form10q093007.htm

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, 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 (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 including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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 November 6, 2007 was 3,491,520.

BNCCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2007

TABLE OF CONTENTS

	PART I. – FINANCIAL INFORMATION
ITEM 1	Financial Statements (Interim periods are unaudited)
	Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006	4
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2006 and 2007	6
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2007 and 2006	7
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	8
	Notes to Consolidated Financial Statements	9
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, 2007 and 2006	17
	Comparison of Operating Results for the Nine Months Ended September 30, 2007 and 2006	18
	Comparison of Financial Condition at September 30, 2007 and December 31, 2006	23
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	35
ITEM 4	Controls and Procedures	36
	PART II. – OTHER INFORMATION
ITEM 1	Legal Proceedings	37
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	37
ITEM 6	Exhibits	37

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

		September 30,		December 31,
ASSETS		2007		2006
		(unaudited)
CASH AND CASH EQUIVALENTS	$	10,897	$	18,216
FEDERAL FUNDS SOLD		-		24,000
INVESTMENT SECURITIES AVAILABLE FOR SALE		104,624		182,974
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK		2,235		5,003
LOANS HELD FOR SALE		-		1,669
PARTICIPATING INTERESTS IN MORTGAGE LOANS		21,817		56,125
LOANS AND LEASES HELD FOR INVESTMENT		444,686		333,934
ALLOWANCE FOR CREDIT LOSSES		(5,502)		(3,370)
Net loans and leases		461,001		386,689
PREMISES AND EQUIPMENT, net		23,076		23,572
INTEREST RECEIVABLE		3,564		3,309
OTHER ASSETS		15,809		13,643
GOODWILL		409		409
OTHER INTANGIBLE ASSETS, net		28		112
ASSETS FROM DISCONTINUED OPERATIONS		355		32,680
	$	621,998	$	692,276

LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Non-interest-bearing	$	73,112	$	84,184
Interest-bearing –
Savings, interest checking and money market		253,878		253,408
Time deposits $100,000 and over		45,990		44,955
Other time deposits		147,957		146,705
Total deposits		520,937		529,252
SHORT-TERM BORROWINGS		14,961		9,709
FEDERAL HOME LOAN BANK ADVANCES		-		62,200
LONG-TERM BORROWINGS		-		1,167
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S SUBORDINATED DEBENTURES		22,769		22,711
OTHER LIABILITIES		4,756		4,959
LIABILITIES FROM DISCONTINUED OPERATIONS		719		6,676
Total Liabilities		564,142		636,674
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value – 10,000,000 shares authorized; 3,493,155 and 3,600,467 shares issued and outstanding		35		36
Capital surplus – common stock		26,250		25,950
Retained earnings		33,372		32,125
Treasury stock (148,298 shares as of September 30, 2007 and 49,186 shares as of December 31, 2006)		(2,393)		(598)
Accumulated other comprehensive income (loss), net		592		(1,911)
Total stockholders’ equity		57,856		55,602
	$	621,998	$	692,276

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data, unaudited)

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
		2007		2006		2007		2006
INTEREST INCOME:
Interest and fees on loans	$	9,387	$	7,791	$	26,792	$	22,774
Interest and dividends on investments
Taxable		1,340		2,435		5,340		7,381
Tax-exempt		232		398		694		1,376
Dividends		29		65		170		189
Total interest income		10,988		10,689		32,996		31,720
INTEREST EXPENSE:
Deposits		4,439		4,269		13,298		11,993
Short-term borrowings		88		173		307		564
Federal Home Loan Bank advances		-		975		1,627		3,064
Long-term borrowings		-		45		10		170
Subordinated debentures		520		573		1,654		1,679
Total interest expense		5,047		6,035		16,896		17,470
Net interest income		5,941		4,654		16,100		14,250
PROVISION FOR CREDIT LOSSES		2,800		-		3,750		210
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		3,141		4,654		12,350		14,040
NON-INTEREST INCOME:
Bank charges and service fees		432		436		1,531		1,328
Wealth management services		536		220		1,339		828
Gains on sales of loans		314		464		1,365		1,319
Net gains (losses) on sales of securities		(1,251)		103		(3,277)		(258)
Other		279		173		765		445
Total non-interest income		310		1,396		1,723		3,662
NON-INTEREST EXPENSE:
Salaries and employee benefits		3,140		3,159		10,254		9,153
Debt extinguishment costs		1,189		-		2,724		-
Occupancy		511		573		1,624		1,771
Depreciation and amortization		385		370		1,219		1,084
Data processing fees		318		255		862		717
Professional services		265		313		742		958
Office supplies, telephone and postage		255		271		793		780
Marketing and promotion		151		217		500		632
FDIC and other assessments		58		46		174		140
Amortization of intangible assets		28		28		84		84
Other		559		556		1,608		1,625
Total non-interest expense		6,859		5,788		20,584		16,944
Income (loss) from continuing operations before income taxes		(3,408)		262		(6,511)		758
Income tax (benefit)		(1,345)		(50)		(2,732)		(211)
Income (loss) from continuing operations		(2,063)		312		(3,779)		969

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income, continued

(In thousands, except per share data, unaudited)

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
		2007		2006		2007		2006
Discontinued Operations:
Income (loss) from discontinued insurance segment, (including a gain on sale of $6,083 for the nine months ended September 30, 2007)	$	(12)	$	787	$	8,142	$	3,292
Income tax provision		62		296		3,116		1,345
Income (loss) from discontinued operations		(74)		491		5,026		1,947
NET INCOME (LOSS)	$	(2,137)	$	803	$	1,247	$	2,916

BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations	$	(0.60)	$	0.09	$	(1.09)	$	0.28
Income (loss) from discontinued insurance segment, net of income taxes		(0.02)		0.14		1.45		0.56
Basic earnings (loss) per common share	$	(0.62)	$	0.23	$	0.36	$	0.84

DILUTED EARNINGS PER COMMON SHARE
Income (loss) from continuing operations	$	(0.60)	$	0.09	$	(1.09)	$	0.28
Income (loss) from discontinued insurance segment, net of income taxes		(0.02)		0.14		1.45		0.55
Diluted earnings (loss) per common share	$	(0.62)	$	0.23	$	0.36	$	0.83

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Nine Months Ended September 30,

(In thousands, except share data, unaudited)


				Capital						Accumulated
				Surplus						Other
	Common Stock			Common		Retained		Treasury		Comprehensive
	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)
Impact of share-based compensation	66,710		1		227		-		-		-		228
Issuance of common shares	38,485		-		483		-		(11)		-		472
BALANCE, September 30, 2006	3,602,640	$	36	$	25,818	$	31,420	$	(570)	$	(1,750)	$	54,954

BALANCE, December 31, 2006	3,600,467	$	36	$	25,950	$	32,125	$	(598)	$	(1,911)	$	55,602
Net income	-		-		-		1,247		-		-		1,247
Other comprehensive gain	-		-		-		-		-		2,503		2,503
Impact of share-based compensation	(12,530)				300		-		(76)		-		224
Purchase of common shares	(94,782)		(1)		-		-		(1,719)		-		(1,720)
BALANCE, September 30, 2007	3,493,155	$	35	$	26,250	$	33,372	$	(2,393)	$	592	$	57,856

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands, unaudited)

	For the Three Months								For the Nine Months
	Ended September 30,								Ended September 30,
	2007				2006				2007				2006

NET INCOME			$	(2,137)			$	803			$	1,247			$	2,916
Unrealized gain (loss) on cash flow hedge, net	$	315			$	140			$	251			$	(292)
Unrealized gain (loss) on securities available for sale		836				3,328				460				(410)
Reclassification adjustment for loss (gain) included in net income		1,251				(103)				3,277				258
Other comprehensive income (loss), before tax		2,402				3,365				3,988				(444)
Income tax (expense) benefit related to items of other comprehensive income (loss)		(901)				(1,278)				(1,485)				170
Other comprehensive income (loss)		1,501		1,501		2,087		2,087		2,503		2,503		(274)		(274)
TOTAL COMPREHENSIVE INCOME (LOSS)			$	(636)			$	2,890			$	3,750			$	2,642

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, unaudited)

		2007		2006
OPERATING ACTIVITIES:
Net income	$	1,247	$	2,916
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		3,750		210
Depreciation and amortization		1,219		1,107
Amortization of intangible assets and deferred charges		129		114
Share-based compensation		224		228
Net amortization of premiums and discounts		338		891
Proceeds from loans recovered		5		22
Change in interest receivable and other assets, net		(2,410)		(3,943)
Losses on disposals of premises and equipment, net		117		2
Net realized losses on sales of investment securities		3,277		258
Provision for deferred income taxes		(914)		1,615
Unamortized premium related to early extinguishment of subordinated debt		289		-
Change in other liabilities, net		(812)		475
Originations of loans to be participated		(152,595)		(81,667)
Proceeds from participations of loans		152,595		81,667
Funding of originations of loans held for sale		(10,593)		(20,384)
Proceeds from sale of loans held for sale		12,262		17,562
Change in operating accounts of discontinued operations		(2,751)		(631)
Gain on sale of discontinued operations		(6,083)		-
Net cash provided (used) by operating activities		(706)		442
INVESTING ACTIVITIES:
Change in Federal funds sold, net		24,000		(31,000)
Purchases of investment securities		(49,358)		(26,052)
Proceeds from sales of investment securities		106,450		39,154
Proceeds from maturities of investment securities		21,380		17,984
Purchases of Federal Reserve and Federal Home Loan Bank Stock		-		-
Sales of Federal Reserve and Federal Home Loan Bank Stock		2,768		788
Net decrease in participating interests in mortgage loans		34,308		82,380
Net increase in loans held for investment		(112,375)		(28,117)
Additions to premises and equipment		(868)		(2,002)
Sales of premises and equipment		28		36
Investing activities of discontinued operations		-		483
Proceeds from sale of discontinued operations, net		35,204		-
Net cash provided by investing activities		61,537		53,654
FINANCING ACTIVITIES:
Net decrease in deposits		(8,315)		(39,185)
Net increase (decrease) in short-term borrowings		5,252		(6,904)
Proceeds from long-term borrowings and subordinated debentures		15,000		-
Repayments of long-term borrowings and subordinated debentures		(16,167)		(1,682)
Repayments of FHLB advances		(62,200)		(20,000)
Purchase of treasury stock		(1,720)		(11)
Net cash (used) by financing activities		(68,150)		(67,782)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS		(7,319)		(13,688)
CASH AND CASH EQUIVALENTS, beginning of period		18,216		28,824
CASH AND CASH EQUIVALENTS, end of period	$	10,897	$	15,138
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	17,266	$	17,566
Income taxes paid	$	3,314	$	709

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2007

NOTE 1 – Organization of Operations, 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 20 locations in Arizona, Minnesota and North Dakota, provides banking and wealth management services to small and mid-sized businesses and individuals.

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 and Accounting Policies

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, 2007 and for the three-month and nine-month periods ended September 30, 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.

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.

The Company’s critical accounting policies remain unchanged. The disclosure related to other significant accounting policies is amended as follows:

Loan Origination Fees and Costs; Other Lending Fees-Loan origination fees and costs incurred to extend credit are deferred and amortized over the term of the loan as an adjustment to yield using the interest method, except where the net amount is immaterial.

The Company occasionally originates lines of credit where the customer is charged a non-usage fee if the line of credit is not used. In such instances, we periodically review use of lines on a retrospective basis and recognize non-usage fees in non-interest income.

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

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.

Statement of Financial Accounting Standard (SFAS) No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140, requires an entity 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. 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 do not currently believe the impact of adopting SFAS No. 157 on January 1, 2008 will have a material impact on the Company’s results of operations or financial position.

In February 2007, 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 do not currently believe the impact of adopting SFAS No. 159 on January 1, 2008 will have a material impact on the Company’s financial statements.

NOTE 5 – Divestiture and Discontinued Operations

On June 1, 2007, the Company completed the sale of substantially all of the assets of BNC Insurance Services, Inc. (BNC Insurance). Management considered the benefits of the sale including, but not limited to the following:

·	Monetizes the value of a segment the Company had nurtured;

·	Strengthens the regulatory capital of Company;

·	Decreases the risk of impaired revenue due to a decline in contingency income;

·	Decreases exposure to the cyclicality of the insurance business; and

·	Permits replacement of a significant portion of the income generated by the agency.

The Company initiated actions related to the sale late in 2006 and reached an agreement to sell substantially all of the assets of the insurance segment in March 2007. Stockholders approved the transaction in May 2007. The proceeds from sale were $37.25 million and a pre-tax gain on sale of $6.083 million was recognized in the second quarter of 2007.

The financial statements of the Company report BNC Insurance in discontinued operations for all periods presented. The gain on sale is also reported in discontinued operations of the Company in 2007. Pre-tax revenues of BNC Insurance were $20,400 and $4.587 million in the third quarter of 2007 and 2006, respectively. Pre-tax revenues of BNC Insurance were $9.111 million and $14.450 million for the nine months of 2007 and 2006, respectively.

BNC Insurance was previously reported as the insurance segment of the Company.

NOTE 6 – Earnings Per Share

Net income (loss) per share was calculated as follows:

	Three months ended		Nine months ended
	September 30, 2007		September 30, 2007
Denominator for basic earnings per share:
Average common shares outstanding		3,414,670		3,472,126
Dilutive common stock options		62,469		63,093
Denominator for diluted earnings per share		3,477,139		3,535,219

Numerator: Net (loss) attributable to continuing operations	$	(2,063)	$	(3,779)
Numerator: Net income (loss) attributable to discontinued operations		(74)		5,026
Numerator: Net income (loss)	$	(2,137)	$	1,247

Basic (loss) per share from continuing operations	$	(0.60)	$	(1.09)
Basic earnings (loss) per share from discontinued operations		(0.02)		1.45
Basic earnings (loss) per common share	$	(0.62)	$	0.36
Diluted (loss) per share from continuing operations	$	(0.60)	$	(1.09)
Diluted earnings (loss) per share from discontinued operations		(0.02)		1.45
Diluted earnings(loss) per common share	$	(0.62)	$	0.36

Pursuant to SFAS No. 128, no contingent shares are included in the computation of the diluted per share amounts because a loss exists in continuing operations for periods in 2007.

For the three and nine months ended September 30, 2007 there were no options outstanding that were excluded from the computation of diluted EPS because their exercise prices were higher than the average price of BNCCORP’s common stock for the period.


	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 continuing operations	$	312	$	969
Numerator: Net income attributable to discontinued operations		491		1,947
Numerator: Net income	$	803	$	2,916

Basic earnings per share from continuing operations	$	0.09	$	0.28
Basic earnings per share from discontinued operations		0.14		0.56
Basic earnings per common share	$	0.23	$	0.84
Diluted earnings per share from continuing operations	$	0.09	$	0.28
Diluted earnings per share from discontinued operations		0.14		0.55
Diluted earnings per common share	$	0.23	$	0.83

NOTE 7 – Segment Disclosures

The Company’s continuing operations has two segments based on the nature of the products and services for each segment: banking operations and wealth management services. Prior to the second quarter of 2007 the Company had three segments. Beginning in the second quarter of 2007 the insurance operations were no longer reported as a segment as they are included in discontinued operations.

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

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 administration. We also offer retirement accounts and prepare tax returns.

The accounting policies of the 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 segment information as of, and for the three months and the nine months ended September 30, 2007 and September 30, 2006, unaudited (in thousands):

	Three months ended September 30, 2007
			Wealth		Bank				Intersegment		Consolidated
	Banking		Mgmt		Holding Co.		Totals		Elimination		Total
Net interest income (loss)	$	6,398	$	42	$	(514)	$	5,926	$	15	$	5,941
Other revenue (loss)-external customers		(220)		597		15		392		(82)		310
Net (loss) from continuing operations		(575)		(149)		(1,194)		(1,918)		(145)		(2,063)
Segment assets from continuing operations		594,508		28,876		82,809		706,193		(84,550)		621,643

	Nine months ended September 30, 2007
			Wealth		Bank				Intersegment		Consolidated
	Banking		Mgmt		Holding Co.		Totals		Elimination		Total
Net interest income (loss)	$	17,592	$	139	$	(1,681)	$	16,050	$	50	$	16,100
Other revenue-external customers		401		1,478		51		1,930		(207)		1,723
Net (loss) from continuing operations		(933)		(479)		(2,226)		(3,638)		(141)		(3,779)
Segment assets from continuing operations		594,508		28,876		82,809		706,193		(84,550)		621,643

	Three months ended September 30, 2006
			Wealth		Bank				Intersegment		Consolidated
	Banking		Mgmt		Holding Co.		Totals		Elimination		Total
Net interest income (loss)	$	4,989	$	276	$	(629)	$	4,636	$	18	$	4,654
Other revenue-external customers		1,174		275		24		1,473		(77)		1,396
Net income (loss) from continuing operations		859		(101)		(445)		313		(1)		312
Segment assets from continuing operations		612,455		31,152		82,627		726,234		(82,430)		643,804

	Nine months ended September 30, 2006
			Wealth		Bank				Intersegment		Consolidated
	Banking		Mgmt		Holding Co.		Totals		Elimination		Total
Net interest income (loss)	$	15,292	$	784	$	(1,877)	$	14,199	$	51	$	14,250
Other revenue-external customers		2,832		964		66		3,862		(200)		3,662
Net income (loss) from continuing operations		2,509		(164)		(1,415)		930		39		969
Segment assets from continuing operations		612,455		31,152		82,627		726,234		(82,430)		643,804

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 or restricted stock awards. Under the 1995 Stock Incentive Plan, the aggregate number of options and shares granted can not exceed 250,000 shares. As of September 30, 2007, there were 8,901 shares available to grant under the 1995 Stock Incentive Plan. Under the 2002 Stock Incentive Plan, the aggregate number of shares granted can not exceed 125,000 shares. As of September 30, 2007, there were 107,250 shares available to grant under the 2002 Stock Incentive Plan. Under the 2006 Stock Incentive Plan, the aggregate number of shares granted can not exceed 200,000 shares. As of September 30, 2007, there were 136,600 shares available to grant under the 2006 Stock Incentive Plan. The compensation committee may grant share-based compensation at prices equal to the fair value of the stock at the grant date.

The Company recognized share-based compensation expense of $121,000 for the three months ended September 30, 2007 and $205,000 for the nine months ended September 30, 2007. Included in these amounts is $121,000 related to restricted stock for the three month period ended September 30, 2007 and $205,000 for the nine month period ended September 30, 2007. Also included in the share-based compensation expense for the three and nine month periods ended September 30, 2007 was expense related to stock options of $0 and $0 respectively. There were no grants of stock options in 2006 or 2007. The cost of all options granted prior to 2006 are fully amortized prior to 2007.

The Company recognized share-based compensation expense of $87,000 for the three months ended September 30, 2006 and $210,000 for the nine months ended September 30, 2006. Included in these amounts is $84,000 related to restricted stock for the three month period ended September 30, 2006 and $200,000 for the nine month period ended September 30, 2006. Also included in the share-based compensation expense for the three and nine month periods ended September 30, 2006 was expense related to stock options of $3,000 and $10,000 respectively.

At September 30, 2007, the Company had $659,000 of unamortized restricted stock compensation expense. The unamortized restricted stock compensation expense as of September 30, 2007 will be amortized by December 31, 2009. At December 31, 2006, the Company had approximately $1.1 million of unamortized restricted stock compensation expense. The grants are generally recognized over three years. There was no unrecognized share-based compensation related to stock options as of September 30, 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 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, 2007, the prime rate was 7.75 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, 2007, the fair value of the floor was $359,000, which was included in other assets. The change in net unrealized gains of $315,000 during the three months ended September 30, 2007 and $251,000 during the nine months ended September 30, 2007 for derivatives designated as cash flow hedges is separately disclosed in the

statement of comprehensive income. No hedge ineffectiveness on cash flow hedges was recognized during the three and nine month periods ended September 30, 2007 and September 30, 2006. The entire loss on the derivative was included in the assessment of the effectiveness. The change in net unrealized gain of $140,000 during the three months ended September 30, 2006 and the change in net unrealized loss of $(292,000) during the nine months ended September 30, 2006 for derivatives designated as cash flow hedges is separately disclosed in the statement of comprehensive income.

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 September 30, 2007 or December 31, 2006. 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, 2007	Cost			Gains		Losses		Value
U.S. government agency mortgage-backed securities guaranteed by GNMA	$		1,904	$	1	$	(29)	$	1,876
U.S. government agency mortgage-backed securities issued by FNMA			3,536		30		(65)		3,501
Collateralized mortgage obligations guaranteed by GNMA			2,617		-		(6)		2,611
Collateralized mortgage obligations issued by FNMA or FHLMC			66,213		179		(129)		66,263
Other collateralized mortgage obligations			11,492		11		(31)		11,472
State and municipal bonds			17,844		1,057		-		18,901
	$		103,606	$	1,278	$	(260)	$	104,624

				Gross		Gross		Estimated
	Amortized			Unrealized		Unrealized		Fair
As of December 31, 2006	Cost			Gains		Losses		Value
U.S. government agency mortgage-backed securities guaranteed by GNMA	$	2,165		$	-	$	(43)	$	2,122
U.S. government agency mortgage-backed securities issued by FNMA		8,149			56		(66)		8,139
Collateralized mortgage obligations guaranteed by GNMA		9,533			-		(163)		9,370
Collateralized mortgage obligations issued by FNMA or FHLMC		148,119			16		(3,658)		144,477
Other collateralized mortgage obligations		-			-		-		-
State and municipal bonds		17,727			1,139		-		18,866
	$	185,693		$	1,211	$	(3,930)	$	182,974

The following table shows the Company’s investments’ gross unrealized losses and fair value; aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2007 and December 31, 2006 (dollars are in thousands):

As of September 30, 2007	Less than 12 months					12 months or more					Total
Description of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	#	Value		Loss		#	Value		Loss		#	Value		Loss
U.S. government agency mortgage-backed securities guaranteed by GNMA	-	$	-	$	-	3	$	1,466	$	(29)	3	$	1,466	$	(29)
U.S. government agency mortgage-backed securities issued by FNMA	2		359		(3)	4		2,081		(62)	6		2,440		(65)
Collateralized mortgage obligations guaranteed by GNMA	-		-		-	1		2,611		(6)	1		2,611		(6)
Collateralized mortgage obligations issued by FNMA or FHLMC	3		13,762		(22)	8		21,434		(107)	11		35,196		(129)
Other collateralized mortgage obligations	3		8,124		(31)	-		-		-	3		8,124		(31)
Total temporarily impaired securities	8	$	22,245	$	(56)	16	$	27,592	$	(204)	24	$	49,837	$	(260)


As of December 31, 2006	Less than 12 months					12 months or more					Total
Description of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	#	Value		Loss		#	Value		Loss		#	Value		Loss
U.S. government agency mortgage-backed securities guaranteed by GNMA	-	$	-	$	-	4	$	1,779	$	(43)	4	$	1,779	$	(43)
U.S. government agency mortgage-backed securities issued by FNMA	3		489		(12)	1		2,044		(54)	4		2,533		(66)
Collateralized mortgage obligations guaranteed by GNMA	1		3,273		(28)	1		6,097		(135)	2		9,370		(163)
Collateralized mortgage obligations issued by FNMA or FHLMC	8		20,250		(120)	22		123,348		(3,538)	30		143,598		(3,658)
Other collateralized mortgage obligations	-		-		-	-		-		-	-		-		-
Total temporarily impaired securities	12	$	24,012	$	(160)	28	$	133,268	$	(3,770)	40	$	157,280	$	(3,930)

In reaching the conclusion that the impairments disclosed in the tables 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 were 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. Further, we have both the intent and ability to hold these impaired securities for a sufficient period of time, until maturity if necessary, to allow for their recovery in market value.

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 $160,000 at September 30, 2007. If this benefit was recognized, it would affect the Company’s effective tax rate. This amount includes estimated interest of $25,000 at September 30, 2007 and no penalties. The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ending December 31, 2004 through 2006 remain open to federal examination, although there are no examinations in progress at this time. Tax years ending December 31, 2003 through 2006 remain open to state examinations.

As of January 1, 2007, the Company determined that it was reasonably possible that $60,000 of the $220,000 unrecognized tax benefit would reverse in the next 12 months. The Company recognized $60,000 of previously unrecognized tax benefit during the quarter ending September 30, 2007. This included $10,000 of interest and no penalties. The Company recognized this benefit as a result of a lapse of the applicable statute of limitations.

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

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 Results for the Three Months Ended September 30, 2007 and 2006

General

As reported previously, in June 2007 we sold substantially all of the assets of our insurance segment, resulting in a pre-tax gain of $6.083 million which is reported in discontinued operations. Since the sale of the agency, we entered into several strategic transactions intended to improve the net interest margin of continuing operations and improve our core businesses. Specifically, the third quarter of 2007 included the following:

·	Selling $48.2 million of securities earning 4.41%, and reinvesting the proceeds in securities yielding 5.42%, resulting in pre-tax losses of $1.251 million;

·	Refinancing $15.0 million of debt to reduce pre-tax interest costs by 218 basis points, incurring early redemption costs of $1.189 million;

·	Increasing the net interest margin from continuing operations to 4.24 % compared to 3.07% for the quarter ended September 30, 2006; and

·	Increasing loans and leases held for investment to $444.7 million as of September 30, 2007.

In the third quarter, we also increased the provision for credits losses to $2.800 million. A portion of the increase relates to loan growth; the remainder relates to approximately $21 million of loans which were deemed to have deteriorated in the third quarter. We also charged off $1.6 million of loans related to a situation that may involve a misrepresentation by third parties.

Continuing Operations

Overall, the net loss from continuing operations in the third quarter of 2007 was $(2.063) million, or $(0.60) per diluted share compared to net income of $312 thousand, or $0.09 per diluted share for the same period in 2006.

Net interest income for the third quarter of 2007 was $5.941 million, an increase of $1.287 million, or 28%, from $4.654 million in the same period of 2006. The net interest margin for the current period improved to 4.24% from 3.07%. The increase in net interest margin was largely due to higher balances of loans held for investment, higher yields on interest earning assets and decreases in high cost debt, which were partially offset by higher rates paid on deposits.

In the third quarter, the Company also increased the provision for credits losses to $2.800 million compared to $0 in the same period of 2006, for the reasons discussed above.

Non-interest income for the third quarter of 2007 included pre-tax losses on sales of securities aggregating $(1.251) million, related to the restructuring previously discussed, which reduced total non-interest income to $310 thousand. This compares to non-interest income of $1.396 million for the same period in 2006, which included pre-tax gains on sales of securities aggregating $103 thousand. Excluding the gains and losses on securities transactions, non-interest income in the third quarter of 2007 was $1.561 million compared to $1.293 million in 2006, an increase of $268 thousand, or 21%. This increase reflects higher wealth management revenue and rent received for office space formerly occupied by BNC’s insurance agency.

Non-interest expense for the third quarter of 2007, which included debt extinguishment costs incurred to refinance debt of $1.189 million, was $6.859 million compared to $5.788 million in the same period of 2006. Excluding the debt extinguishment costs, non-interest expense was $5.670 million in the third quarter of 2007, a decrease of $118 thousand, or 2.0%, compared to the same period in 2006.

Continuing operations had a tax benefit of $(1.345) million in the third quarter of 2007 primarily due to benefits related to losses on sales of securities, debt extinguishment costs, higher provisions for credit losses and tax exempt interest on securities owned by the banking segment. In the third quarter of 2006 the Company recorded a tax benefit in continuing operations of $(50) thousand.

Discontinued Operations

Pre-tax loss for the discontinued operations in the third quarter of 2007 third quarter was $(12) thousand and the after tax loss of discontinued operations in the third quarter was $(74), or $(0.02) per share on a diluted basis. In the third quarter of 2006 pre-tax income for the discontinued operations was $787 thousand and the after tax net income was $491 thousand, or $0.14 on a diluted basis. The discontinued operations recorded a tax expense in 2007 because most of the tax beneficial items of the Company are attributable to the continuing operations. In 2006, the effective tax rate was 37.6%.

Net Income (Loss)

Net income (loss), which combines results of continuing operations and discontinued operations, was $(2.137) million, or $(0.62) per share on a diluted basis, in the third quarter of 2007 compared to net income of $803 thousand, or $0.23 per share on a diluted basis, in the third quarter of 2006.

Comparison of Results for the Nine Months Ended September 30, 2007 and 2006

General

The sale of substantially all of the assets of BNC Insurance completed in the second quarter of 2007 and the large transactions which occurred subsequently significantly influenced our results in the nine month period ending September 30, 2007.

Continuing Operations

Overall, the net loss from continuing operations in the first nine months of 2007 was $(3.779) million, or $(1.09) per diluted share, compared to net income of $969 thousand, or $0.28 per diluted share, for the same period in 2006.

Net interest income was $16.100 million, an increase of $1.850 million, or 13%, from $14.250 million in the same period of 2006 as the net interest margin for the current period improved to 3.69% from 3.05%. The increase in net interest margin was largely due to higher balances of loans held for investment, higher yields on interest earning assets and decreases in high cost debt which were partially offset by higher rates paid on deposits.

The provision for credit losses increased to $3.750 million in the first nine months of 2007 compared to $210 thousand in the first nine months of 2006, for the reasons discussed earlier. A portion of the increase relates to loan growth during the year; the remainder relates to approximately $21 million of loans which were deemed to have deteriorated in the third quarter.

Non-interest income for the first nine months of 2007 was $1.723 million, which included pre-tax losses on sales of securities aggregating $(3.277) million. This compares to non-interest income of $3.662 million for the same period in 2006, which included pre-tax losses on sales of securities aggregating $(258) thousand. Excluding the losses on securities transactions, non-interest income in 2007 was $5.000 million compared to $3.920 million in 2006, an increase of $1.080 million, or 28%. This increase reflects higher wealth management revenues, bank charges and service fees and rent received for office space formerly occupied by BNC’s insurance agency.

Non-interest expense in the first nine months of 2007, including debt extinguishment costs aggregating $2.724 million, was $20.584 million compared to $16.944 million in the same period of 2006. Excluding the debt extinguishment costs, non-interest expense was $17.860 million in the first nine months of 2007, an increase of $916 thousand, or 5.4% compared to the same period in 2006. This increase can primarily be attributed to higher compensation costs.

Continuing operations had a tax benefit of $(2.732) million in the first nine months of 2007 primarily due to benefits related to losses on sales of securities, debt extinguishment costs incurred, higher provisions for credit losses and tax exempt interest earned on securities owned by the banking segment. In the first nine months of 2006 the Company recorded a tax benefit in continuing operations of $(211) thousand.

Net Interest Income from Continuing Operations

The following table presents average balances; interest earned or owed; associated yields on interest-earning assets and costs on interest-bearing liabilities for the three-month periods ended September 30, 2007, and 2006, and the nine-month periods ended September 30, 2007, and 2006 as well as the changes between the periods presented, (dollars are in thousands):

	Three Months Ended September 30,
	2007					2006					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	$	17,907	$	232	5.14%	$	38,553	$	507	5.22%	$	(20,646)	$	(275)	-0.08%	(a)
Investments - taxable		91,096		1,137	4.95%		171,121		1,993	4.62%		(80,025)		(856)	0.33%	(b)
Investments - tax exempt		18,670		232	4.93%		34,845		398	4.53%		(16,175)		(166)	0.40%	(b)
Loans held for sale		485		-	0.00%		892		-	0.00%		(407)		-	0.00%
Participating interests in mortgage loans		18,163		288	6.29%		23,477		436	7.37%		(5,314)		(148)	-1.08%	(c)
Loans and leases held for investment		414,588		9,099	8.71%		336,756		7,355	8.67%		77,832		1,744	0.04%	(d)
Allowance for loan losses		(4,380)		-			(3,378)		-			(1,002)		-
Total interest-earning assets	$	556,529		10,988	7.83%	$	602,266		10,689	7.04%	$	(45,737)		299	0.79%
Interest-bearing liabilities
Interest checking and money market accounts	$	247,329		2,066	3.31%	$	237,657		1,890	3.16%	$	9,672		176	0.15%	(e)
Savings		8,181		16	0.78%		8,132		16	0.78%		49		-	0.00%
Certificates of deposit under $100,000		144,802		1,754	4.81%		156,718		1,762	4.46%		(11,916)		(8)	0.35%	(f)
Certificates of deposit $100,000 and over		46,187		603	5.18%		50,087		601	4.76%		(3,900)		2	0.42%	(f)
Total interest-bearing deposits		446,499		4,439	3.94%		452,594		4,269	3.74%		(6,095)		170	0.20%
Short-term borrowings		7,643		88	4.57%		14,239		173	4.82%		(6,596)		(85)	-0.25%	(g)
Federal Home Loan Bank advances		-		-	0.00%		65,641		975	5.89%		(65,641)		(975)	-5.89%	(h)
Long-term borrowings		8		-	0.00%		2,301		45	7.76%		(2,293)		(45)	-7.76%
Subordinated debentures		22,778		520	9.06%		22,401		573	10.15%		377		(53)	-1.09%	(i)
Total borrowings		30,429		608	7.93%		104,582		1,766	6.70%		(74,153)		(1,158)	1.23%
Total interest-bearing liabilities	$	476,928		5,047	4.20%	$	557,176		6,035	4.30%	$	(80,248)		(988)	-0.10%
Net interest income/spread			$	5,941	3.63%			$	4,654	2.74%			$	1,287	0.89%
Net interest margin					4.24%					3.07%					1.17%
Notation:
Non-interest-bearing deposits	$	67,574		-		$	68,471		-		$	(897)		-
Total deposits	$	514,073	$	4,439	3.43%	$	521,065	$	4,269	3.25%	$	(6,992)	$	170	0.18%
Taxable equivalents:
Total interest-earning assets	$	556,529	$	11,113	7.92%	$	602,266	$	10,894	7.18%	$	(45,737)	$	219	0.74%
Net interest income/spread		-	$	6,066	3.72%		-	$	4,859	2.88%		-	$	1,207	0.84%
Net interest margin		-		-	4.32%		-		-	3.20%		-		-	1.12%

(a)	The average balance of Federal funds sold is lower in 2007, as these funds have been used to fund increases in loans and leases held for investment and decreases in higher interest-bearing liabilities.

(b)	The decrease in average investments was primarily the result of management’s strategy to prepay FHLB advances financed by the sales of investments.

(c)

Participating interests in mortgage loans are collateralized by mortgage loans owned by a mortgage banking counterparty. We advance funds when the counterparty closes on loans and are repaid when the mortgage banking entity sells the loans. Our loans will vary depending on the level of originations and the timing of loan sales by the mortgage banking entity. The mortgage banking industry is currently operating in a challenging environment. The yield on participating interests declined because we reversed approximately $90,000 of interest when a portion of this portfolio went to non-accrual. See discussion on non-accrual loans.

(d)	The average balance of loans has increased as a result of management’s strategy to emphasize loan growth, which included repurchasing loan participations as a result of the higher lending limit due to the sale of the insurance agency.

(e)	The average balance has increased due to management’s strategy of paying attractive rates on higher balance money market accounts.

(f)	The average balance of CD’s has declined as a result of management’s strategy to let certain higher cost CD’s expire.

(g)	The average balances in short-term borrowings are lower because we now offer off-balance sheet sweep products for commercial customers with very large balances.

(h)	The average balance of FHLB advances are lower as these borrowings were repaid in the second quarter of 2007.

(i)	The average cost of subordinated debentures has decreased as $15 million of this debt was refinanced in the third quarter of 2007, lowering the cost by 218bp.

	Nine Months Ended September 30,
	2007					2006					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	$	19,485	$	754	5.17%	$	42,775	$	1,543	4.82%	$	(23,290)	$	(789)	0.35%	(a)
Investments - taxable		133,402		4,756	4.77%		175,699		6,027	4.59%		(42,297)		(1,271)	0.18%	(b)
Investments - tax exempt		18,791		694	4.94%		40,835		1,376	4.51%		(22,044)		(682)	0.43%	(b)
Loans held for sale		524		-	0.00%		917		-	0.00%		(393)		-	0.00%
Participating interests in mortgage loans		29,611		1,696	7.66%		33,093		1,703	6.88%		(3,482)		(7)	0.78%	(c)
Loans and leases held for investment		384,686		25,096	8.72%		333,751		21,071	8.44%		50,935		4,025	0.28%	(d)
Allowance for loan losses		(3,793)		-			(3,311)		-			(482)		-
Total interest-earning assets	$	582,706		32,996	7.57%	$	623,759		31,720	6.80%	$	(41,053)		1,276	0.77%
Interest-bearing liabilities
Interest checking and money market accounts	$	251,117		6,247	3.33%	$	244,059		5,313	2.91%	$	7,058		934	0.42%	(e)
Savings		8,392		49	0.78%		8,350		49	0.78%		42		-	0.00%
Certificates of deposit under $100,000		146,771		5,283	4.81%		151,728		4,718	4.16%		(4,957)		565	0.65%	(f)
Certificates of deposit $100,000 and over		44,503		1,720	5.17%		56,649		1,913	4.51%		(12,146)		(193)	0.66%	(f)
Total interest-bearing deposits		450,783		13,299	3.94%		460,786		11,993	3.48%		(10,003)		1,306	0.46%
Short-term borrowings		8,823		307	4.65%		15,999		564	4.71%		(7,176)		(257)	-0.06%	(g)
Federal Home Loan Bank advances		35,790		1,627	6.08%		76,680		3,064	5.34%		(40,890)		(1,437)	0.74%	(h)
Long-term borrowings		128		9	9.40%		3,066		170	7.41%		(2,938)		(161)	1.99%
Subordinated debentures		22,577		1,653	9.79%		22,432		1,679	10.01%		145		(26)	-0.22%
Total borrowings		67,318		3,596	7.14%		118,177		5,477	6.20%		(50,859)		(1,881)	0.94%
Total interest-bearing liabilities	$	518,101		16,895	4.36%	$	578,963		17,470	4.03%	$	(60,862)		(575)	0.33%
Net interest income/spread			$	16,101	3.21%			$	14,250	2.77%			$	1,851	0.44%
Net interest margin					3.69%					3.05%					0.64%
Notation:
Non-interest-bearing deposits	$	68,793		-		$	68,363		-		$	430		-
Total deposits	$	519,576	$	13,299	3.42%	$	529,149	$	11,993	3.03%	$	(9,573)	$	1,306	0.39%
Taxable equivalents:
Total interest-earning assets	$	582,706	$	33,359	7.65%	$	623,759	$	32,429	6.95%	$	(41,053)	$	930	0.70%
Net interest income/spread		-	$	16,464	3.29%		-	$	14,959	2.92%		-	$	1,505	0.37%
Net interest margin		-		-	3.78%		-		-	3.21%		-		-	0.57%

(a)	The average balance of Federal funds sold is lower in 2007, as these funds have been used to fund increases in loans and leases held for investment and decreases in higher interest-bearing liabilities.

(b)	The decrease in average investments was the result of management’s strategy to prepay FHLB advances financed by the sales of investments.

(c)

(d)	The average balance of loans has increased as a result of management’s strategy to emphasize loan growth, which included repurchasing loan participations as a result of the higher lending limit due to the sale of the insurance agency.

(e)	The average balance has increased due to management’s strategy of paying attractive rates on higher balance money market accounts.

(f)	The average balance of CD’s has declined as a result of management’s strategy to let certain higher cost CD’s expire.

(g)	The average balances in short-term borrowings are lower because we now offer off-balance sheet sweep products for commercial customers with very large balances.

(h)	The average balance of FHLB advances are lower as these borrowings were repaid in the second quarter of 2007.

Non-interest Income from continuing operations

The following table presents the major categories of our non-interest income for the three-month periods ended September 30, 2007 and 2006 and the nine-month periods ended September 30, 2007 and 2006, as well as the amount and percent of change between the periods (dollars are in thousands):

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
Non-interest Income	2007		2006		$		%		2007		2006		$		%

Bank charges and service fees	$	432	$	436	$	(4)	(1)	%	$	1,531	$	1,328	$	203	15	%	(a)
Wealth management services		536		220		316	144	%		1,339		828		511	62	%	(b)
Gain on sales of loans		314		464		(150)	(32)	%		1,365		1,319		46	3	%	(c)
Net gain (loss) on sales of securities		(1,251)		103		(1,354)	(1,315)	%		(3,277)		(258)		(3,019)	1,170	%	(d)
Other		279		173		106	61	%		765		445		320	72	%	(e)
Total non-interest income	$	310	$	1,396	$	(1,086)	(78)	%	$	1,723	$	3,662	$	(1,939)	(53)	%

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

(b)	Wealth management income increased due to increased trust assets under management and new products.

(c)	Our commercial real estate divisions originate and sell loans. The sales generate gains which are dependent on the volume of loans sold. This source of income is subject to variability from period to period.

(d)	We sold several securities at a loss in 2007 to improve the net interest margin. Gains and/or losses on the sale of investment securities can vary significantly from period to period depending on the nature of the securities transactions consummated.

(e)

Other income increased in the third quarter primarily due to rent received for space formerly occupied by BNC Insurance. When we were taken out of a loan in the first quarter of 2007, the Company received a fee of approximately $176,000. This fee was recognized on a cash basis in non-interest income because we could not reasonably estimate when receipt would occur.

Non-interest Expense from continuing operations

The following table presents the major categories of our non-interest expense for the three-month periods ended September 30, 2007 and 2006 and the nine-month periods ended September 30, 2007 and 2006, as well as the amount and percent of change between the periods (dollars are in thousands):

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
Non-interest Expense	2007		2006		$		%		2007		2006		$		%

Salaries and employee benefits	$	3,140	$	3,159	$	(19)	(1)	%	$	10,254	$	9,153	$	1,101	12	%	(a)
Debt extinguishment costs		1,189		-		1,189	NM			2,724		-		2,724	NM		(b)
Occupancy		511		573		(62)	(11)	%		1,624		1,771		(147)	(8)	%
Depreciation and amortization		385		370		15	4	%		1,219		1,084		135	12	%
Data processing fees		318		255		63	25	%		862		717		145	20	%
Professional services		265		313		(48)	(15)	%		742		958		(216)	(23)	%	(c)
Office supplies, telephone and postage		255		271		(16)	(6)	%		793		780		13	2	%
Marketing and promotion		151		217		(66)	(30)	%		500		632		(132)	(21)	%	(c)
FDIC and other assessments		58		46		12	26	%		174		140		34	24	%
Amortization of intangible assets		28		28		-	-	%		84		84		-	-	%
Other		559		556		3	1	%		1,608		1,625		(17)	(1)	%
Total non-interest expense	$	6,859	$	5,788	$	1,071	19	%	$	20,584	$	16,944	$	3,640	21	%
Efficiency ratio		109.7%		95.7%						115.5%		94.6%

(a)	Salary and benefit expenses have increased because of normal increases and bonuses rewarding successful efforts.

(b)	Debt extinguishment costs are related to refinancing subordinated debt in the third quarter and prepaying FHLB advances in the second quarter.

(c)	Professional services and marketing expenses have decreased due to efforts to control expenses.

NM is defined as not meaningful.

Income Tax Provision in Continuing Operations

Continuing operations had a tax benefit of $(2.732) million in the first nine months of 2007 primarily due to benefits related to losses on sales of securities, debt extinguishment costs incurred, higher provisions for credit losses and tax exempt interest on securities owned by the banking segment. In the first nine months of 2006 the Company recorded a tax benefit in continuing operations of $(211) thousand, primarily because of tax exempt securities owned by the banking segment.

Comparison of Financial Condition at September 30, 2007 and December 31, 2006

Total assets were $622 million at September 30, 2007, declining from $692.3 million at December 31, 2006. The decrease was primarily related to the extinguishment of $62.2 million of FHLB advances costing approximately 6.1% financed by the sale of investment securities which were earning 4.1%. The balance of participating interests in mortgage loans also declined by $34.3 million since December 31, 2006. These decreases have been partially offset by increases in loans and leases held for investment, which were $444.7 million as of September 30, 2007 compared to $333.9 million as of December 31, 2006. The increase in loans and leases held for investment can be attributed to repurchases of participations sold of approximately $45 million and organic growth. The participations were repurchased because our legal lending limit increased significantly in 2007 as a result of the sale of our insurance agency.

Assets. The following table presents our assets by category (dollars are in thousands):

	September 30,		December 31,		Change
Assets	2007		2006		$		%

Cash and due from banks	$	10,897	$	18,216	$	(7,319)	(40)	%	(a)
Federal funds sold		-		24,000		(24,000)	(100)	%	(b)
Investment securities available for sale		104,624		182,974		(78,350)	(43)	%	(c)
Federal Reserve Bank and Federal Home Loan Bank stock		2,235		5,003		(2,768)	(55)	%	(d)
Loans held for sale		-		1,669		(1,669)	(100)	%
Participating interests in mortgage loans		21,817		56,125		(34,308)	(61)	%	(e)
Loans and leases held for investment, net		439,184		330,564		108,620	33	%	(f)
Premises and equipment, net		23,076		23,572		(496)	(2)	%
Interest receivable		3,564		3,309		255	8	%
Other assets		15,809		13,643		2,166	16	%	(g)
Goodwill		409		409		-	-	%
Other intangible assets, net		28		112		(84)	(75)	%
Assets from discontinued operations		355		32,680		(32,325)	(99)	%	(h)
Total assets	$	621,998	$	692,276	$	(70,278)	(10)	%

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

(b)	The balance of Federal funds sold is lower in 2007, as these funds have been used to fund increases in loans and leases held for investment and decreases in higher interest-bearing liabilities.

(c)	The decrease in investments was primary the result of management’s strategy to prepay FHLB advances financed by the sales of investments.

(d)	Federal Reserve Bank stock and Federal Home Loan Bank stock balances declined as we were permitted to lower holding after the FHLB advances were extinguished.

(e)

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 level of originations and timing of loan sales by the mortgage banking entity. The mortgage banking industry is currently operating in a challenging environment.

(f)	The balance of loans has increased as a result of management’s strategy to emphasize loan growth, which included repurchasing loan participations as a result of the higher lending limit due to the sale of the Bank’s insurance company.

(g)	Other assets have increased primarily due to higher deferred tax assets resulting from higher provisions for loan losses.

(h)	Assets of discontinued operations have declined due to the sale of substantially all of the assets of the insurance segment.

Loan Portfolio

The following table presents the composition of our loan portfolio as of the dates indicated (dollars are in thousands):

	September 30, 2007			December 31, 2006			Increase (Decrease)
	Amount		%	Amount		%	Amount		%
Commercial and industrial	$	120,862	26.2	$	100,127	25.9	$	20,735	21%	(a)
Real estate mortgage		153,246	33.3		124,551	32.2		28,695	23%	(b)
Real estate construction		148,342	32.2		89,619	23.2		58,723	66%	(c)
Agricultural		16,339	3.5		14,286	3.7		2,053	14%
Consumer/other		5,104	1.1		4,237	1.1		867	20%
Participating interests in mortgage loans		21,817	4.7		56,125	14.5		(34,308)	(61)%	(d)
Lease financing		1,934	0.4		1,800	0.5		134	7%
Total principal amount of loans		467,644	101.4		390,745	101.1		76,899	20%
Unearned income and net unamortized deferred fees and costs		(1,141)	(0.2)		(686)	(0.2)		(455)	66%
Loans, net of unearned income and unamortized fees and costs		466,503	101.2		390,059	100.9		76,444	20%
Less allowance for credit losses		(5,502)	(1.2)		(3,370)	(0.9)		(2,132)	63%
Net loans	$	461,001	100.0	$	386,689	100.0	$	74,312	19%

(a)	Growth in commercial and industrial loans was in all of our banking markets.

(b)	Growth in real estate mortgage loans is primarily related to our Minnesota and Arizona commercial real estate divisions.

(c)	Growth in real estate construction loans is related to originations in all of our banking markets.

(d)	Participating interests in mortgage loans are collateralized mortgage loans held for sale by mortgage banking counterparties. These loans will vary significantly depending on the volume of originations by the counterparties.

Loan Participations

Pursuant to our lending policy, loans may not exceed 85 percent of the Bank’s legal lending limit (except to the extent collateralized by U.S. Treasury securities or Bank deposits unless the Bank’s Chief Credit Officer or the Executive Credit Committee grant prior approval. To accommodate customers whose financing needs exceed lending limits and internal restrictions, the Bank sells loan participations to outside participants without recourse.

The sales of participations are accounted for pursuant to SFAS No. 140.

Loan participations sold on a nonrecourse basis to outside financial institutions were (in thousands) $166.1 million as of September 30, 2007 and $189.0 million as of December 31, 2006.

Concentrations of Credit

Loan concentrations exceeding 10% of total loans outstanding, and other significant relationships, involving customers located throughout our market areas are indicated below (dollars are in thousands):


	Number of customers	Total outstanding loans		Total outstanding loans and loan commitments		Percent of total outstanding loans and loan commitments

As of September 30, 2007
Non-residential and apartment building operators, developers and lessors of real property	148	$	190,039	$	226,127	36.4%
Participating interests in mortgage loans	96		21,817		22,217	3.6%
Total	244	$	211,856	$	248,344	40.0%

There is one mortgage banking counterparty from whom we purchase the participating interests in mortgage loans.

Loan Maturities

The following table sets forth the remaining maturities of loans in each major category of our portfolio as of September 30, 2007 (in thousands):

			Over 1 year
			through 5 years				Over 5 years
	One year		Fixed		Floating		Fixed		Floating
	or less		rate		rate		rate		rate		Total
Commercial and industrial	$	79,956	$	16,300	$	11,182	$	6,562	$	6,862	$	120,862
Real estate mortgage		27,200		25,358		57,171		22,652		20,865		153,246
Real estate construction		52,838		6,190		75,332		199		13,783		148,342
Agricultural		7,502		4,978		256		2,759		844		16,339
Consumer/other		2,127		2,066		612		49		250		5,104
Participating interests in mortgage loans		21,817		-		-		-		-		21,817
Lease financing		-		1,934		-		-		-		1,934
Total principal amount of loans	$	191,440	$	56,826	$	144,553	$	32,221	$	42,604	$	467,644

(1)	Maturities are based on contractual maturities. Floating rate loans include loans that would reprice prior to maturity if base rates change.

Actual maturities may differ from the contractual maturities shown above as a result of renewals and prepayments. Loan renewals are evaluated in the same manner as new credit applications.

Allowance for Credit Losses. The following tables below set forth information regarding changes in our allowance for credit losses for the three and nine-month periods ending September 30, 2007 and 2006 and certain ratios related to the allowance for credit losses (dollars are in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2007		2006	2007		2006

Balance, beginning of period	$	4,308	$	3,387	$	3,370	$	3,188
Provision for credit losses		2,800		-		3,750		210
Loans charged off		(1,609)		(15)		(1,623)		(46)
Loans recovered		3		2		5		22
Balance, end of period	$	5,502	$	3,374	$	5,502	$	3,374
Total loans at September 30, 2007 and September 30, 2006	$	466,503	$	360,483
Loans and leases held for investment at September 30, 2007 and September 30, 2006	$	444,686	$	338,439
Allowance for credit losses as a percentage of total loans at September 30, 2007 and September 30, 2006		1.18%		0.94%
Allowance for credit losses as a percentage of loans and leases held for investment at September 30, 2007 and September 30, 2006		1.24%		1.00%

	Three Months		Nine Months
	Ended September 30,		Ended September 30,
	2007	2006	2007	2006

Ratio of net charge-offs to average total loans	0.371%	0.004%	0.390%	0.007%
Ratio of net charge-offs to average loans and leases held for investment	0.387%	0.004%	0.421%	0.007%
Ratio of net charge-offs to average total loans, annualized	1.483%	0.014%	0.520)%	0.009%
Ratio of net charge-offs to average loans and leases held for investment, annualized	1.549%	0.015%	(0.561)%	0.010%

The provision for credit losses was $2.8 million in the third quarter of 2007 compared with $0 in the third quarter of 2006. The provision for credit losses was $3.750 million in the first nine months of 2007 compared to $210 thousand in same period in 2006.

A portion of the provision for credit losses relates to loan growth, the remainder relates to loans deemed to have deteriorated in the third quarter. The Company downgraded approximately $21 million of loans in the third quarter. Most of the loans downgraded, approximately $16 million, are related to real estate development loans which the Company currently believes are adequately collateralized. A smaller portion of the downgraded loans, approximately $3.5 million, are associated with participating interests in mortgage loans. The guarantors and the Company are currently resolving issues related to these loans in a cooperative manner. The Company charged off $1.6 million of commercial and industrial loans in the third quarter, and is using all of its legal rights and remedies to recover funds from the guarantors.

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 non-accrual or renegotiated loans that meet the criteria as being “impaired” under the definition in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”. 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

We consider qualitative factors in evaluating the allowance for credit losses. Qualitative factors we consider include the general economic environment in our markets; state of certain industries in our market areas; and pace of growth in our portfolio. In estimating the portion of our allowance allocated to the qualitative reserve we also consider inherent risks associated with loan size, complexity, structure and variances from underwriting guidelines granted in the underwriting process. When we underwrite and originate loans we may grant variances from specific underwriting guidelines but only when other underwriting factors mitigate the risk of such variances.

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.

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. When loans, leases and other extensions of credit are deemed uncollectible, or when the relationship with the borrower is contentious and we estimate the borrower will have limited assets available to repay, they are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. 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.

The following table summarizes, for the periods indicated, activity in the allowance for credit losses, including amounts of loans charged-off, amounts of recoveries, additions to the allowance charged to operating expense, the ratio of net charge-offs to average total loans, the ratio of the allowance to total loans at the end of each period and the ratio of the allowance to nonperforming loans:

	Nine Months Ended September 30, 2007		Year Ended December 31, 2006
	Nine Months Ended September 30, 2007		Year Ended December 31, 2006
	(dollars are in thousands)
Balance of allowance for credit losses, beginning of period	$	3,370	$	3,188
Charge-offs:
Commercial and industrial		(1,504)		(19)
Real estate mortgage		(3)		-
Real estate construction		-		-
Agricultural		-		-
Consumer/other		(116)		(32)
Lease financing		-		-
Total charge-offs		(1,623)		(51)
Recoveries:
Commercial and industrial		-		3
Real estate mortgage		-		-
Real estate construction		-		-
Agricultural		-		-
Consumer/other		5		20
Lease financing		-		-
Total recoveries		5		23
Net charge-offs		(1,618)		(28)
Provision for credit losses charged to operations		3,750		210
Balance of allowance for credit losses, end of period	$	5,502	$	3,370
Ratio of net charge-offs to average loans and leases held for investment		0.387%		0.008%
Average loans and leases held for investment	$	414,588	$	334,058
Ratio of allowance for credit losses to loans and leases held for investment		1.24%		1.01%
Ratio of allowance for credit losses to nonperforming loans		94%		3,304%

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

Allocation of the Allowance for Loan Losses

	September 30,			December 31,
	2007			2006
	Amount of allowance		Loans in category as a percentage of total gross loans	Amount of allowance		Loans in category as a percentage of total gross loans
		(dollars are in thousands)
Commercial and industrial	$	1,255	26%	$	1,602	26%
Real estate mortgage		1,531	33%		838	32%
Real estate construction		2,271	32%		534	23%
Agricultural		253	3%		171	4%
Consumer/other		102	1%		70	1%
Participating interests in mortgage loans		71	5%		140	14%
Lease financing		19	0%		15	0%
Total	$	5,502	100%	$	3,370	100%

We do not originate sub-prime single family loans. We do have a significant portion of our portfolio in construction and commercial real estate. While the company believes these loans are adequately secured, there has been a significant slow down in the construction and commercial real estate market. We continue to closely monitor all loans, but particularly those in deteriorating industries.

The allowance for loan loss has increased in our real estate portfolios because these are the portions of our portfolio where deterioration occurred.

Nonperforming Assets

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

	September 30,		December 31,
	2007		2006
Nonperforming loans:
Loans 90 days or more delinquent and still accruing interest	$	12	$	2
Non-accrual loans (includes $3.5 million of restructured loans at September 30, 2007)		5,851		100
Total nonperforming loans		5,863		102
Total nonperforming assets	$	5,863	$	102
Allowance for credit losses	$	5,502	$	3,370
Ratio of total nonperforming loans to total loans		1.26%		0.03%
Ratio of total nonperforming loans to loans and leases held for investment		1.32%		0.03%
Ratio of total nonperforming assets to total assets		0.94%		0.02%
Ratio of allowance for credit losses to nonperforming loans		94%		3,304%

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

Non-accrual 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 non-accrual 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 non-accrual 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.

In the third quarter, a $3.5 million relationship in the mortgage banking industry was restructured. The restructured loan earns no interest. At the time we placed the loan on non-accrual we reversed $90,000 of interest previously recognized. The mortgage banking industry is currently operating in a challenging environment.

For the nine months ended September 30, 2007, interest income recognized on non-accrual loans was $47 thousand. For the same period, interest income that would have been recognized if non-accrual loans had been current was $143 thousand.

Impaired loans and Potential Problem Loans

In accordance with accounting standards, we identify loans considered impaired and the valuation allowance attributable to these loans. Impaired loans generally include loans on which we believe, based on current information and events, it is probable that we will not be able to collect all amounts due in accordance with the terms of the loan agreement and which are analyzed for a specific reserve allowance. Potential problem loans at September 30, 2007 totaled $16 million compared to $1.2 million at December 31, 2006. A significant portion of these potential problem loans are not in default but may have characteristics such as recent adverse operating cash flows or general risk characteristics that the loan officer feels might jeopardize the future timely collection of principal and interest payments. The ultimate resolution of these credits is subject to changes in economic conditions and other factors. These loans are closely monitored to ensure that our position as creditor is protected to the fullest extent possible.

Subsequent to September 30, 2007, the Bank received a pay down of $325,000 and a payoff in full of $3.4 million relating to loans that were identified as problem loans in the third quarter.

Impaired Loans

As of September 30, 2007 and December 31, 2006, the Bank’s recorded investment in impaired loans and the related valuation allowance was as follows (in thousands):

	September 30, 2007				December 31, 2006
	Recorded Investment		Valuation Allowance		Recorded Investment		Valuation Allowance
Impaired loans -
Valuation allowance required	$	6,910	$	535	$	1,259	$	274
No valuation allowance required		-		-		-		-
Total impaired loans	$	6,910	$	535	$	1,259	$	274

Impaired loans generally include loans on which management believes it is probable that the Bank will not be able to collect all amounts due in accordance with the terms of the loan agreement and which are analyzed for a specific reserve allowance. The Bank generally considers all loans risk-graded substandard and doubtful, as well as non-accrual and restructured loans, as impaired loans.

The valuation allowance on impaired loans is included in the Bank’s allowance for credit losses. The average recorded investment in impaired loans, and approximate interest income for the nine months ended September 30,

2007 and twelve months ended December 31, 2006 recognized for such loans, were as follows (dollars are in thousands):

	September 30, 2007		December 31, 2006
Average recorded investment in impaired loans	$	4,268	$	2,914
Average recorded investment in impaired loans as a percentage of average total loans		1.03%		0.87%

	Nine Months Ended		Twelve Months Ended
	September 30, 2007		December 31, 2006
Interest income recognized on impaired loans	$	66	$	147

Cash receipts on impaired loans that are on non-accrual are applied to principal, except when well collateralized. Cash receipts on impaired loans risk rated doubtful or loss are applied to principal. Cash receipts on restructured loans included in impaired loans are recognized in accordance with the restructured terms. Interest income on impaired loans is recognized on an accrual basis only when the loan is considered to be well collateralized and payments are being received as we currently expect even though expectations are other than the original contractual terms.

Restructured loans are those for which concessions, including a reduction of the interest rate or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. We had restructured loans aggregating $3.5 million at September 30, 2007 and $0 at December 31, 2006. All restructured loans are included in non-accrual loans.

Liabilities

The following table presents our liabilities by category as of September 30, 2007 and December 31, 2006 as well as the amount and percent of change between the two dates (dollars are in thousands):

	September 30,		December 31,		Change
Liabilities	2007		2006		$		%

Deposits:
Non-interest-bearing	$	73,112	$	84,184	$	(11,072)	(13)	%	(a)
Interest-bearing -
Savings, interest checking and money market		253,878		253,408		470	0	%
Time deposits $100,000 and over		45,990		44,955		1,035	2	%
Other time deposits		147,957		146,705		1,252	1	%
Short-term borrowings		14,961		9,709		5,252	54	%	(b)
FHLB advances		-		62,200		(62,200)	(100)	%	(c)
Long-term borrowings		-		1,167		(1,167)	(100)	%	(d)
Guaranteed preferred beneficial interests in Company's subordinated debentures		22,769		22,711		58	0	%
Other liabilities		4,756		4,959		(203)	(4)	%
Liabilities from discontinued operations		719		6,676		(5,957)	(89)	%	(e)
Total liabilities	$	564,142	$	636,674	$	(72,532)	(11)	%

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

(b)	At quarter end the balance of short-term borrowings is higher as the borrowings have been used to fund that portion of increases in loans that are believed to be shorter term increases.

(c)	FHLB advances are lower as these borrowings were repaid in the second quarter of 2007.

(d)	The balance of long-term borrowings is lower in 2007 because we have focused on paying down higher cost borrowings.

(e)	The decrease in liabilities of discontinued operations relates to the sale of the insurance segment.

Stockholders’ Equity. Our stockholders’ equity increased between December 31, 2006 and September 30, 2007. The increase to stockholders’ equity is a result of earnings and increases in accumulated other comprehensive income partially offset by purchases of treasury stock .

Capital Adequacy. 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. The following table includes the risk-based and leverage capital ratios of the Company and the Bank:

	Tier 1 Risk-Based Ratio	Total Risk-Based Ratio	Tier 1 Leverage Ratio
As of September 30, 2007
BNCCORP, consolidated	13.53%	15.16%	12.44%
BNC National Bank	14.12%	15.10%	13.01%

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

As of September 30, 2007, BNCCORP and the Bank exceeded capital adequacy requirements and the Bank was considered “well-capitalized” under prompt corrective action provisions.

Regulatory capital ratios improved in the second quarter of 2007 because of earnings and a decrease in intangible assets resulting from the sale of assets in the insurance segment.

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.

The consolidated statements of cash flows in the consolidated financial statements included under Item 1 present data on cash and cash equivalents provided by and used in operating, investing and financing activities. In addition to liquidity from core deposit growth, together with repayments and maturities of loans and investments, we utilize brokered deposits, sell securities under agreements to repurchase and borrow overnight Federal funds. The Bank is a member of the FHLB, which affords it the opportunity to borrow funds 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, for the nine months ended September 30, 2007 and 2006, a summary of our major recurring sources and (uses) of funds (amounts are in thousands):

	For the Nine Months Ended
	September 30,
Major Sources and (Uses) of Funds		2007	2006

Repayments of Federal Home Loan Bank Advances		(62,200)	(20,000)
Originations of loans to be participated		(152,595)	(81,667)
Proceeds from participations of loans		152,595	81,667
Net increase in loans held for investment		(112,375)	(28,117)
Net decrease in participating interests in mortgage loans		34,308	82,380
Net decrease in deposits		(8,315)	(39,185)
Change in Federal funds sold, net		24,000	(31,000)
Proceeds from sale of investment securities		106,450	39,154
Purchases of investment securities		(49,358)	(26,052)
Proceeds from maturities of investment securities		21,380	17,984
Proceeds from sale of loans held for sale		12,262	17,562
Funding of originations of loans held for sale		(10,593)	(20,384)
Proceeds from sale of discontinued operations, net		35,204	-
Proceeds from long-term borrowings and subordinated debentures		15,000	-
Repayments of long-term borrowings and subordinated debentures		(16,167)	(1,682)

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, 2007, the Bank had established Federal funds purchase programs with three banks, totaling $17.5 million. At September 30, 2007, the Bank had purchased Federal funds of $6.5 million under these programs leaving $11 million available. 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.

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.

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, 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 September 30, 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’s 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, 2007 of 7.75 percent to 8.75 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. The parallel movement of interest rates takes the level of the 10-year U.S. Treasury note yield in the -300bp scenario to 1.59 percent. This is nearly 152bp 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 more than the record levels experienced during the 2003 lows in mortgage rates. The net interest income simulation results for the 12-month horizon are 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	$	25,288	$	25,109	$	24,672	$	24,852	$	25,102	$	25,304	$	25,554
Dollar change from unchanged scenario	$	436	$	257	$	(180)		-	$	250	$	452	$	702
Percentage change from unchanged scenario		1.75%		1.03%		(0.72)%		-		1.01%		1.82%		2.82%
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. When a given scenario falls outside of these limits, the ALCO reviews the circumstances surrounding the exception and,

considering the level of net interest income generated in the scenario and other related factors, may approve the exception to the general policy or recommend actions aimed at bringing the respective scenario within the general limits noted above.

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, 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, and our internal control over financial reporting. This 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. 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, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that material information relating to BNCCORP, including its consolidated subsidiaries is made known to the CEO and CFO by others within those entities, particularly during the period in which the applicable report is being prepared. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with accounting principles generally accepted in the United States 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 errors 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, controls 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, 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 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 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 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 2. Unregistered Sale of Equity Securities and Use of Proceeds

On July 5, 2007, the Company repurchased 94,782 shares of common stock for $1,720,293 ($18.15 per share) in a privately negotiated transaction. Our board of directors has not authorized the purchase of any other shares of common stock under any plan or program.

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 8, 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