s outstanding common stock on May 10, 2007 was 3,601,767.

BNCCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2007

TABLE OF CONTENTS

	PART I. - FINANCIAL INFORMATION
ITEM 1	Financial Statements
	Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006	4
	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2006 and 2007	5
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2007 and 2006	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006	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 March 31, 2007 and 2006	14
	Comparison of Financial Condition at March 31, 2007 and December 31, 2006	17
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	22
ITEM 4	Controls and Procedures	24
	PART II. - OTHER INFORMATION
ITEM 1	Legal Proceedings	25
ITEM 6	Exhibits	26

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements


BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)

ASSETS		March 31, 2007		December 31, 2006
		(unaudited)
CASH AND CASH EQUIVALENTS	$	14,756	$	18,218
FEDERAL FUNDS SOLD		22,000		24,000
INVESTMENT SECURITIES AVAILABLE FOR SALE		176,554		182,974
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK		5,003		5,003
LOANS HELD FOR SALE		526		1,669
PARTICIPATING INTERESTS IN MORTGAGE LOANS		45,204		56,125
LOANS AND LEASES HELD FOR INVESTMENT		367,705		333,934
ALLOWANCE FOR CREDIT LOSSES		(3,615)		(3,370)
Net loans and leases		409,294		386,689
PREMISES AND EQUIPMENT, net		24,078		24,286
INTEREST RECEIVABLE		3,261		3,309
OTHER ASSETS		15,437		16,278
GOODWILL		23,503		22,743
OTHER INTANGIBLE ASSETS, net		6,836		7,107
	$	701,248	$	692,276

LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Non-interest-bearing	$	74,217	$	84,184
Interest-bearing -
Savings, interest checking and money market		273,684		253,408
Time deposits $100,000 and over		43,543		44,955
Other time deposits		146,610		146,705
Total deposits		538,054		529,252
SHORT-TERM BORROWINGS		10,361		9,709
FEDERAL HOME LOAN BANK ADVANCES		62,200		62,200
LONG-TERM BORROWINGS		-		1,167
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S SUBORDINATED DEBENTURES		22,482		22,711
OTHER LIABILITIES		10,378		11,635
Total Liabilities		643,475		636,674
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value - 10,000,000 shares authorized; 3,600,567 and 3,600,467 shares issued and outstanding (excluding shares held in treasury)		36		36
Capital surplus - common stock		25,977		25,950
Retained earnings		33,682		32,125
Treasury stock (49,186 shares)		(598)		(598)
Accumulated other comprehensive loss, net		(1,324)		(1,911)
Total stockholders’ equity		57,773		55,602
	$	701,248	$	692,276

See accompanying notes to consolidated financial statements.

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

		2007		2006
INTEREST INCOME:		(unaudited)		(unaudited)
Interest and fees on loans	$	8,336	$	7,360
Interest and dividends on investments -
Taxable		2,251		2,426
Tax-exempt		231		519
Dividends		58		56
Total interest income		10,876		10,361
INTEREST EXPENSE:
Deposits		4,457		3,815
Short-term borrowings		110		193
Federal Home Loan Bank advances		936		1,039
Long-term borrowings		9		67
Subordinated debentures		565		551
Total interest expense		6,077		5,665
Net interest income		4,799		4,696
PROVISION FOR CREDIT LOSSES		250		210
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		4,549		4,486
NON-INTEREST INCOME:
Insurance income		5,811		5,362
Bank charges and service fees		541		470
Gains on sales of loans		363		436
Wealth management income		456		333
Net losses on sales of securities		-		(599)
Other		336		168
Total non-interest income		7,507		6,170
NON-INTEREST EXPENSE:
Salaries and employee benefits		6,283		5,748
Occupancy		628		643
Depreciation and amortization		495		424
Data processing		345		263
Office supplies, telephone and postage		381		366
Professional services		243		392
Marketing and promotion		255		278
Amortization of intangible assets		271		228
FDIC and other assessments		57		49
Other		769		820
Total non-interest expense		9,727		9,211
Income before income taxes		2,329		1,445
Income tax provision		772		428
Net income	$	1,557	$	1,017
Basic earnings per common share	$	0.44	$	0.30
Diluted earnings per common share	$	0.44	$	0.29

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
For the Three Months Ended March 31,
(In thousands, except share data, unaudited)

				Capital						Accumulated
				Surplus						Other
	Common Stock			Common		Retained		Treasury		Comprehensive
	Shares	Amount		Stock		Earnings		Stock		Income (Loss)		Total
BALANCE, December 31, 2005	3,497,445	$	35	$	25,108	$	28,504	$	(559)	$	(1,476)	$	51,612
Net income	-		-		-		1,017		-		-		1,017
Other comprehensive loss	-		-		-		-		-		(1,462)		(1,462)
Impact of share- based compensation	32		-		55		-		(6)		-		49
Issuance of common shares	-		-		-		-		-		-		-
BALANCE, March 31, 2006	3,497,477	$	35	$	25,163	$	29,521	$	(565)	$	(2,938)	$	51,216

BALANCE, December 31, 2006	3,600,467	$	36	$	25,950	$	32,125	$	(598)	$	(1,911)	$	55,602
Net income	-		-		-		1,557		-		-		1,557
Other comprehensive gain	-		-		-		-		-		587		587
Impact of share- based compensation	100		-		27		-		-		-		27
Issuance of common shares	-		-		-		-		-		-		-
BALANCE, March 31, 2007	3,600,567	$	36	$	25,977	$	33,682	$	(598)	$	(1,324)	$	57,773

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31
(In thousands)

	2007				2006
	(unaudited)				(unaudited)
NET INCOME			$	1,557			$	1,017
Unrealized gain (loss) on cash flow hedge, net	$	40			$	(333)
Unrealized gain (loss) on securities available for sale		893				(2,420)
Reclassification adjustment for loss included in net income		-				599
Other comprehensive income (loss), before tax		933				(2,154)
Income tax (expense) benefit related to items of other comprehensive income		(346)				692
Other comprehensive income (loss)		587		587		(1,462)		(1,462)
TOTAL COMPREHENSIVE INCOME (LOSS)			$	2,144			$	(445)

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31
(In thousands)
		2007		2006
		(unaudited)		(unaudited)
OPERATING ACTIVITIES:
Net income	$	1,557	$	1,017
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		250		210
Depreciation and amortization		495		424
Amortization of intangible assets		271		228
Amortization of share based compensation		27		-
Net amortization of premiums and discounts on investment securities and subordinated debentures		220		356
Proceeds from recoveries on loans		1		13
Change in interest receivable and other assets, net		583		(806)
Losses (gains) on disposals of premises and equipment, net		27		(5)
Net realized losses on sales of investment securities		-		599
Change in other liabilities, net		(1,257)		678
Originations of loans to be participated		(41,418)		(24,894)
Proceeds from participations of loans		41,418		24,894
Funding of originations of loans held for sale		(2,852)		(6,083)
Proceeds from sale of loans held for sale		3,995		5,118
Net cash provided by operating activities		3,317		1,749
INVESTING ACTIVITIES:
Decrease (increase) Federal funds sold, net		2,000		(50,000)
Purchases of investment securities		-		(10,115)
Proceeds from sales of investment securities		-		17,484
Proceeds from maturities of investment securities		7,097		5,629
Purchases of Federal Reserve and Federal Home Loan Bank Stock		-		(7)
Net decrease in participating interests in mortgage loans		10,921		67,916
Net increase in loans, excluding participating interests in mortgage loans		(33,777)		(27,542)
Additions to premises and equipment		(314)		(440)
Cash paid for acquisition of insurance subsidiary, net		(600)		-
Cash paid for insurance company earnout		(160)		(160)
Other		-		17
Net cash (used in) provided by in investing activities		(14,833)		2,782
FINANCING ACTIVITIES:
Net increase (decrease) in deposits		8,802		(7,904)
Net increase (decrease) in short-term borrowings		652		(5,703)
Repayments of long-term borrowings		(1,167)		(683)
Change in subordinated debentures		(233)		(222)
Purchase of treasury stock		-		49
Net cash provided by (used in) financing activities		8,054		(14,463)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,462)		(9,932)
CASH AND CASH EQUIVALENTS, beginning of period		18,218		28,824
CASH AND CASH EQUIVALENTS, end of period	$	14,756	$	18,892
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	5,966	$	5,431
Income taxes paid	$	253	$	153

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2007

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 27 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 March 31, 2007 and for the three-month periods ended March 31, 2007 and 2006 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, 2007.

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, 2006. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2006 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, 2006 and the notes thereto.

NOTE 3 - Reclassifications

Certain of the 2006 amounts have been reclassified to conform to the 2007 presentations. These reclassifications had no effect on net income or stockholders’ equity.

NOTE 4 - Recently Issued or Adopted Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115. This Statement permits entities to measure many financial instruments and other items at fair value and most of the provisions of the Statement apply only to entities that elect the fair value option. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not completed our analysis of the statement, but we believe the impact of adopting SFAS No. 159 on January 1, 2008 will not have a material impact on the Company’s financial statements.

The Company adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 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. See Footnote 11, “Income Taxes,” for additional information.

In March 2006, FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140. Effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006, an entity is required to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset. SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value and permits, but does not require, the subsequent measurement of servicing assets and liabilities at fair value. It also permits a one-time reclassification, at the time of initial adoption, of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value. Separate presentation of servicing assets and liabilities subsequently measured at fair value are required to be disclosed in the statement of financial position. The provisions of SFAS No. 156 were adopted by the Company on January 1, 2007 and did not have a material impact on the Company’s results of operations or financial position. The Company elected to measure the subsequent measurements of the servicing assets and liabilities using the amortization method.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about the use of fair value to measure assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not completed our analysis of the statement, but we believe the impact of adopting SFAS No. 157 on January 1, 2008 will not have a material impact on the Company’s results of operations or financial position.

NOTE 5. Acquisitions and Divestitures

On March 14, 2007 the Company announced a definitive agreement to sell substantially all of the assets of the Company’s insurance agency, BNC Insurance Services, Inc., (“BNC Insurance”) which have been reported as a segment in Note 7. In connection with the sale the Company expects to receive cash proceeds of approximately $37.0 million and incur costs of approximately $1.0 million. Consummation of the transaction is subject to approval by the holders of the Company’s outstanding common stock at a special meeting to be held on May 23, 2007. The following is a summary of the results of operations for BNC Insurance for the years ended December 31, (in thousands):

	2006		2005		2004
Income:
Commission income	$	16,929	$	16,675	$	16,053
Contingent income		1,408		2,076		1,437
Intercompany interest income		225		90		45
Other income		316		278		809
Total income		18,878		19,119		18,344
Expenses:
Personnel expense		10,814		10,455		11,282
Amortization and depreciation		1,195		1,124		1,112
Intercompany management fees		1,050		547		427
Other		2,629		3,808		3,115
Total expenses		15,688		15,934		15,936
Incomes before income tax		3,190		3,185		2,408
Income tax expense		1,256		1,243		941
Net income	$	1,934	$	1,942	$	1,467

Following is a summary of unaudited results of operations for BNC Insurance for the three months ended March 31, (in thousands):

	2007		2006
Income:
Commission income		4,525		4,191
Contingent income		1,286		1,171
Intercompany interest income		62		41
Other income		-		28
Total income		5,873		5,431
Expenses:
Personnel expense		2,843		2,698
Amortization and depreciation		305		270
Intercompany management fees		277		137
Other		620		822
Total expenses		4,045		3,927
Incomes before income tax		1,828		1,504
Income tax expense		716		589
Net income		1,112		915

Following is a summary of the unaudited balance sheets for BNC Insurance as of the dates indicated, (in thousands):

	March 31, 2007		December 31, 2006
Assets:
Cash and cash equivalents	$	7,975	$	7,432
Receivable from customers		1,067		2,287
Intangible assets, net		29,814		29,297
Other assets		1,107		1,075
Total assets	$	39,963	$	40,091
Liabilities and stockholder’s equity:
Accounts payable	$	3,029	$	5,155
Intercompany payable		3,192		2,625
Other liabilities		3,715		3,395
Total liabilities		9,936		11,175
Total stockholder’s equity		30,027		28,916
Total liabilities and stockholder’s equity	$	39,963	$	40,091

On March 12, 2007, BNC Insurance acquired substantially all of the assets of an insurance agency located in Phoenix, Arizona. The total purchase price paid for the assets was $600,000, which was paid in cash. The results of operations of the acquired assets are included in the Company’s consolidated financial statements effective as of the date of acquisition.

On May 31, 2006, BNC Insurance acquired substantially all of the assets of an insurance agency located in Phoenix, Arizona. BNCCORP issued 38,485 shares of its common stock in this transaction. The shares were issued as partial consideration for the acquisition. The total purchase price paid for the assets was $2,000,000. Approximately $1,500,000 was paid in cash and the remainder was paid with shares of BNCCORP common stock. Of the approximate $2.0 million purchase price, approximately $1.1 million was allocated to an identifiable intangible asset and approximately $900,000 was recorded as goodwill. The results of operations of the acquired assets are included in the Company’s consolidated financial statements effective June 1, 2006.

NOTE 6 - Earnings Per Share

Net income per share for the three months ended March 31, was calculated as follows:

		2007		2006
Denominator for basic earnings per share:
Average common shares outstanding		3,501,003		3,449,067
Dilutive common stock options		55,174		36,873
Denominator for diluted earnings per share		3,556,177		3,485,940
Numerator: Net income	$	1,557	$	1,017
Net income per share
Basic	$	0.44	$	0.30
Diluted	$	0.44	$	0.29

As of March 31, 2007 and 2006 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 7 - 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. 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 operations provide a variety of financial services including, trust, asset management, financial planning, estate planning, estate administration, tax planning, payroll services, employee benefit plan design and employee plan administration. We also offer retirement accounts and prepare tax returns.

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, 2006.

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 unaudited segment profit or loss, assets and a reconciliation of segment information as of, and for the three months ended March 31, (in thousands):

						2007					2007
	Banking		Insurance		Wealth Mgmt		Bank Holding Co.		Totals		Intersegment Elimination		Consolidated Total
Net interest income	$	5,255	$	62	$	50	$	(585)	$	4,782	$	17	$	4,799
Other revenue-external customers		1,244		5,811		496		18		7,569		(62)		7,507
Segment profit (loss)		1,003		1,112		(144)		(414)		1,557		-		1,557
Segment assets		635,377		39,963		25,923		83,458		784,721		(83,473)		701,248
Efficiency ratios		74.36%		68.73%		143.22%		117.6%		82.04%		-		78.98%

		2006										2006
		Banking	Insurance			Wealth Mgmt		Bank Holding Co.	Totals		Intersegment Elimination		Consolidated Total
Net interest income	$	5,037	$	41	$	228	$	(626)	$	4,680	$	16	$	4,696
Other revenue-external customers		443		5,390		368		24		6,225		(55)		6,170
Segment profit (loss)		527		915		(35)		(390)		1,017		-		1,017
Segment assets		642,196		38,093		45,364		81,194		806,847		(81,082)		725,765
Efficiency ratios		82.85%		72.31%		109.40%		160.5%		87.06%		-		84.77%

NOTE 8 - 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, restricted stock, and other stock- based 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, related to grants of restricted stock, of $27,375 for the three months ended March 31, 2007, and $57,535 for the three months ended March 31, 2006. No stock options were granted during these periods.

At March 31, 2007, the Company had $935,772 of unamortized restricted stock compensation. The grants are generally amortized over three years. At December 31, 2006 the Company had approximately $1.1 million of unamortized restricted stock compensation. At March 31, 2006, the company had approximately $12,000 of unrecognized share-based compensation expense related to stock options. There was no unrecognized share-based compensation expense related to stock options at March 31, 2007.

NOTE 9 - 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. 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 March 31, 2007, 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 March 31, 2007, the fair value of the floor was $206,000, which was included in other assets. The change in net unrealized gains of $40,000 during the three months ended March 31, 2007 for the derivative 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.

NOTE 10 - 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 March 31, 2007 or December 31, 2006. The carrying amount of available-for-sale securities and their approximate fair values were as follows (in thousands):

As of March 31, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agency mortgage-backed securities	$	9,306	$	26	$	(128)	$	9,204
Collateralized mortgage obligations		151,309		50		(2,919)		148,440
State and municipal bonds		17,765		1,145		-		18,910
	$	178,380	$	1,221	$	(3,047)	$	176,554


As of December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agency mortgage-backed securities	$	10,314	$	56	$	(109)	$	10,261
Collateralized mortgage obligations		157,652		16		(3,821)		153,847
State and municipal bonds		17,727		1,139		-		18,866
	$	185,693	$	1,211	$	(3,930)	$	182,974

In reaching the conclusion that the unrealized losses 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 unrealized losses were due to deterioration in credit quality that might result in the non-collection of contractual principal and interest. The cause of the unrealized losses is, in general, attributable to changes in interest rates.

NOTE 11 - Income Taxes

The Company adopted FIN 48 on January 1, 2007. Although the implementation of FIN 48 did not impact the amounts in our financial statements, the Company does have an unrecognized tax benefit of approximately $220,000 at January 1, 2007 and March 31, 2007. If this benefit was recognized, it would affect the Company’s effective tax rate. This amount includes estimated interest of $35,000 and no penalties. The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ending December 31, 2003 through 2006 remain open to examination, although there are no examinations in progress at this time.

The Company had no material increases or decreases in unrecognized tax benefits as a result of tax positions taken during a prior period, during the current period, relating to settlements with taxing authorities, or as a result of a lapse of the applicable statute of limitations.

It is reasonably possible the unrecognized tax benefit discussed above may be reduced by $75,000 within the next 12 months. This amount includes $15,000 of interest and no penalties. The nature of the uncertainty relates to tax filings for 2003.

In accordance with the Company’s accounting policy, accrued interest and penalties related to unrecognized tax benefits would be recognized as a component of the provision for income taxes. No interest or penalties were recorded in the current period.

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 March 31, 2007 and 2006

General. Net income was $1.6 million, or $0.44 per share on a diluted basis, for the first quarter ended March 31, 2007. This compared with net income for the first quarter ended March 31, 2006, of $1.0 million, or $0.29 per diluted share.

The strong 2007 first quarter results reflected a continuation of several recent trends, including higher net interest income, higher wealth management fees and low provisions for credit losses. Net interest income increased by 2.2 percent to $4.8 million, and the net interest margin increased by 24 basis points to 3.21 percent in the first quarter. Non-interest income increased by 21.7 percent to $7.5 million in the first quarter while non-interest expense increased by 5.6 percent to $9.7 million.

Net interest income was $4.8 million for the first quarter of 2007, up from the $4.7 million in the first quarter of 2006. This reflects an increase in the net interest margin to 3.21 percent, for the quarter ended March 31, 2007, from 2.97 percent for the same period in 2006. The improvement in net interest margin was largely due to higher balances of loans held for investment, excluding participating interests in mortgage loans, and higher rates earned on these assets. While the rates paid on deposits have increased in 2007, this increase was partially mitigated by lower interest expense on brokered deposits and borrowings. Overall, the yield on interest earning assets for the period ended March 31, 2007 was 7.29 percent compared to 6.55 percent for the period in the prior year, an increase of 74 basis points. The cost of interest- bearing liabilities was 4.45 percent compared to 3.85 percent, an increase of 60 basis points.

Non-interest income was $7.5 million for the 2007 first quarter, an increase of $1.3 million, or 21.7 percent, from $6.2 million in the first quarter of 2006. Insurance agency income was up by $449,000. Gains on sales of loans and securities totaled $363,000 in 2007 versus an aggregate loss of $163,000 in the 2006 first quarter. The revenue resulting from such activities will vary significantly from period to period. Wealth management fees increased to $456,000, up by $123,000 or 36.9 percent, while bank fees and service charges rose to $541,000 increasing by $71,000, or 15.1 percent. These sources of revenue tend to be more consistent from period to period.

Non-interest expense increased by $516,000, or 5.6 percent, to $9.7 million in the first quarter of 2007 compared to $9.2 million in 2006. This increase primarily reflects continued investment in wealth management professionals and expansion of banking activities.

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 month periods ended March 31, 2007 and 2006, as well as the changes between the periods presented, (amounts are in thousands):

	Three Months Ended March 31,
	2007					2006					Change
	Average balance		Interest earned or owed		Average yield or cost	Average balance		Interest earned or owed		Average yield or cost	Average balance		Interest earned or owed		Average yield or cost
Interest-earning assets
Federal funds sold/interest-bearing due from	$	30,825	$	390	5.13%	$	39,110	$	421	4.37%	$	(8,285)	$	(31)	0.76%	(a)
Investments - Taxable		165,758		1,919	4.70%		182,876		2,062	4.57%		(17,118)		(143)	0.13%	(b)
Investments - Tax Exempt		18,810		231	4.98%		46,897		519	4.49%		(28,087)		(288)	0.49%	(b)
Loans held for sale		377		-	0.00%		904		-	0.00%		(527)		-	0.00%
Participating interests in mortgage loans		41,519		812	7.93%		49,539		808	6.61%		(8,020)		4	1.32%	(c)
Loans and leases held for investment		351,458		7,524	8.68%		325,427		6,551	8.16%		26,031		973	0.52%	(d)
Allowance for loan losses		(3,372)		-			(3,173)		-			(199)		-
Total interest-earning assets	$	605,375		10,876	7.29%	$	641,580		10,361	6.55%	$	(36,205)		515	0.74%
Interest-bearing liabilities
Interest checking and money market accounts	$	256,947		2,103	3.32%	$	248,548		1,663	2.71%	$	8,399		440	0.61%
Savings		8,475		16	0.77%		8,376		16	0.77%		99		-	0.00%
Certificates of deposit under $100		149,631		1,775	4.81%		146,570		1,394	3.86%		3,061		381	0.95%
Certificates of deposit $100 and over		44,071		563	5.18%		67,282		742	4.47%		(23,211)		(179)	0.71%	(e)
Total interest-bearing deposits		459,124		4,457	3.94%		470,776		3,815	3.29%		(11,652)		642	0.65%
Short-term borrowings		9,891		110	4.51%		17,379		193	4.50%		(7,488)		(83)	0.01%	(f)
Federal Home Loan Bank advances		62,200		936	6.10%		82,200		1,039	5.13%		(20,000)		(103)	0.97%	(f)
Long-term borrowings		376		9	9.71%		3,832		67	7.09%		(3,456)		(58)	2.62%	(f)
Subordinated debentures		22,407		565	10.23%		22,360		551	9.99%		47		14	0.24%
Total borrowings		94,874		1,620	6.92%		125,771		1,850	5.97%		(30,897)		(230)	0.95%
Total interest-bearing liabilities	$	553,998		6,077	4.45%	$	596,547		5,665	3.85%	$	(42,549)		412	0.60%
Net interest income/spread			$	4,799	2.84%			$	4,696	2.70%			$	103	0.14%
Net interest margin					3.21%					2.97%					0.24%
Notation:
Non-interest-bearing deposits	$	69,918		-		$	67,201		-		$	2,717		-
Total deposits	$	529,042	$	4,457	3.42%	$	537,977	$	3,815	2.88%	$	(8,935)	$	642	0.54%
Taxable equivalents:
Total interest-earning assets	$	605,375	$	10,997	7.37%	$	641,580	$	10,628	6.72%	$	(36,205)	$	369	0.65%
Net interest income/spread		-	$	4,920	2.92%		-	$	4,963	2.87%		-	$	(43)	0.05%
Net interest margin		-		-	3.30%		-		-	3.14%		-		-	0.16%

(a)	The average balance of Federal funds sold will vary from period to period depending on the yield curve and the relative balances of loans, investment securities, deposits and borrowings.

(b)	The decrease in average investments is the result of management’s strategy to use proceeds from sales and maturities of investments to pay down higher cost borrowings and reinvest in loans.

(c)

Participating interests in mortgage loans are collateralized by mortgage loans owned by mortgage banking counterparties. We advance funds when the counterparties close 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.

(d)	Loans and leases continue to increase as we improve our ability to generate loans.

(e)	The average balance of certificates of deposits has declined as a result of management’s decision to let higher cost brokered and national CD’s mature.

(f)	The average balances of borrowings are lower because we have used liquid assets and proceeds from sales and maturities of investments to pay down higher cost borrowings.

Non-interest Income. The following table presents the major categories of our non-interest income for the three month periods ended March 31, 2007 and 2006 (amounts are in thousands):

	Three Months Ended				Increase (Decrease)
	March 31,				2007 - 2006
Non-interest Income		2007		2006	$		%
Insurance income	$	5,811	$	5,362	$	449	8	%	(a)
Bank charges and service fees		541		470		71	15	%	(b)
Gain on sales of loans		363		436		(73)	(17)	%	(c)
Wealth management income		456		333		123	37	%	(d)
Net loss on sales of securities		-		(599)		599	(100)	%	(c)
Other		336		168		168	100	%	(e)
Total non-interest income	$	7,507	$	6,170	$	1,337	22	%

Non-interest income as a percent of gross revenues		61.0%		56.8%		7.4%

(a)

Insurance revenues are up as a result of increased contingency income and increased commissions. Contingency income received from insurance underwriters was $1.3 million in the quarter ended March 31, 2007 compared to $1.2 million for same period in 2006. Contingent income tends to vary from period to period and is mostly earned in the first quarter of the year. Commission income was approximately $332,000 higher in the first quarter of 2007 than in 2006. We have acquired agencies in the last year and the increase in commissions are partially attributed to the acquisitions.

(b)	Increases in bank charges and service fees can be attributed to an increase in the number of banking relationships, newer banking products and revised pricing for products and services.

(c)	Gains and losses on sales of loans and securities vary from period to period depending on the nature and number of transactions consummated.

(d)	Wealth management income has increased due to an increase in assets under management.

(e)	Other income increased primarily due to a success fee of approximately $170,000 received in the first quarter of 2007. This type of fee does not recur regularly.

Non-interest Expense. The following table presents the major categories of our non-interest expense for the three month periods ended March 31, 2007 and 2006 (amounts are in thousands):

	Three Months Ended				Increase (Decrease)
	March 31,				2007 - 2006
Non-interest Expense	2007			2006	$		%
Salaries and employee benefits	$	6,283	$	5,748	$	535	9%	(a)
Occupancy		628		643		(15)	(2)%
Depreciation and amortization		495		424		71	17%
Data processing		345		263		82	32%	(b)
Office supplies, telephone and postage		381		366		15	4%
Professional Services		243		392		(149)	(38)%	(c)
Marketing and promotion		255		278		(23)	(8)%
Amortization of intangible assets		271		228		43	19%
FDIC and other assessments		57		49		8	16%
Other		769		820		(51)	(6)%
Total non-interest expense	$	9,727	$	9,211	$	516	6%
Efficiency ratio		79.0%		84.8%

(a)	Salaries and benefits increased due to continued investment in the wealth management segment and expansion of banking activities.

(b)	Increased due to the implementation of new procedures and higher maintenance costs.

(c)	These costs have decreased due to managements’ efforts to control expenses.

Income Tax Provision. The income tax provision for the quarter ended March 31, 2007 was $772,000 as compared to $428,000 for the same period in 2006. The effective tax rate for the three month periods ended March 31, 2007 and 2006 were 33.1 percent and 29.6 percent, respectively. It is anticipated pre-tax income will be higher and tax exempt income will be lower in 2007 compared to 2006.

Comparison of Financial Condition at March 31, 2007 and December 31, 2006

Assets. Total assets were $701.2 million and $692.3 million at March 31, 2007 and December 31, 2006, respectively.

The following table presents our assets by category as of March 31, 2007 and December 31, 2006, as well as the amount and percent of change between the two dates (amounts are in thousands):

	March 31,		December 31,		Change
Assets	2007		2006		$		%
Cash and due from banks	$	14,756	$	18,218	$	(3,462)	(19)	%	(a)
Federal funds sold		22,000		24,000		(2,000)	(8)	%
Investment securities available for sale		176,554		182,974		(6,420)	(4)	%
Federal Reserve Bank and Federal Home Loan Bank stock		5,003		5,003		-	-	%
Loans held for sale		526		1,669		(1,143)	(68)	%	(b)
Participating interests in mortgage loans		45,204		56,125		(10,921)	(19)	%	(c)
Loans and leases held for investment, net		364,090		330,564		33,526	10	%	(d)
Premises and equipment, net		24,078		24,286		(208)	(1)	%
Interest receivable		3,261		3,309		(48)	(1)	%
Other assets		15,437		16,278		(841)	(5)	%
Goodwill		23,503		22,743		760	3	%
Other intangible assets, net		6,836		7,107		(271)	(4)	%
Total assets	$	701,248	$	692,276	$	8,972	1	%

(a)	These balances vary significantly on a daily basis.

(b)	The balances are highly dependent on the housing market, which has been depressed.

(c)

(d)	Loans and leases continue to increase as we improve our ability to generate loans.

Allowance for Credit Losses. The following table sets forth information regarding changes in our allowance for credit losses for the three month periods ending March 31, 2007 and 2006 (amounts are in thousands):

		2007		2006
Balance, beginning of period	$	3,370	$	3,188
Provision for credit losses		250		210
Loans charged off		(6)		(31)
Loans recovered		1		13
Balance, end of period	$	3,615	$	3,380
Total loans held for investment at March 31, 2007 and March 31, 2006	$	412,909	$	371,299
Loans held for investment, excluding participating interests in mortgage loans at March 31, 2007 and March 31, 2006	$	367,705	$	337,879
Allowance for credit losses as a percentage of total loans held for investment at March 31, 2007 and March 31, 2006		0.88%		0.91%
Allowance for credit losses as a percentage of loans held for investment, excluding participating interests in mortgage loans at March 31, 2007 and March 31, 2006		0.98%		1.00%

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

	Three Months
	Ended March 31,
	2007	2006
Ratio of net charge-offs to average total loans held for investment	(0.001)%	(0.005)%
Ratio of net charge-offs to average total loans held for investment, excluding participating interests in mortgage loans	(0.001)%	(0.006)%
Ratio of net charge-offs to average total loans held for investment, annualized	(0.005)%	(0.019)%
Ratio of net charge-offs to average total loans held for investment, excluding participating interests in mortgage loans, annualized	(0.006)%	(0.022)%

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):

	March 31,		December 31,
	2007		2006
Nonperforming loans:
Loans 90 days or more delinquent and still accruing interest	$	-	$	2
Nonaccrual loans		106		100
Total nonperforming loans		106		102
Total nonperforming assets	$	106	$	102
Allowance for credit losses	$	3,615	$	3,370
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%		0.03%
Ratio of total nonperforming assets to total assets		0.02%		0.01%
Ratio of allowance for credit losses to total nonperforming loans		3,410%		3,304%

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.

Potentially Problematic Assets. Certain components of the residential housing market and mortgage banking industry are currently in a downward trending cycle. To the extent we have relationships with entities in, or serving, these markets and industries our risk exposure is increased. For example, our counterparties in the mortgage banking industry are currently operating in a stressed industry.

Liabilities. The following table presents our liabilities by category as of March 31, 2007 and December 31, 2006 as well as the amount and percent of change between the two dates (amounts are in thousands):

	March 31,		December 31,		Change
Liabilities	2007		2006		$		%
Deposits:
Non-interest-bearing	$	74,217	$	84,184	$	(9,967)	(12)	%	(a)
Interest-bearing -
Savings, interest checking and money market		273,684		253,408		20,276	8	%	(b)
Time deposits $100,000 and over		43,543		44,955		(1,412)	(3)	%
Other time deposits		146,610		146,705		(95)	(0)	%
Short-term borrowings		10,361		9,709		652	7	%
FHLB advances		62,200		62,200		-	-	%
Long-term borrowings		-		1,167		(1,167)	(100)	%	(c)
Guaranteed preferred beneficial interests in Company's subordinated debentures		22,482		22,711		(229)	(1)	%
Other liabilities		10,378		11,635		(1,257)	(11)	%
Total liabilities	$	643,475	$	636,674	$	6,801	1	%

(a)	These accounts fluctuate daily due to the cash management activities of our customers, particularly our commercial customers.

(b)	The increase in these balances is the result of managements’ emphasis on growing core deposits.

(c)	The decreases are the result of our plan to reduce higher rate borrowings.

Stockholders’ Equity. Total common stockholders’ equity for BNCCORP was $57.8 million at March 31, 2007. This equates to a book value per common share of $16.05 and tangible book value per common share of $7.62. Our stockholders’ equity increased $2.2 million between March 31, 2007 and December 31, 2006. The increase to stockholder’s equity was a result of earnings and lower unrealized losses on investment securities.

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 March 31, 2007, 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 March 31, 2007:

	Tier 1 Risk-	Total Risk-	Tier 1 Leverage
	Based Ratio	Based Ratio	Ratio
As of March 31, 2007
BNCCORP, consolidated	9.36%	10.60%	7.33%
BNC National Bank	9.75%	10.45%	7.64%

As of December 31, 2006
BNCCORP, consolidated	9.49%	10.89%	7.12%
BNC National Bank	10.26%	10.94%	7.70%

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. Historically, 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 Three Months Ended
	March 31,
Major Sources and (Uses) of Funds		2007		2006
Originations of loans to be participated	$	(41,418)	$	(24,894)
Proceeds from participations of loans		41,418		24,894
Net increase in loans, excluding participating interests in mortgage loans		(33,777)		(27,542)
Net decrease in participating interests in mortgage loans		10,921		67,916
Net increase (decrease) in deposits		8,802		(7,904)
Proceeds from maturities of investment securities		7,097		5,629
Proceeds from sale of loans held for sale		3,995		5,118
Funding of originations of loans held for sale		(2,852)		(6,083)

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 March 31, 2007, the Bank had established federal funds purchase programs with three banks, totaling $17.5 million. At March 31, 2007, 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. For detailed information regarding these policies, refer to the 2006 10-K.

Allowance for Credit Losses

Goodwill Impairment

Interest Income Recognition

Income Taxes

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 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. See Footnote 11, “Income Taxes,” for additional information.

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 March 31, 2007 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 March 31, 2007 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 March 31, 2007 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. Since the yield curve is currently inverted, 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 greater 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. (in thousands).

Net Interest Income Simulation
Movement in interest rates		-300bp		-200bp		-100bp		Unchanged		+100bp		+200bp		+300bp
Projected 12-month net interest income	$	19,743	$	20,479	$	21,347	$	21,763	$	22,059	$	22,318	$	22,174
Dollar change from unchanged scenario	$	(2,020)	$	(1,284)	$	(416)		-	$	296	$	555	$	411
Percentage change from unchanged scenario		(9.28)%		(5.90)%		(1.91)%		-		1.36%		2.55%		1.89%
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 March 31, 2007 (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. 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:	May 14, 2007	By	/s/ Gregory K. Cleveland
			Gregory K. Cleveland
			President and Chief Executive Officer

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