U.S. Securities and Exchange Commission

Washington, D.C. 20549

______________

FORM 10-Q

______________

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

For the quarter ended March 31, 2006

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

Commission File No. 0-26290

BNCCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

45-0402816

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

322 East Main

Bismarck, North Dakota 58501

(Address of principal executive office)

(701) 250-3040

(Registrant’s telephone number)

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

Yes x

No o

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

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

The number of shares of the registrant’s outstanding common stock on May 11, 2006 was 3,450,227.

BNCCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2006

TABLE OF CONTENTS


	PART I. -- FINANCIAL INFORMATION


ITEM 1.	Financial Statements	3

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and	13
	Results of Operations

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	22

ITEM 4.	Controls and Procedures	24



	PART II. – OTHER INFORMATION


ITEM 5.	Legal Proceedings	25

ITEM 6.	Exhibits	25

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)

	March 31,		December 31,
ASSETS	2006		2005
	(unaudited)
CASH AND CASH EQUIVALENTS	$	18,892	$	28,824
FEDERAL FUNDS SOLD		50,000		-
INVESTMENT SECURITIES AVAILABLE FOR SALE		211,434		227,185
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK		5,798		5,791
LOANS HELD FOR SALE		1,231		266
PARTICIPATING INTERESTS IN MORTGAGE LOANS		33,420		101,336
LOANS AND LEASES HELD FOR INVESTMENT		337,879		310,368
ALLOWANCE FOR CREDIT LOSSES		(3,380)		(3,188)
Net loans and leases		367,919		408,516
PREMISES AND EQUIPMENT, net		23,518		23,514
INTEREST RECEIVABLE		2,914		3,330
OTHER ASSETS		15,388		13,851
GOODWILL		21,999		21,839
OTHER INTANGIBLE ASSETS, net		6,672		6,900
	$	725,765	$	740,016

LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Noninterest-bearing	$	64,420	$	72,977
Interest-bearing –
Savings, interest checking and money market		269,838		260,807
Time deposits $100,000 and over		61,485		71,287
Other time deposits		145,143		143,719
Total deposits		540,886		548,790
SHORT-TERM BORROWINGS		15,713		21,416
FEDERAL HOME LOAN BANK ADVANCES		82,200		82,200
LONG-TERM BORROWINGS		3,167		3,850
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S SUBORDINATED DEBENTURES		22,448		22,648
OTHER LIABILITIES		10,135		9,500
Total Liabilities		674,549		688,404
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value – 2,000,000 shares authorized; 0 and 0 shares issued and outstanding		-		-
Common stock, $.01 par value – 10,000,000 shares authorized; 3,450,227 and 3,447,945 shares issued and outstanding (excluding shares held in treasury)		35		35
Capital surplus – common stock		25,163		25,108
Retained earnings		29,521		28,504
Treasury stock (46,591 and 46,123 shares)		(565)		(559)
Accumulated other comprehensive income, net of income taxes		(2,938)		(1,476)
Total stockholders’ equity		51,216		51,612
	$	725,765	$	740,016

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

For the Three Months Ended March 31

(In thousands, except share and per share data)


	2006		2005
INTEREST INCOME:	(unaudited)		(unaudited)
Interest and fees on loans	$	7,360	$	5,797
Interest and dividends on investments -
Taxable		2,006		2,052
Tax-exempt		519		435
Dividends		56		73
Other		420		-
Total interest income		10,361		8,357
INTEREST EXPENSE:
Deposits		3,815		2,245
Short-term borrowings		193		170
Federal Home Loan Bank advances		1,039		1,185
Long-term borrowings		67		123
Subordinated debentures		551		477
Total interest expense		5,665		4,200
Net interest income		4,696		4,157
PROVISION FOR CREDIT LOSSES		210		250
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		4,486		3,907
NONINTEREST INCOME:
Insurance income		5,362		5,768
Fees on loans		616		1,295
Trust and financial services		210		159
Service charges		182		184
Brokerage income		123		84
Net losses on sales of securities		(599)		(66)
Other		276		289
Total noninterest income		6,170		7,713
NONINTEREST EXPENSE:
Salaries and employee benefits		5,748		5,619
Occupancy		757		755
Professional services		436		446
Depreciation and amortization		424		408
Office supplies, telephone and postage		366		361
Marketing and promotion		278		281
Amortization of intangible assets		228		328
FDIC and other assessments		49		55
Other		925		958
Total noninterest expense		9,211		9,211
Income before income taxes		1,445		2,409
Income tax provision		428		620
Net income	$	1,017	$	1,789

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income, continued

For the Three Months Ended March 31

(In thousands, except per share data)


	2006		2005
	(unaudited)		(unaudited)
Dividends on preferred stock		-		(23)
Income available to common stockholders		1,017	$	1,766

Basic earnings per common share	$	0.30	$	0.61

Diluted earnings per common share	$	0.29	$	0.60

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31

(In thousands)


	2006				2005
	(unaudited)				(unaudited)
NET INCOME			$	1,017			$	1,789
OTHER COMPREHENSIVE INCOME (LOSS)-
Unrealized holding losses arising during the period, net of income taxes				(1,652)				(1,950)
Reclassification adjustment for losses included in net income, net of income taxes				428				49
Beginning balance of cash flow hedging instruments	$	563			$	-
Ending balance of cash flow hedging instruments		230				-
Net loss on derivative instruments qualifying as cash flow hedging instruments, before tax and net of tax.		(333)		(238)		-		-
OTHER COMPREHENSIVE (LOSS)				(1,462)				(1,901)
COMPREHENSIVE (LOSS)			$	(445)			$	(112)

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Three Months Ended March 31

(In thousands, except share data)

				Capital						Capital									Accumulated
				Surplus						Surplus									Other
	Preferred Stock			Preferred			Common Stock			Common		Retained			Treasury			Comprehensive
	Shares	Amount		Stock			Shares	Amount		Stock		Earnings			Stock			Income				Total
BALANCE, December 31, 2004	125	$		$		1,250	2,928,777	$	29	$	18,601	$	24,430		$		(530)		$	66		$	43,846
Net income	-		-				-		-		-		1,789				-			-			1,789
Other comprehensive loss-																				(1,901)			(1,901)
Preferred stock dividends	-		-				-		-		-		(23)				-			-			(23)
Other	(25)					(250)	1,100		-		63		-				(3)			-			(190)
BALANCE, March 31, 2005	100		-	$		1,000	2,929,877	$	29		18,664	$	26,196		$		(533)		$	(1,835)		$	43,521



				Capital						Capital									Accumulated
				Surplus						Surplus									Other
	Preferred Stock			Preferred			Common Stock			Common		Retained			Treasury			Comprehensive
	Shares	Amount		Stock			Shares	Amount		Stock		Earnings			Stock			Income				Total
BALANCE, December 31, 2005	-	$		$	-		3,494,068	$	35	$	25,108	$		28,504		$	(559)	$			(1,476)	$	51,612
Net income	-		-		-		-		-		-			1,017			-				-		1,017
Other comprehensive loss -	-		-		-																(1,462)		(1,462)
Other	-				-		2,750		-		55			-			(6)				-		49
BALANCE, March 31, 2006	-		-	$	-		3,496,818	$	35	$	25,163	$		29,521		$	(565)	$			(2,938)	$	51,216

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Three Months Ended March 31

(In thousands)

	2006		2005
OPERATING ACTIVITIES:	(unaudited)		(unaudited)
Net income	$	1,017	$	1,789
Adjustments to reconcile net income to net cash provided by operating activities -
Provision for credit losses		210		250
Depreciation and amortization		424		408
Amortization of intangible assets		228		328
Net amortization of premiums and discounts on investment securities and subordinated debentures		356		610
Proceeds from loans recovered		13		118
Change in interest receivable and other assets, net		(806)		(216)
(Gain) loss on sale of bank premises and equipment		(5)		1
Net realized losses on sales of investment securities		599		66
Change in dividend distribution payable		(222)		(217)
Change in other liabilities, net		678		1,154
Originations of loans held for sale		(6,083)		(31,919)
Proceeds from sale of loans held for sale		5,118		15,825
Originations paid of loans to be participated		(24,894)		(57,551)
Proceeds received from participations of loans		24,894		57,551
Net cash provided (used) by operating activities		1,527		(11,803)
INVESTING ACTIVITIES:
Purchase of Federal funds sold, net		(50,000)		-
Purchases of investment securities		(10,115)		(8,195)
Proceeds from sales of investment securities		17,484		1,631
Proceeds from maturities of investment securities		5,629		6,445
Purchases of Federal Reserve and Federal Home Loan Bank Stock		(7)		(1,844)
Redemptions of Federal Reserve and Federal Home Loan Bank Stock		-		1,414
Net decrease (increase) in participating interests in mortgage loans		67,916		11,010
Net (increase) decrease in loans, excluding participating interests in mortgage loans		(27,542)		1,089
Additions to bank premises and equipment		(440)		(481)
Cash paid for insurance agency earnout		(160)		-
Other		17		7
Net cash provided by investing activities		2,782		11,076
FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(7,904)		12,263
Net decrease in short-term borrowings		(5,703)		(6,798)
Repayments of Federal Home Loan Bank advances		-		(120,000)
Proceeds from Federal Home Loan Bank advances		-		120,000
Repayments of long-term borrowings		(683)		(682)
Repurchase of preferred stock		-		(250)
Payment of preferred stock dividends		-		(22)
Other, net		49		59
Net cash (used) provided by financing activities		(14,241)		4,570
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(9,932)		3,843
CASH AND CASH EQUIVALENTS, beginning of period		28,824		11,881
CASH AND CASH EQUIVALENTS, end of period	$	18,892	$	15,724
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	5,431	$	4,253
Income taxes paid	$	153	$	61

See accompanying notes to consolidated financial statements.

BNCCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2006

NOTE 1 – BNCCORP, Inc.

BNCCORP, Inc. (“BNCCORP”) is a registered bank holding company incorporated under the laws of Delaware. It is the parent company of BNC National Bank (together with its wholly owned subsidiaries, BNC Insurance Services, Inc., and BNC Asset Management, Inc., collectively the “Bank”). BNCCORP, through these wholly owned subsidiaries, which operate from 27 locations in Arizona, Colorado, Minnesota, North Dakota and Utah, provides a broad range of banking, insurance, and wealth management services to individuals and small and mid-sized businesses.

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

NOTE 2 – Basis of Presentation

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

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

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

NOTE 3 – Reclassifications

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

NOTE 4 – Earnings Per Share

The following table shows the amounts used in computing earnings per share (“EPS”) and the effect on weighted average number of shares of potential dilutive common stock issuances for the three-month periods ended March 31:

Net income per share was calculated as follows:

	2006		2005
Denominator for basic earnings per share:
Average common shares outstanding		3,449,067		2,885,414
Dilutive common stock options		36,873		63,771
Denominator for diluted earnings per share		3,485,940		2,949,185
Numerator: Net income attributable to common shareholders	$	1,017	$	1,766
Net income per share
Basic	$	0.30	$	0.61
Diluted	$	0.29	$	0.60

As of March 31, 2006 and 2005, options to purchase 57,450 and 60,550 shares, respectively were outstanding but were not included in the computation of diluted EPS because their exercise prices were higher than the average price of BNCCORP’s common stock for the period.

NOTE 5 – Segment Disclosures

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

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

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

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

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

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

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

	2006											2006
					Wealth		Bank					Intersegment		Consolidated
	Banking		Insurance		Mgmt		Holding Co.			Totals		Elimination		Total
Net interest income (loss)	$	5,037	$	41	$	228	$		(626)	$	4,680	$	16	$	4,696
Other revenue-external customers		443		5,390		368			24		6,225		(55)		6,170
Segment profit (loss)		527		915		(35)			(390)		1,017		-		1,017
Segment assets		642,196		38,093		45,364			81,194		806,847		(81,082)		725,765
Efficiency Ratios		82.85%		72.31%		109.40%			(62.29)%		87.06%				84.77%

	2005											2005
					Wealth		Bank					Intersegment		Consolidated
	Banking		Insurance		Mgmt		Holding Co.			Totals		Elimination		Total
Net interest income (loss)	$	4,639	$	8	$	101		$	(605)	$	4,143	$	14	$	4,157
Other revenue-external customers		1,636		5,841		268			23		7,768		(55)		7,713
Segment profit (loss)		979		1,086		(6)			(270)		1,789		-		1,789
Segment assets		626,109		36,068		16,267			78,491		756,935		(77,851)		679,084
Efficiency Ratios		75.14%		69.62%		102.71%			(56.36)%		79.71%				77.60%

NOTE 6 – Stock-Based Compensation

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

As of January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. The Company recognized share-based compensation expense of $57,535 for the three months ended March 31, 2006. Included in this amount is $53,926 related to restricted stock. In the quarter ended March 31, 2005 the amount of compensation expense related to restricted stock was approximately $41,000. Also included in the share based compensation expense for the quarter ended March 31, 2006 was $3,609 of expense related to stock options.

The Company utilizes the Black-Scholes valuation model to determine the fair value of the stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. No stock options were granted during the three month period ended March 31, 2006. There were no cash flow effects of stock-based compensation during the quarter ended March 31, 2006.

At January 1, 2006 the Company had $627,422 of unamortized restricted stock compensation expense and $12,860

of unrecognized share based compensation expense related to stock options.

Prior to January 1, 2006, the Company accounted for the stock options under APB 25, accounting for employee share options at intrinsic value, which provided that no compensation expense was charged for options granted at an exercise price equal to market value of the stock on the grant date. If SFAS 123R had been applied for the three months ended March 31, 2005, the Company’s pro forma net income and earnings per share would have been as follows:

	2005
	(unaudited)
Net income available to stockholders	$	1,766
Add: total stock-based employee compensation expense included in reported net income, net of related tax effects		41
Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(51)
Pro forma net income	$	1,756

Earnings per share:
Basic – as reported	$	0.61
Basic – pro forma		0.59
Diluted – as reported		0.60
Diluted – pro forma		0.58

NOTE 7 – 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 March 31, 2006, 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 assets.

At March 31, 2006, the fair value of the floor was $230,000, which was included in other assets. The change in net unrealized losses of $333,000 during the first quarter for derivatives designated as cash flow hedges is separately disclosed in the statement of changes in stockholders’ equity and comprehensive income. No hedge ineffectiveness on cash flow hedges was recognized during the quarter. The entire loss on the derivative was included in the assessment of the effectiveness.

The Company has interest rate cap contracts with a notional amount of $20.0 million at March 31, 2006 and March 31, 2005. The contracts were originally purchased in 2001 to mitigate interest rate risk in rising-rate scenarios. The referenced interest rate is three-month LIBOR; the 5.50 percent contracts have five-year original maturities (maturing during May and June of 2006). The contracts are reflected in the Company’s consolidated balance sheet at current fair value of $0 at March 31, 2006 and $1,300 at March 31, 2005. The contracts are not being accounted for as hedges under SFAS 133. As a result, the impact of marking the contracts to fair value has been, and will continue to be, included in net interest income. During the three months ended March 31, 2006 and 2005, the impact of marking the contracts to market, reflected as additional interest expense on Federal Home Loan Bank (“FHLB”) advances, was an increase/ (reduction) to net interest income of $18 and approximately $(143), respectively.

NOTE 8 – Recently Issued or Adopted Accounting Standards

As of January 1, 2006, the Company adopted SFAS 123R, which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. The Company adopted SFAS 123R using the modified prospective transition method. In accordance with this method, the Company’s Financial Statements for prior periods have not been restated to reflect the impact of SFAS 123R (see Note 6).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For purposes of Items 2, 3 and 4 of Part I of this Form 10-Q, we refer to “we,” “our” or the “Company” when such reference includes BNCCORP, Inc. and its consolidated subsidiaries, collectively; “BNCCORP” when referring only to BNCCORP, Inc.; the “Bank” when referring only to BNC National Bank; “BNC Insurance” when referring only to BNC Insurance Services, Inc.; and “BNC AMI” when referring only to BNC Asset Management, Inc.

Comparison of Operating Results for the Three Months Ended March 31, 2006 and 2005

General. Net income was $1.0 million, or $0.29 per share on a diluted basis, for the quarter ended March 31, 2006. This compared with net income for the first quarter ended March 31, 2005, of $1.8 million, or $0.60 per diluted share.

Net interest income was $4.7 million for the first quarter of 2006, an increase of 13.0 percent from the $4.2 million reported for the first quarter of 2005. This reflected an increase in the net interest margin to 2.97 percent, for the quarter ended March 31, 2006, from 2.78 percent for the same period in 2005. The improvement in net interest margin was largely due to growth in loan balances and higher rates earned on loans, coupled with a decline in the balance of higher cost borrowings. The yield on interest earning assets for the period ended March 31, 2006 was 6.55 percent compared to 5.60 percent for the period in the prior year, an increase of 95 basis points. The cost of interest bearing liabilities was 3.85 percent compared to 3.00 percent, an increase of 85 basis points.

Noninterest income was $6.2 million for the 2006 first quarter, a decrease of $1.5 million, or 20.0 percent, from $7.7 million in the first quarter of 2005. This decrease is partially the result of losses on the sales of securities of $599,000 in the recent quarter. The securities were sold to reduce higher cost liabilities and reinvest in higher earning assets. Loan fees, a significant component of noninterest income, were $616,000 in the first quarter of 2006, a decrease of approximately $679,000, or 52.4 percent, from $1.3 million in the first quarter of 2005. The decrease is attributable to fees of approximately $800,000 generated by a large commercial real estate transaction consummated in the first quarter of 2005 which did not recur in the first quarter of 2006. Insurance revenues were $5.4 million in the first quarter of 2006. This is a decrease of approximately $406,000, or 7.0 percent, from $5.8 million in the first quarter of 2005. This decrease can be attributed to a decline in contingent income and a soft rate environment for insurance agencies. Service charges, brokerage income, trust fees and other fees were $791,000 in the first quarter of 2006. This is an increase of $75,000, or 10.5 percent from the first quarter of 2005.

Noninterest expense held steady at $9.2 million for the first quarters of both 2006 and 2005.

The financial performance of our Company has historically been strongest in the first quarter due to contingency payments received by BNC Insurance.

Total assets were $725.8 million, $740.0 million and $679.1 million at March 31, 2006, December 31, 2005, and March 31, 2005, respectively. Loans, excluding participating interests in mortgage loans, were $337.9 million, $310.4 million and $292.9 million at March 31, 2006, December 31, 2005, and March 31, 2005, respectively. The interest yield on loans for the first quarter of 2006 was 7.94 percent compared to 6.43 percent in the same period of 2005. Investment securities available for sale were $211.4 million at March 31, 2006; $227.2 million at December 31, 2005; and $232.3 million at March 31, 2005. Proceeds from the maturities of investments have been reinvested in loans and used to reduce higher cost borrowings.

Total deposits at March 31, 2006 were $540.9 million, compared to $548.8 million at December 31, 2005 and $467.6 million at March 31, 2005. The growth in deposits from March 31, 2005 is primarily due to increases in core deposits. The new branches in Arizona and Minnesota account for most of the increases in deposits.

Borrowed funds were $123.5 million, $130.1 million and $155.8 million at March 31, 2006, December 31, 2005, and March 31, 2005, respectively. Increases in deposits have permitted BNCCORP to reduce the need for other borrowed funds.

Reflecting the Company’s focus on building its wealth management business, trust assets under administration rose to $257.8 million at March 31, 2006, compared to $240.5 million at December 31, 2005, and $74.3 million at March 31, 2005.

Net Interest Income. Net interest income for the first quarter of 2006 was $4.7 million, an increase of 13.0 percent, from the $4.2 million reported for the first quarter of 2005. This reflected an increase in the net interest margin due to higher loan balances, higher rates earned on loans and a decline in the balance of higher cost borrowings.

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 March 31, 2006 and 2005, as well as the changes between the periods presented, unaudited, (amounts are in thousands):

	Three Months Ended March 31,
	2006					2005					Change
			Interest		Average			Interest		Average			Interest		Average
	Average		earned		yield or	Average		earned		yield or	Average		earned		yield or
	Balance		Or owed		cost	balance		Or owed		Cost	balance		Or owed		cost
Interest-earning assets
Federal funds sold/interest-bearing due from	$	39,110	$	421	4.37%	$	240	$	-	-	$	38,870	$	421	4.37%	(a)
Investments - Taxable		182,876		2,062	4.57%		205,033		2,125	4.20%		(22,157)		(63)	0.37%	(b)
Investments - Tax Exempt		46,897		519	4.49%		38,454		435	4.59%		8,443		84	-0.10%	(c)
Loans held for sale		904		-	0.00%		42,133		414	3.98%		(41,229)		(414)	-3.98%	(d)
Participating interests in mortgage loans		49,539		808	6.61%		29,098		408	5.69%		20,441		400	0.92%	(e)
Loans and leases held for investment		325,427		6,551	8.16%		294,111		4,975	6.86%		31,316		1,576	1.30%
Allowance for loan losses		(3,173)		-			(3,335)		-			162		-
Total interest-earning assets	$	641,580		10,361	6.55%	$	605,734		8,357	5.60%	$	35,846		2,004	0.95%
Interest-bearing liabilities
Interest checking and money market accounts	$	248,548		1,663	2.71%	$	212,620		804	1.53%	$	35,928		859	1.18%	(f)
Savings		8,376		16	0.77%		7,353		15	0.83%		1,023		1	-0.06%
Certificates of deposit under $100,000		146,570		1,394	3.86%		100,046		678	2.75%		46,524		716	1.11%	(f)
Certificates of deposit $100,000 and over		67,282		742	4.47%		83,504		748	3.63%		(16,222)		(6)	0.84%
Total interest-bearing deposits		470,776		3,815	3.29%		403,523		2,245	2.26%		67,253		1,570	1.03%
Short-term borrowings		17,379		193	4.50%		26,342		170	2.62%		(8,963)		23	1.88%	(g)
Federal Home Loan Bank advances		82,200		1,039	5.13%		106,526		1,185	4.51%		(24,326)		(146)	0.62%	(g)
Long-term borrowings		3,832		67	7.09%		10,062		123	4.96%		(6,230)		(56)	2.13%	(h)
Subordinated debentures		22,360		551	9.99%		22,239		477	8.70%		121		74	1.29%
Total borrowings		125,771		1,850	5.97%		165,169		1,955	4.80%		(39,398)		(105)	1.17%
Total interest-bearing liabilities	$	596,547		5,665	3.85%	$	568,692		4,200	3.00%	$	27,855		1,465	0.85%
Net interest income/spread			$	4,696	2.70%			$	4,157	2.60%			$	539	0.10%
Net interest margin					2.97%					2.78%					0.19%
Notation:
Noninterest-bearing deposits	$	67,201		-		$	62,403		-		$	4,798		-
Total deposits	$	537,977	$	3,815	2.88%	$	465,926	$	2,245	1.95%	$	72,051	$	1,570	0.93%
Taxable equivalents:
Total interest-earning assets	$	641,580	$	10,628	6.72%	$	605,734	$	8,581	5.75%	$	35,846	$	2,047	0.97%
Net interest income/spread		-	$	4,963	2.87%		-	$	4,381	2.75%		-	$	582	0.12%
Net interest margin		-		-	3.14%		-		-	2.93%		-		-	0.21%

(a)

The average balance of Federal funds sold is higher in 2006. This relates to management’s decision to shorten the duration of investments due to the flat yield curve and maintain liquidity in order to have the ability to repay higher cost liabilities coming due in the near future.

(b)

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

(c)

Tax exempt investments have increased as a part of our continued strategy to minimize taxes.

(d)

The average balance of loans held for sale declined as a result of discontinuing a student loan financing program in the second half of 2005.

(e)

See page 16 for discussion of participating interests in mortgage loans.

(f)

Increases in deposits are primarily attributable to growth of the new branches in Minnesota and Arizona.

(g)

Increases in deposits have allowed the Bank to reduce short term borrowings and FHLB advances.

(h)

The average balance of long-term borrowings is lower because the Bank used proceeds from the sale of stock to reduce long-term borrowings in the second half of 2005.

Noninterest Income. The following table presents the major categories of our noninterest income for the three-month periods ended March 31, 2006 and 2005 as well as the amount and percent of change between the periods (amounts are in thousands):

	Three Months Ended				Increase (Decrease)
	March 31,				2006 – 2005
Noninterest Income	2006		2005		$		%
	(unaudited)		(unaudited)
Insurance commissions	$	5,362	$	5,768	$	(406)	(7)	%	(a)
Fees on loans		616		1,295		(679)	(52)	%	(b)
Trust and financial services		210		159		51	32	%	(c)
Service charges		182		184		(2)	(1)	%
Brokerage income		123		84		39	46	%	(d)
Net loss on sales of securities		(599)		(66)		(533)	808	%	(e)
Other		276		289		(13)	(5)	%
Total noninterest income	$	6,170	$	7,713	$	(1,543)	(20)	%
Noninterest income as a percent of gross revenues		56.8%		65.0%		(8.2)%

(a)

Insurance revenues were down as a result of a decrease in contingency income received from insurance companies. Contingency income recognized during the quarter ended March 31, 2006 was $1.2 million compared to $1.5 million for the same period in 2005. Most of our income from insurance companies is received during the first quarter of the year. The remainder of the decrease is a result of soft rate environment for insurance agencies.

(b)

The decrease is attributable to a large commercial real estate transaction consummated in the first quarter of 2005. The fees on this transaction were approximately $800,000. These types of transactions do not recur on a regular basis.

(c)

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

(d)

Brokerage revenue increased primarily due to higher production in the North Dakota market relative to that of the first quarter of 2005.

(e)

Gains and/or losses on the sale of investment securities vary from period to period depending on the nature of the securities transactions consummated. Sales of investment securities during the quarter ended March 31, 2006 resulted in net realized losses of $599,000. The proceeds from sale are being used to reduce higher cost borrowings and reinvest in higher earning assets.

Noninterest Expense. Noninterest expense was flat in the first quarters of 2006 and 2005. The following table presents the major categories of our noninterest expense for the three-month periods ended March 31, 2006 and 2005 as well as the amount and percent of change between the periods (amounts are in thousands):

	Three Months Ended				Increase (Decrease)
	March 31,				2006 – 2005
Noninterest Expense	2006		2005		$		%
	(unaudited)		(unaudited)
Salaries and employee benefits	$	5,748	$	5,619	$	129	2	%
Occupancy		757		755		2	0	%
Professional Services		436		446		(10)	(2)	%
Depreciation and amortization		424		408		16	4	%
Office supplies, telephone and postage		366		361		5	1	%
Marketing and promotion		278		281		(3)	(1)	%
Amortization of intangible assets		228		328		(100)	(30)	%
FDIC and other assessments		49		55		(6)	(11)	%
Other		925		958		(33)	(3)	%
Total noninterest expense	$	9,211	$	9,211	$	-	-	%
Efficiency ratio		84.8%		77.6%		7.2%

Income Tax Provision. Our provision for income taxes for the quarter ended March 31, 2006 was $428,000 as compared to $620,000 for the same period in 2005. The estimated effective tax rates for the three-month periods ended March 31, 2006 and 2005 were 29.6 and 25.8 percent, respectively. The effective tax rate increased because the ratio of tax exempt income to anticipated pre-tax income decreased.

Comparison of Financial Condition at March 31, 2006 and December 31, 2005

Assets. Our total assets were $725.8 million at March 31, 2006 and $740.0 million at December 31, 2005. The following table presents our assets by category as of March 31, 2006 and December 31, 2005, as well as the amount and percent of change between the two dates (amounts are in thousands):

	March 31,		December 31,		Change
Assets	2006		2005		$		%
	(unaudited)		(unaudited)
Cash and due from banks	$	18,892	$	28,824	$	(9,932)	(34)	%	(a)
Federal funds sold		50,000		-		50,000	100	%	(b)
Investment securities available for sale		211,434		227,185		(15,751)	(7)	%
Federal Reserve Bank and Federal Home Loan Bank stock		5,798		5,791		7	0	%
Loans held for sale		1,231		266		965	363	%
Participating interests in mortgage loans		33,420		101,336		(67,916)	(67)	%	(c)
Loans and leases held for investment, net		334,499		307,180		27,319	9	%	(d)
Premises and equipment, net		23,518		23,514		4	0	%
Interest receivable		2,914		3,330		(416)	(12)	%
Other assets		15,388		13,851		1,537	11	%
Goodwill		21,999		21,839		160	1	%
Other intangible assets, net		6,672		6,900		(228)	(3)	%
Total assets	$	725,765	$	740,016	$	(14,251)	(2)	%

(a)

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

(b)

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

(c)

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

(d)

The increase in loans and leases held for investment can be attributed to both the purchase of loans and originations of new loans.

Allowance for Credit Losses. The following table sets forth information regarding changes in our allowance for credit losses for the three-month periods ending March 31, 2006 and 2005 (amounts are in thousands):

	2006		2005
	(unaudited)		(unaudited)
Balance, beginning of period	$	3,188	$	3,335
Provision for credit losses		210		250
Loans charged off		(31)		(113)
Loans recovered		13		118
Balance, end of period	$	3,380	$	3,590

Total loans held for investment at March 31, 2006 and March 31, 2005	$	371,299	$	316,403
Loans held for investment, excluding participating interests in mortgage loans at March 31, 2006 and March 31, 2005	$	337,879	$	292,898
Allowance for credit losses as a percentage of total loans held for investment at March 31, 2006 and March 31, 2005		0.91%		1.13%
Allowance for credit losses as a percentage of loans held for investment, excluding participating interests in mortgage loans at March 31, 2006 and March 31, 2005		1.00%		1.23%

As of March 31, 2006, our allowance for credit losses was 0.91 percent of total loans held for investment compared to 0.77 percent as of December 31, 2005. Our allowance for credit losses was 1.00 percent of loans held for investment, excluding participating interests in mortgage loans, as of March 31, 2006 compared to 1.03 percent at December 31, 2005.

There was a $210,000 provision for loan losses for the three-month period ended March 31, 2006 and a $250,000 provision for the three-month period ended March 31, 2005.

Loans charged off during the first quarter of 2006 totaled $31,000 and $113,000 during the first quarter of 2005.

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

	Three Months
	Ended March 31,
	2006	2005
	(unaudited)	(unaudited)
Ratio of net charge-offs to average total loans held for investment	(0.005)%	0.002%
Ratio of net charge-offs to average total loans held for investment, excluding participating interests in mortgage loans	(0.006)%	0.002%
Ratio of net charge-offs to average total loans held for investment, annualized	(0.019)%	0.006%
Ratio of net charge-offs to average total loans held for investment, excluding participating interests in mortgage loans, annualized	(0.022)%	0.007%

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

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

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

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

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

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

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

	March 31,		December 31,
	2006		2005
Nonperforming loans:	(unaudited)		(unaudited)
Loans 90 days or more delinquent and still accruing interest	$	-	$	-
Nonaccrual loans		132		143
Total nonperforming loans		132		143
Total nonperforming assets	$	132	$	143
Allowance for credit losses	$	3,380	$	3,188
Ratio of total nonperforming loans to total loans held for investment		0.04%		0.03%
Ratio of total nonperforming loans to total loans held for investment, excluding participating interests in mortgage loans		0.04%		0.05%
Ratio of total nonperforming assets to total assets		0.02%		0.02%
Ratio of allowance for credit losses to nonperforming loans		2,561%		2,229%

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.

Nonaccrual loans include loans on which the accrual of interest has been discontinued. Accrual of interest is discontinued when we believe, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed on nonaccrual status when it becomes 90 days or more past due unless the loan is well-secured and in the process of

collection. When a loan is placed on nonaccrual status, accrued but uncollected interest income applicable to the current reporting period is reversed against interest income of the current period. Accrued but uncollected interest income applicable to previous reporting periods is charged against the allowance for credit losses. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual write-down or charge-off of the principal balance of the loan which may necessitate additional charges to earnings.

Restructured loans are those for which concessions, including a reduction of the interest rate or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. We had no restructured loans in our portfolio at March 31, 2006 or December 31, 2005.

Other real estate owned and repossessed assets represent properties and other assets acquired through, or in lieu of, loan foreclosure. Such properties and assets are included in other assets in the consolidated balance sheets. They are initially recorded at fair value at the date of acquisition establishing a new cost basis. Write-downs to fair value at the time of acquisition are charged to the allowance for credit losses. After foreclosure, we perform valuations periodically and the real estate or assets are carried at the lower of carrying amount or fair value less cost to sell. Write-downs, revenues and expenses incurred subsequent to foreclosure are charged to operations as recognized/incurred. We had no other real estate owned and repossessed assets at March 31, 2006 or December 31, 2005.

Potential Problem Loans

In accordance with accounting standards, we identify loans considered impaired and the valuation allowance attributable to these loans. Impaired loans generally include loans on which we believe, based on current information and events; it is probable that we will not be able to collect all amounts due in accordance with the terms of the loan agreement and which are analyzed for a specific reserve allowance. We generally consider all loans risk-graded substandard and doubtful as well as nonaccrual and restructured loans as impaired. Potential problem loans, other than nonperforming loans, at March 31, 2006 totaled $1.3 million as compared to $1.3 million at December 31, 2005. 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.

Liabilities. Our total liabilities decreased $13.9 million, to $674.5 million at March 31, 2006, from $688.4 million at December 31, 2005. The following table presents our liabilities by category as of March 31, 2006 and December 31, 2005 as well as the amount and percent of change between the two dates (amounts are in thousands):

	March 31,		December 31,		Change
Liabilities	2006		2005		$		%
	(unaudited)		(unaudited)
Deposits:
Noninterest-bearing	$	64,420	$	72,977	$	(8,557)	(12)	%	(a)
Interest-bearing -
Savings, interest checking and money market		269,838		260,807		9,031	3	%
Time deposits $100,000 and over		61,485		71,287		(9,802)	(14)	%	(b)
Other time deposits		145,143		143,719		1,424	1	%
Short-term borrowings		15,713		21,416		(5,703)	(27)	%	(c)
FHLB advances		82,200		82,200		-	-	%
Long-term borrowings		3,167		3,850		(683)	(18)	%
Guaranteed preferred beneficial interests in Company's subordinated debentures		22,448		22,648		(200)	(1)	%
Other liabilities		10,135		9,500		635	7	%
Total liabilities	$	674,549	$	688,404	$	(13,855)	(2)	%

(a)

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

(b)

The decreases in balances were a result of management’s decision to let higher cost CD’s mature.

(c)

The decrease is a result of our plan to pay off higher rate borrowings as they mature.

Stockholders’ Equity. Our stockholders’ equity decreased $400,000 between December 31, 2005 and March 31, 2006. The increase to stockholder’s equity as result of earnings was more than offset by increases in unrealized losses in our investment portfolio.

Capital Adequacy and Expenditures. We actively monitor compliance with regulatory capital requirements, including risk-based and leverage capital measures. Under the risk-based capital method of capital measurement, the ratio computed is dependent upon the amount and composition of assets recorded on the balance sheet, the amount and composition of off-balance-sheet items, and the amount of capital. The following table includes the risk-based and leverage capital ratios of the Company and the Bank as of March 31:

	Tier 1 Risk-	Total Risk-	Tier 1 Leverage
	Based Ratio	Based Ratio	Ratio
As of March 31, 2006
BNCCORP, consolidated	8.97%	10.57%	6.23%
BNC National Bank	10.35%	11.04%	7.19%

As of March 31, 2005
BNCCORP, consolidated	7.12%	9.60%	4.71%
BNC National Bank	10.48%	11.31%	6.93%

As of March 31, 2006, BNCCORP and the Bank exceeded capital adequacy requirements and the Bank was considered “well-capitalized” under prompt corrective action provisions.

Capital expenditures for 2006 will include amounts for new branch sites in Minnesota and Arizona, a new in-house ATM system, IP Telephony phone systems and access control to certain locations. Capital expenditures could also include the purchase or lease of additional facilities in our various market areas should such facilities or properties be deemed to add additional franchise value.

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 three months ended March 31, 2006 and 2005, a summary of our major sources and (uses) of funds. The summary information is derived from the consolidated statements of cash flows included under Item 1 (amounts are in thousands):

	For the Three Months Ended
	March 31,
Major Sources and (Uses) of Funds	2006		2005
	(unaudited)		(unaudited)
Proceeds from Federal Home Loan Bank advances	$	-	$	120,000
Repayments of Federal Home Loan Bank advances		-		(120,000)
Purchase of Federal funds sold		(50,000)		-
Proceeds received from participations of loans		24,894		57,551
Originations paid on loans to be participated		(24,894)		(57,551)
Net decrease (increase) in participating interests in mortgage loans		67,916		11,010
Net (increase) decrease in loans, excluding participating interests in mortgage loans		(27,542)		1,089
Proceeds from sales of investment securities		17,484		1,631
Purchases of investment securities		(10,115)		(8,195)
Net (decrease) increase of deposits		(7,904)		12,263
Net decrease in short-term borrowings		(5,703)		(6,798)
Proceeds from maturities of investment securities		5,629		6,445

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

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

As of March 31, 2006, the Bank had established federal funds purchase programs with three banks, totaling $17.5 million. At March 31, 2006, the Bank had purchased Federal funds of $0 under these programs leaving $17.5 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.

Application of Critical Accounting Policies

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

Allowance for Credit Losses

Goodwill Impairment

Interest Income Recognition

Income Taxes

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

Forward-Looking Statements

Statements included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are not historical in nature are intended to be, and are hereby identified as “forward-looking statements” for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We caution readers that these forward-looking statements, including without limitation, those relating to our future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements due to several important factors. These factors include, but are not limited to: risks of loans and investments, including dependence on local and regional economic conditions; competition for our customers from other providers of financial services; possible adverse effects of changes in interest rates including the effects of such changes on derivative contracts and associated accounting consequences; risks associated with our acquisition and growth strategies; and other risks which are difficult to predict and many of which are beyond our control.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Interest rate risk arises from changes in interest rates. Interest rate risk can result from: (1) Repricing risk – timing differences in the maturity/repricing of assets, liabilities, and off-balance-sheet contracts; (2) Options risk – the effect of embedded options, such as loan prepayments, interest rate caps/floors, and deposit withdrawals; (3) Basis risk – risk resulting from unexpected changes in the spread between two or more different rates of similar maturity, and the resulting impact on the behavior of lending and funding rates; and (4) Yield curve risk – risk resulting from unexpected changes in the spread between two or more rates of different maturities from the same type of instrument. We have risk management policies to monitor and limit exposure to interest rate risk. To date we have not conducted trading activities as a means of managing interest rate risk. Our asset/liability management process is utilized to manage our interest rate risk. The measurement of interest rate risk associated with financial instruments is meaningful only when all related and offsetting on-and off-balance-sheet transactions are aggregated, and the resulting net positions are identified.

Our interest rate risk exposure is actively managed with the objective of managing the level and potential volatility of net interest income in addition to the long-term growth of equity, bearing in mind that we will always be in the business of taking on rate risk and that rate risk immunization is not entirely possible. Also, it is recognized that as exposure to interest rate risk is reduced, so too may the overall level of net interest income and equity. In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to repricing or maturity characteristics. Access to the derivatives market can be an important element in maintaining our interest rate risk position within policy guidelines. Using derivative instruments, principally interest rate floors, caps, and interest rate swaps, the interest rate sensitivity of specific transactions, as well as pools of assets or liabilities, is adjusted to maintain the desired interest rate risk profile.

Our primary tool for measuring and managing interest rate risk is net interest income simulation. This exercise includes our assumptions regarding the level of interest rates and their impact on our current balance sheet. Interest

rate caps and floors are included to the extent that they are exercised in the 12-month simulation period. Additionally, changes in prepayment behavior of the residential mortgage, CMOs, and mortgage-backed securities portfolios in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. For purposes of this simulation, projected month-end balances of the various balance sheet accounts are held constant at their March 31, 2006 levels. Cash flows from a given account are reinvested back into the same account so as to keep the month-end balance constant at its March 31, 2006 level. The static balance sheet assumption is made so as to project the interest rate risk to net interest income embedded in the existing balance sheet. With knowledge of the balance sheet’s existing net interest income profile, more informed strategies and tactics may be developed as it relates to the structure/mix of growth.

We monitor the results of net interest income simulation on a quarterly basis at regularly scheduled ALCO meetings. Each quarter net interest income is generally simulated for the upcoming 12-month horizon in seven interest scenarios. The scenarios generally modeled are parallel interest ramps of +/- 100bp, 200bp, and 300bp along with a rates unchanged scenario. The parallel movement of interest rates means all projected market interest rates move up or down by the same amount. A ramp in interest rates means that the projected change in market interest rates occurs over the 12-month horizon on a pro-rata basis. For example, in the +100bp scenario, the projected prime rate will increase from its starting point at March 31, 2006 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. As the yield curve has flattened over the course of the last couple of years with short-term rates increasing more than long-term rates, the parallel movement of interest rates takes the level of the 10-year U.S. Treasury note yield in the -300bp scenario to 1.85 percent. This is nearly 125bp below the June 13, 2003 low for the 10-year U.S. Treasury note yield of 3.11 percent. Therefore in the -300bp scenario, 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 is shown below:

Net Interest Income Simulation

(amounts in thousands)


Movement in interest rates		-300bp		-200bp		-100bp		Unchanged		+100bp		+200bp		+300bp
Projected 12-month net interest income	$	17,181	$	18,004	$	18,711	$	19,318	$	9,413	$	19,491	$	19,555
Dollar change from unchanged scenario	$	(2,137)	$	(1,314)	$	(607)		-	$	95	$	173	$	237
Percentage change from unchanged scenario		(11.06)%		(6.80)%		(3.14)%		-		0.49%		0.90%		1.23%
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. Should a given scenario fall 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. A targeted level of net interest income is established and approved by the Board of Directors and ALCO. This target is reevaluated and reset at each quarterly ALCO meeting.

Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, these analyses are not intended to be a forecast of the actual effect of changes in market interest rates such as those indicated above on the Company. Further, these analyses are based on our assets and liabilities as of March 31, 2006 (without forward adjustments for planned growth and anticipated business activities) and do not contemplate any actions we might undertake in response to changes in market interest rates.

Item 4. Controls and Procedures

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

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

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

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

activities is to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary. Our external auditors also review Internal Controls in connection with their audit and review activities. Our intent in this regard is that the Disclosure Controls and Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.

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

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

Part II – Other Information

Item 5. Legal Proceedings

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

Item 6. Exhibits

(a)

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

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

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

Signatures

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

BNCCORP, Inc.

Date:	May 11, 2006	By	/s/ Gregory K. Cleveland
			Gregory K. Cleveland
			President and Chief Executive Officer

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