BNC Bancorp (BNNC) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x  Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period ended

Commission File Number      000-50128      

BNC Bancorp

(Exact name of registrant as specified in its charter)

North Carolina	47-0898685
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
1226 Eastchester Drive
High Point, North Carolina	27265
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code (336) 476-9200

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer   ¨	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of May 5, 2011, the registrant had outstanding 9,059,809 shares of Common Stock, no par value.

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets March 31, 2011 and December 31, 2010	3
	Consolidated Statements of Income Three Months Ended March 31, 2011 and 2010	4
	Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2011 and 2010	5
	Consolidated Statements of Shareholders’ Equity Three Months Ended March 31, 2011 and 2010	6
	Consolidated Statements of Cash Flows Three Months Ended March 31, 2011 and 2010	7
	Notes to Consolidated Financial Statements	8
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4 -	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 1A -	Risk Factors	37
Item 6 -	Exhibits	37
SIGNATURES		38
EXHIBIT INDEX		39

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PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

BNC BANCORP

CONSOLIDATED BALANCE SHEETS

	March 31, 2011			December 31,
	(Unaudited)			2010*
	(In thousands, except share data)
Assets
Cash and due from banks	$	9,145		$	7,812
Interest-earning deposits in other banks		38,543			22,275
Investment securities available for sale, at fair value		327,265			352,871
Investment securities held to maturity, at amortized cost		6,000			6,000
Federal Home Loan Bank stock, at cost		10,541			9,146
Loans held for sale		1,679			6,751
Loans, net of deferred loan costs/fees		1,528,727			1,508,180
Less allowance for loan losses		(24,325	)		(24,813	)
Net loans		1,504,402			1,483,367
Accrued interest receivable		8,759			10,363
Premises and equipment, net		31,435			30,550
Other real estate owned		37,474			39,737
FDIC indemnification asset		68,355			69,493
Investment in bank-owned life insurance		47,032			46,607
Goodwill		26,129			26,129
Other assets		40,521			38,831
Total assets	$	2,157,280		$	2,149,932
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand	$	116,286		$	107,547
Interest-bearing demand		849,392			841,062
Time deposits		905,173			879,461
Total deposits		1,870,851			1,828,070
Short-term borrowings		26,226			60,207
Long-term debt		94,713			97,713
Accrued expenses and other liabilities		11,279			11,718
Total liabilities		2,003,069			1,997,708
Shareholders' Equity:
Preferred stock, no par value, authorized 20,000,000 shares;
Series A, Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation value per share, 31,260 shares issued and outstanding, net of discount		29,877			29,757
Series B, Mandatorily Convertible Non-Voting Preferred Stock, $10 stated value, 1,804,566 shares issued and outstanding		17,161			17,161
Common stock, no par value; authorized 80,000,000 shares; 9,059,809 and 9,053,360 issued and outstanding, respectively		86,908			86,791
Common stock warrants		2,412			2,412
Retained earnings		23,365			22,901
Stock in directors rabbi trust		(1,726	)		(1,729	)
Directors deferred fees obligation		1,726			1,729
Accumulated other comprehensive loss		(5,512	)		(6,798	)
Total shareholders' equity		154,211			152,224
Total liabilities and shareholders' equity	$	2,157,280		$	2,149,932

* Derived from audited consolidated financial statements.

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended
	March 31,
	2011			2010
	(In thousands, except
	per share data)
Interest income:
Interest and fees on loans	$	20,849		$	14,873
Investment securities:
Taxable		1,538			2,126
Tax-exempt		2,622			2,247
Interest on interest-earning balances and other		33			26
Total interest income		25,042			19,272
Interest expense:
Interest on demand deposits and savings		2,771			1,622
Interest on time deposits		4,780			5,092
Interest on short-term borrowings		88			302
Interest on long-term debt		725			712
Total interest expense		8,364			7,728
Net interest income		16,678			11,544
Provision for loan losses		3,500			2,946
Net interest income after provision for loan losses		13,178			8,598
Non-interest income:
Mortgage fees		362			257
Service charges		827			655
Earnings on bank-owned life insurance		425			246
Investment brokerage fees		157			3
Gain on sales of investment securities available for sale, net		57			17
Other		597			184
Total non-interest income		2,425			1,362
Non-interest expense:
Salaries and employee benefits		7,239			4,806
Occupancy		976			519
Furniture and equipment		596			372
Data processing and supply		563			411
Advertising and business development		419			289
Insurance, professional and other services		996			641
FDIC insurance assessments		810			600
Loan, foreclosure and collection		2,076			500
Other		1,057			749
Total non-interest expense		14,732			8,887
Income before income tax benefit		871			1,073
Income tax benefit		(647	)		(316	)
Net income		1,518			1,389
Less preferred stock dividends and discount accretion		601			503
Net income available to common shareholders	$	917		$	886
Basic earnings per common share	$	0.09		$	0.12
Diluted earnings per common share	$	0.09		$	0.12
Dividends paid per common share	$	0.05		$	0.05

See accompanying notes.

- 4 -

BNC BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Net income	$	1,518		$	1,389
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized holding gains		770			180
Tax effect		(297	)		(70	)
Reclassification of gains recognized in net income		(57	)		(17	)
Tax effect		22			7
Net of tax amount		438			100
Cash flow hedging activities:
Unrealized holding gains (losses)		358			(5,193	)
Tax effect		(138	)		2,002
Reclassification of losses recognized in net income		1,022			41
Tax effect		(394	)		(16	)
Net of tax amount		848			(3,166	)
Total other comprehensive income (loss), net of tax		1,286			(3,066	)
Comprehensive income (loss)	$	2,804		$	(1,677	)

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

																		Directors			Accumulated
					Common		Preferred		Discount						Stock in			deferred			other
	Common stock				stock		stock		on preferred			Retained			directors			fees			comprehensive
	Shares		Amount		warrants		Series A		stock			earnings			rabbi trust			obligation			income (loss)			Total
	(In thousands, except share and per share data)
Balance, December 31, 2009		7,341,901	$	70,376	$	2,412	$	31,260	$	(1,956	)	$	19,009		$	(1,388	)	$	1,388		$	5,105		$	126,206
Net income		-		-		-		-		-			1,389			-			-			-			1,389
Directors deferred fees		-		-		-		-		-			-			90			(90	)		-			-
Other comprehensive loss, net of tax		-		-		-		-		-			-			-			-			(3,066	)		(3,066	)
Common stock issued puruant to:
Stock-based compensation		-		40		-		-		-			-			-			-			-			40
Cash dividends:
Common stock, $0.05 per share		-		-		-		-		-			(367	)		-			-			-			(367	)
Preferred stock, net of accretion		-		-		-		-		112			(503	)		-			-			-			(391	)
Balance, March 31, 2010		7,341,901	$	70,416	$	2,412	$	31,260	$	(1,844	)	$	19,528		$	(1,298	)	$	1,298		$	2,039		$	123,811
Balance, December 31, 2010		9,053,360	$	86,791	$	2,412	$	48,421	$	(1,503	)	$	22,901		$	(1,729	)	$	1,729		$	(6,798	)	$	152,224
Net income		-		-		-		-		-			1,518			-			-			-			1,518
Directors deferred fees		-		-		-		-		-			-			3			(3	)		-			-
Other comprehensive income, net of tax		-		-		-		-		-			-			-			-			1,286			1,286
Common stock issued pursuant to:
Stock-based compensation		-		66		-		-		-			-			-			-			-			66
Dividend reinvestment plan		6,449		51		-		-		-			-			-			-			-			51
Cash dividends:		-		-		-		-		-			-			-			-			-			-
Common stock, $0.05 per share		-		-		-		-		-			(453	)		-			-			-			(453	)
Preferred stock, net of accretion		-		-		-		-		120			(601	)		-			-			-			(481	)
Balance, March 31, 2011		9,059,809	$	86,908	$	2,412	$	48,421	$	(1,383	)	$	23,365		$	(1,726	)	$	1,726		$	(5,512	)	$	154,211

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Operating activities
Net income	$	1,518		$	1,389
Adjustments to reconcile net income to net cash provided by operating activities:
Provision  for loan losses		3,500			2,946
Depreciation and amortization		549			405
Amortization of premiums and discounts, net		107			200
Amortization of core deposit intangible		101			61
Accretion of fair value purchase accounting adjustments		(1,128	)		-
Stock-based compensation		66			40
Deferred compensation		75			170
Earnings on bank-owned life insurance		(425	)		(246	)
Gain on sales investment securities available for sale, net		(57	)		(17	)
Losses on other real estate owned		967			50
Decrease in loans held for sale		5,072			1,529
Decrease in accrued interest receivable		1,604			642
Decrease in FDIC indemnification asset		3,127			-
(Increase) decrease in other assets		(2,104	)		(3,868	)
Increase (decrease) in accrued expenses and other liabilities		(653	)		256
Other operating activities, net		1,008			41
Net cash provided by operating activities		13,327			3,598
Investing activities
Purchases of investment securities available for sale		(9,306	)		(11,262	)
Proceeds from sales of investment securities available for sale		23,898			6,601
Proceeds from maturities of investment securities available for sale		11,677			11,291
Purchases of Federal Home Loan Bank stock		(1,395	)		-
Investment in bank-owned life insurance		-			(8	)
Net increase in loans		(27,687	)		(19,234	)
Purchases of premises and equipment		(1,437	)		(247	)
Proceeds from disposal of premises and equipment		18			14
Investment in other real estate owned		(61	)		(240	)
Proceeds from sales of other real estate owned		3,644			1,041
Net cash used by investing activities		(649	)		(12,044	)
Financing activities
Net increase decrease in deposits		42,781			1,353
Net decrease in short-term borrowings		(36,975	)		(5,077	)
Common stock issued pursuant to dividend reinvestment plan		51			-
Cash dividends paid, net of accretion		(934	)		(758	)
Net cash provided (used) by financing activities		4,923			(4,482	)
Net increase (decrease) in cash and cash equivalents		17,601			(12,928	)
Cash and cash equivalents, beginning of period		30,087			48,173
Cash and cash equivalents, end of period	$	47,688		$	35,245
Supplemental statement of cash flows disclosure
Interest paid	$	8,464		$	7,935
Income taxes paid		-			5
Summary of noncash investing and financing activities
Transfer of loans to other real estate owned	$	4,276		$	6,852
FDIC indemnification asset increase from losses		1,989			-

See accompanying notes.

- 7 -

BNC BANCORP

 Notes to Consolidated Financial Statements

NOTE 1 - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.  The consolidated financial statements include the accounts of BNC Bancorp (the “Company”) and its wholly-owned subsidiary Bank of North Carolina (the “Bank”).  All significant intercompany transactions and balances have been eliminated in consolidation.

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  This quarterly report should be read in conjunction with the Annual Report.  There have been no material changes or developments in the Company’s evaluation of accounting estimates and underlying assumptions or methodologies that the Company believes to be Critical Accounting Policies and Estimates since the December 31, 2010 Annual Report on Form 10-K.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period.  The accounting principles and methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry.  Actual results could differ from those estimates. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

Certain reclassifications have been made to conform prior year financial information to the current period presentation.  These reclassifications had no material impact on the unaudited consolidated financial statements.

NOTE 2 – OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unfunded lines of credit, and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying consolidated financial statements.

The Company's risk of loss in the event of nonperformance by the other party to the commitment to extend credit, lines of credit and  letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management's evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent cash requirements.

At March 31, 2011 and December 31, 2010, outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk are as follows:

	March 31,		December 31,
	2011		2010
	(In thousands)
Commitments under unfunded loans and lines of credit	$	201,706	$	198,388
Letters of credit		22,373		23,716
Unused credit card lines		7,016		7,577
Commitments to sell loans held for sale		1,679		6,751

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BNC BANCORP

 Notes to Consolidated Financial Statements

The Company is party to various legal proceedings arising in the ordinary course of business.  In the opinion of management, after consultation with legal counsel, there are no proceedings expected to have a material adverse effect on the financial statements of the Company.  The Company has pending litigation as a result of the Beach First acquisition but any resulting losses are covered  by the terms of the loss share indemnification agreement.

NOTE 3 - EARNINGS PER SHARE

Basic earnings per common share is computed using the weighted average number of common shares and participating securities outstanding during the reporting period.  Diluted earnings per common share is the amount of earnings available to each share of common stock during the reporting period adjusted to include the effect of potentially dilutive common shares.  Potentially dilutive common shares include incremental shares issued for stock options, restricted stock awards and the warrant under the United States Treasury’s Capital Purchase Program (collectively referred to herein as “Stock Rights”).  Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in the periods in which the effect would be anti-dilutive.

The weighted average numbers of shares outstanding or assumed to be outstanding for the periods ended March 31, is as follows:

	Three Months Ended
	March 31,
	2011		2010
	(Dollars in thousands)
Net income available to common shareholders	$	917	$	886
Add:  Convertible preferred stock dividends		90		-
Net income available to participating common shareholders	$	1,007	$	886
Weighted average common shares - basic		9,055,868		7,341,901
Add:  Convertible preferred stock		1,804,566		-
Weighted average participating common shares - basic		10,860,434		7,341,901
Effects of dilutive Stock Rights		18,516		21,164
Weighted average participating common shares - diluted		10,878,950		7,363,065
Basic earnings per common share	$	0.09	$	0.12
Diluted earnings per common share	$	0.09	$	0.12

For the three months ended March 31, 2011and 2010, there were 670,590 and 744,935 shares, respectively, of Stock Rights that were excluded in computing diluted common shares outstanding.

NOTE 4 – SHARE-BASED COMPENSATION

The Company maintains various types of share-based compensation plans.  These plans have been approved by the Company’s shareholders.  Detail descriptions of the plans are included in Note M of the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The share-based awards granted under the aforementioned plans have similar characteristics, except that some awards have been granted in options and certain awards have been granted in restricted stock.  Therefore, the following disclosures have been disaggregated for the stock option and restricted stock awards of the plans due to their dissimilar characteristics.  The Company funds the option shares and restricted stock from authorized but unissued shares.

Stock Option Awards.  The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model.  The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant.  Volatility is based on the average volatility of the Company based upon previous trading history.  The expected life and forfeiture assumptions are based on historical data.  Dividend yield is based on the yield at the time of the option grant.  There were no options granted for the three months ended March 31, 2011.

- 9 -

BNC BANCORP

 Notes to Consolidated Financial Statements

A summary of activity under the stock option plans as of March 31, 2011 and changes during the three months ended March 31, 2011 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
						(in thousands)
Outstanding at December 31, 2010		269,245	$	9.64
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding at March 31, 2011		269,245		9.64	3.5 years	$	146
Exercisable at March 31, 2011		249,629		9.75	3.1 years	$	137
Share options expected to vest		19,616		8.25	8.6 years	$	9

As of March 31, 2011, there was $41,000 of total unrecognized compensation cost related to non-vested stock options granted under the plans.  That cost is expected to be recognized over a weighted average period of 1.57 years.  There were no stock options exercised during the three months ended March 31, 2011 and 2010.  The compensation expense recognized during the three months ended March 31, 2011 and 2010 was $3,000 and $2,000, respectively.

Restricted Stock Awards.  A summary of the status of the Company’s non-vested stock awards as of March 31, 2011 and changes during the three months ended March 31, 2011 is presented below:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Non-vested at December 31, 2010		69,443	$	7.64
Granted		8,200		7.92
Exercised		-		-
Vested		-		-
Non-vested at March 31, 2011		77,643	$	7.67

As of March 31, 2011, there was $359,000 of total unrecognized compensation cost related to non-vested stock awards granted under the plans.  That cost is expected to be recognized over a weighted average period of 1.24 years.  The related compensation expense recognized during the three months ended March 31, 2011 and 2010 was $63,000 and $38,000, respectively.

- 10 -

BNC BANCORP

 Notes to Consolidated Financial Statements

NOTE 5 – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of March 31, 2011 and December 31, 2010 are as follows:

			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
	(In thousands)
March 31, 2011:
Available for sale:
State and municipals	$	206,328	$	2,992	$	2,918	$	206,402
Mortgage-backed		113,861		7,185		230		120,816
Other		47		-		-		47
	$	320,236	$	10,177	$	3,148	$	327,265
Held to maturity:
Corporate bonds	$	6,000	$	-	$	760	$	5,240

			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
	(In thousands)
December 31, 2010:
Available for sale:
State and municipals	$	221,902	$	2,722	$	4,082	$	220,542
Mortgage-backed		124,604		7,854		176		132,282
Other		47		-		-		47
	$	346,553	$	10,576	$	4,258	$	352,871
Held to maturity:
Corporate bonds	$	6,000	$	-	$	720	$	5,280

The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010. At March 31, 2011, the unrealized losses relate to 95 state and municipal securities, two mortgage-backed securities and two corporate bonds.  Of those, 14 of the state and municipal securities and the two corporate bonds had continuous unrealized losses for more than 12 months. At December 31, 2010, the unrealized losses relate to 137 state and municipal securities, two mortgage-backed securities and two corporate bonds. Of those, 13 of the state and municipal securities and the corporate bonds had continuous unrealized losses for more than twelve months.  The deterioration in value is attributable to changes in market interest rates and the Company expects these securities to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity.  The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a forecasted recovery or until maturity.  The temporarily impaired investment securities as of March 31, 2011 and December 31, 2010 are as follows:

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BNC BANCORP

 Notes to Consolidated Financial Statements

	March 31, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
	(In thousands)
Securities available for sale:
State and municipals	$	78,562	$	1,810	$	9,672	$	1,108	$	88,234	$	2,918
Mortgage-backed		9,901		230		-		-		9,901		230
	$	88,463	$	2,040	$	9,672	$	1,108	$	98,135	$	3,148
Securities held to maturity:
Corporate bonds	$	-	$	-	$	5,240	$	760	$	5,240	$	760

	December 31, 2010
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
	(In thousands)
Securities available for sale:
State and municipals	$	112,579	$	2,896	$	9,330	$	1,186	$	121,909	$	4,082
Mortgage-backed		10,171		176		-		-		10,171		176
	$	122,750	$	3,072	$	9,330	$	1,186	$	132,080	$	4,258
Securities held to maturity:
Corporate bonds	$	-	$	-	$	5,280	$	720	$	5,280	$	720

The following is a summary of realized gains and losses from the sales of investment securities classified as available for sale:

	Three Months Ended March 31,
	2011			2010
	(In thousands)
Proceeds from sales	$	23,898		$	6,601
Gross realized gains on sales	$	565		$	17
Gross realized losses on sales		(508	)		-
Total realized gains, net	$	57		$	17

- 12 -

BNC BANCORP

 Notes to Consolidated Financial Statements

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans at March 31, 2011 and December 31, 2010 are summarized below:

	March 31, 2011							December 31, 2010
	Loans		Loans not					Loans		Loans not
	covered under		covered under					covered under		covered under
	loss share		loss share					loss share		loss share
	agreements		agreements		Total			agreements		agreements		Total
	(In thousands)
Commercial real estate	$	115,962	$	588,482	$	704,444		$	120,053	$	557,634	$	677,687
Commercial construction		61,231		165,663		226,894			62,879		170,079		232,958
Commercial and industrial		24,502		113,239		137,741			24,903		111,668		136,571
Leases		-		11,192		11,192			-		10,985		10,985
Total commercial		201,695		878,576		1,080,271			207,835		850,366		1,058,201
Residential construction		2,397		25,896		28,293			2,402		29,949		32,351
Residential mortgage		92,933		313,272		406,205			94,701		308,615		403,316
Consumer and other		4,411		9,809		14,220			4,404		10,099		14,503
	$	301,436	$	1,227,553		1,528,989		$	309,342	$	1,199,029		1,508,371
Deferred loan costs (fees)						(262	)						(191	)
Total loans, net of deferred loan costs/fees					$	1,528,727						$	1,508,180

A portion of the fair value discount on acquired non-imparied loans has an accretable yield associated with those loans that is accreted into interest income over the estimated remaining life of the loans.  The remaing nonaccretable difference represents cash flows not expected to be collected.  The changes in the carrying amount of covered acquired loans and accretable yield for loans receivable as of and for the three months ended March 31, 2011 is as follows:

	2011
	Accretable			Carrying
	Yield			Amount
	(In thousands)
Balance at beginning of period	$	(13,009	)	$	309,342
Reductions from payments and foreclosures, net		-			(9,027	)
Accretion		1,121			1,121
Balance at end of period	$	(11,888	)	$	301,436

The unpaid principal balance for loans covered under loss share agreements was $384.3 million and $404.2 million at March 31, 2011 and December 31, 2010, respectively.

A summary of activity in the allowance for loan losses for the three months ended March 31 is as follows:

	Three Months Ended
	March 31,
	2011		2010
	(In thousands)
Balance at beginning of period	$	24,813	$	17,309
Provision charged to operations		3,500		2,946
Loans charged-off:
Commercial real estate		573		1,245
Commercial construction		2,698		419
Commercial and industrial		287		410
Leases		-		-
Residential construction		508		395
Residential mortgage		303		283
Consumer and other		-		124
Total loans charged-off		4,369		2,876
Recoveries of loans:
Commercial real estate		1		-
Commercial construction		19		-
Commercial and industrial		353		-
Residential construction		4		5
Residential mortgage		3		11
Consumer and other		1		-
Total  loan recoveries		381		16
Net charge-offs		3,988		2,860
Balance at end of period	$	24,325	$	17,395

- 13 -

BNC BANCORP

 Notes to Consolidated Financial Statements

The following presents by loan category, the balance in the allowance for loan losses disaggregated on the basis of the Company’s measurement method and the related recorded investment in loans as of March 31, 2011and December 31, 2010:

	Commercial Loan Portfolio
	Commercial		Commercial		Commercial and
	real estate		construction		industrial		Leases		Total
	(In thousands)
March 31, 2011:
Specific reserves:
Impaired loans	$	1,454	$	1,134	$	494	$	-	$	3,082
Purchase credit impaired loans		-		-		-		-		-
Total specific reserves		1,454		1,134		494		-		3,082
General reserves		9,160		3,601		2,904				15,665
Total	$	10,614	$	4,735	$	3,398	$	-	$	18,747
Loans individually evaluated for impairment	$	17,995	$	28,731	$	3,519	$	-	$	50,245
Purchase credit impaired loans		26,007		25,047		2,472		-		53,526
Loans collectively evaluated for impairment		660,442		173,116		131,750		11,192		976,500
Total	$	704,444	$	226,894	$	137,741	$	11,192	$	1,080,271

	Residential Loan Portfolio
	Residential		Residential		Consumer
	construction		mortgage		and other		Total
	(In thousands)
Specific reserves:
Impaired loans	$	141	$	2,176	$	-	$	2,317
Purchase credit impaired loans		-		-		-		-
Total specific reserves		141		2,176		-		2,317
General reserves		590		2,469		202		3,261
Total	$	731	$	4,645	$	202	$	5,578
Loans individually evaluated for impairment	$	2,507	$	8,454	$	-	$	10,961
Purchase credit impaired loans		225		21,733		-		21,958
Loans collectively evaluated for impairment		25,561		376,018		14,220		415,799
Total	$	28,293	$	406,205	$	14,220	$	448,718

- 14 -

BNC BANCORP

 Notes to Consolidated Financial Statements

	Commercial Loan Portfolio
	Commercial		Commercial		Commercial and
	real estate		construction		industrial		Leases		Total
	(In thousands)
December 31, 2010:
Specific reserves:
Impaired loans	$	1,414	$	383	$	570	$	-	$	2,367
Purchase credit impaired loans		-		-		-		-		-
Total specific reserves		1,414		383		570		-		2,367
General reserves		11,558		4,142		2,955		33		18,688
Total	$	12,972	$	4,525	$	3,525	$	33	$	21,055
Loans individually evaluated for impairment	$	7,170	$	13,560	$	5,957	$	-	$	26,687
Purchase credit impaired loans		31,396		22,810		2,084		-		56,290
Loans collectively evaluated for impairment		639,121		196,588		128,530		10,985		975,224
Total	$	677,687	$	232,958	$	136,571	$	10,985	$	1,058,201

	Residential Loan Portfolio
	Residential		Residential		Consumer
	construction		mortgage		and other		Total
	(In thousands)
Specific reserves:
Impaired loans	$	-	$	359	$	-	$	359
Purchase credit impaired loans		-		-		-		-
Total specific reserves		-		359		-		359
General reserves		682		2,508		209		3,399
Total	$	682	$	2,867	$	209	$	3,758
Loans individually evaluated for impairment	$	322	$	2,826	$	-	$	3,148
Purchase credit impaired loans		-		22,723		-		22,723
Loans collectively evaluated for impairment		32,029		377,767		14,503		424,299
Total	$	32,351	$	403,316	$	14,503	$	450,170

- 15 -

BNC BANCORP

 Notes to Consolidated Financial Statements

The following presents by loan category, information related to impaired loans as of March 31, 2011 and December 31, 2010:

							Impaired Loans - With
	Impaired Loans - With Allowance						No Allowance
			Unpaid		Allowance for				Unpaid
	Recorded		principal		loan losses		Recorded		principal
	investment		balance		allocated		investment		balance
	(In thousands)
March 31, 2011:
Commercial real estate	$	6,470	$	6,470	$	1,454	$	37,532	$	49,466
Commercial construction		10,297		10,297		1,134		43,481		57,641
Commercial and industrial		803		803		494		5,188		5,803
Leases		-		-		-		-		-
Residential construction		818		818		141		1,915		1,935
Residential mortgage		5,474		5,474		2,176		24,712		40,206
Consumer and other		-		-		-		-		-
Total	$	23,862	$	23,862	$	5,399	$	112,828	$	155,051

							Impaired Loans - With
	Impaired Loans - With Allowance						No Allowance
			Unpaid		Allowance for				Unpaid
	Recorded		principal		loan losses		Recorded		principal
	investment		balance		allocated		investment		balance
	(In thousands)
December 31, 2010:
Commercial real estate	$	4,534	$	4,534	$	1,414	$	34,032	$	46,188
Commercial construction		1,788		1,788		383		34,582		51,253
Commercial and industrial		1,323		1,323		570		6,718		7,549
Leases		-		-		-		-		-
Residential construction		-		-		-		322		322
Residential mortgage		929		929		359		24,620		40,615
Consumer and other		-		-		-		-		-
Total	$	8,574	$	8,574	$	2,726	$	100,274	$	145,927

- 16 -

BNC BANCORP

 Notes to Consolidated Financial Statements

The following presents by loan category, information related to the average investment and interest income recognized on impaired loans for the three months ended March 31, 2011:

	Average		Interest
	recorded		income
	investment		recognized
	(In thousands)
Impaired loans with allowance
Commercial real estate	$	6,667	$	42
Commercial construction		7,235		6
Commercial and industrial		851		-
Leases		-		-
Residential construction		273		-
Residential mortgage		2,411		-
Consumer and other		-		-
Total impaired loans with allowance	$	17,437	$	48
Impaired loans with no allowance
Commercial real estate	$	41,049	$	70
Commercial construction		44,965		54
Commercial and industrial		5,666		-
Leases		5		-
Residential construction		1,991		-
Residential mortgage		25,755		48
Consumer and other		258		-
Total impaired loans with no allowance	$	119,689	$	172
Impaired loans:
Commercial	$	106,438	$	172
Consumer		30,688		48
Total impaired loans	$	137,126	$	220

At March 31, 2011, troubled debt restructurings (“TDR’s”) totaled $38.9 million, of which $13.0 million is included in nonaccrual loans, and the remaining $25.9 million were not past due and performing to the restructured terms.  When compared to December 31, 2010, TDR’s totaled $5.1 million, an increase of $20.8 million. Loan restructurings occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and a modification that would otherwise not be considered is granted to the borrower.  The increase of $18.1 million of loans considered TDR’s were in performing residential A&D and construction loans that were renewed at extended amortization terms or interest-only terms deemed to be concessionary in the current economic environment.

For the three months ended March 31, 2011, the amount of interest income recognized within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring that remained on accrual status.  For the three months ended March 31, 2011, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

- 17 -

BNC BANCORP

 Notes to Consolidated Financial Statements

The following presents by loan category, a summary of recorded investment in nonaccrual loans at March 31, 2011 and December 31, 2010, including those that are covered under loss share agreements:

	March 31, 2011						December 31, 2010
	Loans		Loans not				Loans		Loans not
	covered under		covered under				covered under		covered under
	loss share		loss share				loss share		loss share
	agreements		agreements		Total		agreements		agreements		Total
	(In thousands)
Nonaccrual loans
Commercial real estate	$	24,020	$	11,827	$	35,847	$	22,090	$	11,187	$	33,277
Commercial construction		22,763		14,466		37,229		20,474		10,245		30,719
Commercial and industrial		2,658		1,053		3,711		1,749		1,065		2,814
Leases		-		14		14		-		-
Residential construction		-		2,247		2,247		-		252		252
Residential mortgage		19,886		4,411		24,297		20,413		3,475		23,888
Consumer and other		50		29		79		27		-		27
Total nonaccrual loans	$	69,377	$	34,047	$	103,424	$	64,753	$	26,224	$	90,977
Accruing greater than 90 days past due
Commercial real estate	$	-	$	-	$	-	$	3,009	$	-	$	3,009
Commercial construction		-		124		124		267		-		267
Commercial and industrial		-		-		-		337		-		337
Residential construction		-		-		-		-		-		-
Residential mortgage		-		-		-		930		44		974
Consumer and other		-		-		-		11		-		11
Total 90 days past due loans	$	-	$	124	$	124	$	4,554	$	44	$	4,598

The following presents by loan category, an aging analysis of past due loans as of March 31, 2011and December 31, 2010:

					Greater
					Than
	30-59 Days		60-89 Days		90 Days				Total				Total
	Past Due		Past Due		Past Due		Nonaccrual		Past Due		Current		Loans
	(In thousands)
March 31, 2011:
Commercial real estate	$	10,642	$	2,864	$	-	$	35,847	$	49,353	$	655,091	$	704,444
Commercial construction		1,165		1,031		124		37,229		39,549		187,345		226,894
Commercial and industrial		317		157		-		3,711		4,185		133,556		137,741
Leases		5		-		-		14		19		11,173		11,192
Residential construction		143		1,236		-		2,247		3,626		24,667		28,293
Residential mortgage		5,743		-		-		24,297		30,040		376,165		406,205
Consumer and other		24		-		-		79		103		14,117		14,220
Total	$	18,039	$	5,288	$	124	$	103,424	$	126,875	$	1,402,114	$	1,528,989

- 18 -

BNC BANCORP

 Notes to Consolidated Financial Statements

					Greater
					Than
	30-59 Days		60-89 Days		90 Days				Total				Total
	Past Due		Past Due		Past Due		Nonaccrual		Past Due		Current		Loans
	(In thousands)
December 31, 2010:
Commercial real estate	$	4,029	$	1,426	$	3,009	$	33,277	$	41,741	$	635,946	$	677,687
Commercial construction		606		3,213		267		30,719		34,805		198,153		232,958
Commercial and industrial		513		130		337		2,814		3,794		132,777		136,571
Leases		98		-		-		-		98		10,887		10,985
Residential construction		2,827		-		-		252		3,079		29,272		32,351
Residential mortgage		3,836		3,105		974		23,888		31,803		371,513		403,316
Consumer and other		44		8		11		27		90		14,413		14,503
Total	$	11,953	$	7,882	$	4,598	$	90,977	$	115,410	$	1,392,961	$	1,508,371

Credit quality indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators are to use an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics are typically risk rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful/Loss. Loans classified as doubtful/loss have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following presents by loan category and by credit quality indicator, the recorded investment in the Company’s loans as of March 31, 2011 and December 31, 2010:

- 19 -

BNC BANCORP

 Notes to Consolidated Financial Statements

			Pass		Special
	Total		credits		mention		Substandard		Doubtful / Loss
	(In thousands)
March 31, 2011:
Commercial real estate	$	704,444	$	572,224	$	50,336	$	64,019	$	17,865
Commercial construction		226,894		122,185		25,137		60,951		18,621
Commercial and industrial		137,741		112,671		11,029		10,082		3,959
Leases		11,192		11,178		-		14		-
Residential construction		28,293		20,229		1,740		6,099		225
Residential mortgage		406,205		308,531		43,347		43,851		10,476
Consumer and other		14,220		12,725		715		555		225
Total	$	1,528,989	$	1,159,743	$	132,304	$	185,571	$	51,371
Loans covered under loss share agreements	$	301,436	$	115,912	$	63,437	$	70,866	$	51,221

			Pass		Special
	Total		credits		mention		Substandard		Doubtful / Loss
	(In thousands)
December 31, 2010:
Commercial real estate	$	677,687	$	551,893	$	50,594	$	63,143	$	12,057
Commercial construction		232,958		126,213		32,101		56,904		17,740
Commercial and industrial		136,571		114,492		14,069		6,649		1,361
Leases		10,985		10,985		-		-		-
Residential construction		32,351		23,633		3,948		4,770		-
Residential mortgage		403,316		308,110		45,718		40,214		9,274
Consumer and other		14,503		13,265		716		488		34
Total	$	1,508,371	$	1,148,591	$	147,146	$	172,168	$	40,466
Loans covered under loss share agreements	$	309,342	$	124,522	$	65,252	$	79,397	$	40,171

NOTE 7 – DERIVATIVES

The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The Company does not use financial instruments or derivatives for any trading or other speculative purposes.

Risk Management Policies - Hedging Instruments

The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks.  On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned over a twelve-month period following the date of simulation.  The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities during the measurement period.  Based upon the outcome of the simulation analysis, the Company considers the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates.  The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.

- 20 -

BNC BANCORP

 Notes to Consolidated Financial Statements

The Company entered into interest rate swaps designated as cash flow hedges with nominal amounts aggregating $15 million, to fix the interest rate received on certain variable rate loans at a combined weighted average rate of 8.13%.  These loans expose the Company to variability in cash flows, primarily from interest receipts due to changes to interest rates.  If interest rates increase, interest income increases.  Conversely, if interest rates decrease, interest income decreases.  Management believes it is prudent to limit the variability of a portion of its cash flows on variable rate loans therefore, generally hedges a portion of its variable-rate receipts. The aggregate fair value of these derivatives of $6,000 is included in other assets in the accompanying consolidated balance sheet at March 31, 2011.  The change in fair value of these derivatives was a decrease of $249,000 for the quarter ended March 31, 2011, when compared to the $255,000 recorded at December 31, 2010.  For the quarters ended March 31, 2011 and 2010, no hedge ineffectiveness was recognized on these loan cash flow hedges.  The amount of net settlement gains recorded from the interest rate swaps totaled $238,000 and $624,000 for the quarters ended March 31, 2011 and 2010, respectively, and is included in loan interest income in the accompanying consolidated statements of income.

During the first quarter of 2009, the Company entered into a five-year interest rate derivative contract, with a notional amount of $250 million, to offset the effects of interest rate changes on an unsecured $250 million variable rate money market funding arrangement.  The Company is exposed to risk of rising interest rates.  Under this cash flow hedge relationship, the Company has structured a synthetic cap, where the objective is to offset the effect of interest rate changes, whenever funding rates are higher than the strike rate of the synthetic cap.  During the third quarter of 2009, the Company paid $24.0 million to self-finance the transaction, thus securing a traditional interest rate cap.  From this modification, the Company will achieve significantly reduced funding costs.  Going forward, the amounts reclassified from other comprehensive income into earnings are expected to be more than compensated for by the reduced variable rate funding costs, as the hedge only covers a portion of the Company’s variable interest rate exposure.  The fair value of this derivative was an asset of $6.4 million, which is included in other assets in the accompanying consolidated balance sheet at March 31, 2011.  The change in fair value of this derivative was an increase of $607,000 for the quarter ended March 31, 2011, when compared to the $5.8 million recorded at December 31, 2010.  The Company has recorded a $9.8 million loss, net of tax, as accumulated other comprehensive income at March 31, 2011, and expects $6.4 million to be reclassified into earnings within the next 12 months.  In addition, ineffectiveness related to this hedge amounted to $1.0 million and $41,000 for the quarters ended March 31, 2011 and 2010, respectively, and is included in interest expense on demand deposits in the accompanying consolidated statements of income.

Counterparty Credit Risk - By entering into derivative instrument contracts, the Company exposes itself, from time to time, to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to the Company, which creates credit risk for the Company. The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings, limiting its exposure to any single counterparty and regularly monitoring its market position with each counterparty.

Credit-Risk Related Contingent Features - The Company’s derivative instrument does not contain any credit-risk related contingent features.

The table below presents the fair value of the Company’s derivative financial instruments designated as hedging instruments, as well as their classification on the balance sheet as of March 31, 2011 and December 31, 2010.

	March 31,		December 31,
	2011		2010
	Estimated		Estimated
	fair value		fair value
	(In thousands)
Interest rate swaps - Other assets	$	6	$	255
Interest rate cap - Other assets		6,361		5,754
Total derivatives	$	6,367	$	6,009

- 21 -

BNC BANCORP

 Notes to Consolidated Financial Statements

NOTE 8 – GOODWILL AND OTHER INTANGIBLES

Goodwill and identified intangible assets, with indefinite lives, are subject to impairment testing annually or more frequently if events or circumstances indicate possible impairment.  When appropriate, a projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by a valuation model.  The last test for goodwill impairment, conducted as of June 30, 2010, concluded that there was no goodwill impairment.  No impairment charges were recognized as of March 31, 2011.  The carrying amount of goodwill and other intangible assets was $26.1 million and $2.2 million as of March 31, 2011, respectively, and $26.1 million and $2.3 million, as of December 31, 2010, respectively.

NOTE 9 - FAIR VALUE MEASUREMENTS

The Company adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuations are defined as follows:

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement, and require significant management judgment or estimation using pricing models, discounted cash flow methodologies or similar techniques.

Fair Value on a Recurring Basis.  The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.

Securities Available for Sale.  The fair values of securities available-for-sale are recorded at quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 valuation securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 valuation securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 valuation include asset-backed securities in less liquid markets.

Derivative Assets and Liabilities.  The values of derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivative instruments held or issued for risk management purposes as Level 2 valuation.

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis:

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BNC BANCORP

 Notes to Consolidated Financial Statements

	Assets
	(Liabilities)
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
			(In thousands)
At March 31, 2011:
Available for sale securities	$	327,265	$	-	$	327,265	$	-
Interest rate swaps		6		-		6		-
Interest rate cap		6,361		-		6,361		-
At December 31, 2011:
Available for sale securities	$	352,871	$	-	$	352,871	$	-
Interest rate swaps		255		-		255		-
Interest rate cap		5,754		-		5,754		-
At March 31, 2010:
Available for sale securities	$	353,937	$	-	$	353,937	$	-
Interest rate swaps		2,051		-		2,051		-
Interest rate cap		15,654		-		15,654		-

Fair Value on a Nonrecurring Basis. The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets.

Loans Held for Sale.  Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2 valuation.

Impaired Loans.  Fair values of impaired loans are generally estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  Substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as Level 2 valuation. When current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as Level 3 valuation.

Other Real Estate Owned.  Fair values of other real estate owned are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as Level 2 valuation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation.

Below is a table that presents information about certain assets and liabilities measured at fair value on a nonrecurring basis:

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BNC BANCORP

 Notes to Consolidated Financial Statements

	Assets
	(Liabilities)
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
			(In thousands)
At March 31, 2011:
Loans held for sale	$	1,679	$	-	$	1,679	$	-
Impaired loans		131,291		-		-		131,291
Other real estate owned		37,474		-		-		37,474
At December 31, 2010:
Loans held for sale	$	6,751	$	-	$	6,751	$	-
Impaired loans		106,122		-		-		106,122
Other real estate owned		39,737		-		-		39,737
At March 31, 2010:
Loans held for sale	$	1,237	$	-	$	1,237	$	-
Impaired loans		14,918		-		-		14,918
Other real estate owned		20,326		-		-		20,326

The fair values of securities held to maturity are recorded on a nonrecurring basis when an impairment in value that is deemed to be other than temporary occurs.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  At March 31, 2011, there were no fair value adjustments related to $6.0 million of securities held to maturity.

Goodwill and other intangible assets are subject to impairment testing. When appropriate, a projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, the Company classifies goodwill and other intangible assets as Level 3 valuation.  At March 31, 2011, there were no fair value adjustments related to $26.1 million of goodwill, and $2.3 million of other intangible assets.

NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair values of financial instruments have been estimated by the Company using the provisions of ASC Topic 825, Financial Instruments “ASC 825”, which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.  ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.  The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and Cash Equivalents - The carrying amounts reported in the balance sheets for cash and cash equivalents approximate the fair value of those assets.

- 24 -

BNC BANCORP

 Notes to Consolidated Financial Statements

Securities Available for Sale and Securities Held to Maturity - Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Federal Home Loan Bank Stock - The fair value for FHLB stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock and the Company, in order to be a member of the FHLB, is required to maintain a minimum investment.

Loans Held for Sale - Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Loans Receivable - The fair values for fixed rate loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms and credit ratings for the same remaining maturities, adjusted for the allowance for loan losses.

FDIC Indemnification Asset - The fair value for the FDIC indemnification asset is estimated based on discounted future cash flows using current discount rates.

Investment in Life Insurance - The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Accrued Interest Receivable and Accrued Interest Payable - The carrying amount of accrued interest is assumed to approximate fair value.

Deposits - The fair values disclosed for deposits with no stated maturity (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for deposits with a stated maturity date (time deposits) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these accounts to a schedule of aggregated expected monthly maturities on time deposits.

Short-term Borrowings and Long-Term Debt - Rates currently available to the Company for borrowings and debt with similar terms and remaining maturities are used to estimate fair value of the existing debt.

Derivative Financial Instruments - Fair values for derivatives are based on values from third parties typically determined using widely accepted discounted cash flow models or Level 2 measurements.

Financial Instruments with Off-Balance Sheet Risk - The fair value of financial instruments with off-balance sheet risk discussed in Note 2 is not material.

The estimated carrying and fair values of the Company’s financial instruments are as follows:

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BNC BANCORP

 Notes to Consolidated Financial Statements

	March 31, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	value		fair value		value		fair value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	47,688	$	47,688	$	30,087	$	30,087
Investment securities available for sale		327,265		327,265		352,871		352,871
Investment securities held to maturity		6,000		5,240		6,000		5,280
Federal Home Loan Bank stock		10,541		10,541		9,146		9,146
Loans held for sale		1,679		1,679		6,751		6,751
Loans receivable, net		1,504,402		1,503,586		1,483,367		1,481,315
Accrued interest receivable		8,759		8,759		10,363		10,363
FDIC indemnification asset		68,355		68,355		69,493		69,493
Investment in bank-owned life insurance		47,032		47,032		46,607		46,607
Financial liabilities:
Demand deposits and savings	$	965,678	$	965,678	$	948,609	$	948,609
Time deposits		905,173		922,788		879,461		905,670
Short-term borrowings		26,226		26,226		60,207		60,207
Long-term debt		94,713		87,807		97,713		88,315
Accrued interest payable		1,454		1,454		1,554		1,554
On-balance sheet derivative financial instruments:
Derivative agreements – asset (liability):
Interest rate swap agreements	$	6	$	6	$	255	$	255
Interest rate cap agreement		6,361		6,361		5,754		5,754

NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2011, the Financial Accounting Standards Board (”FASB”) issued Accounting Standards Update (“ASU”) No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU 2011-01”).  The amendments in ASU 2011-01 defer the effective date of the disclosures regarding troubled debt restructurings in ASU No. 2010-20 for public entities.  The effective date is for interim and annual reporting periods ending after June 15, 2011.  As the provisions of this ASU only defer the effective date of disclosure requirements related to trouble debt restructurings, the adoption of this ASU will have no impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU No. 2011-02”).  ASU No. 2011-02 provides additional guidance to clarify when a loan modification or restructuring is considered a troubled debt restructuring (TDR) in order to address current diversity in practice and lead to more consistent application of U.S. GAAP for debt restructurings.  In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist:  (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties.  A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20.  The provisions of ASU No. 2011-02 are effective for the Company’s reporting period ending September 30, 2011.  The adoption of ASU No. 2011-02 is not expected to have a material impact on the Company’s consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain certain forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.  These forward-looking statements can generally be identified as such because the context of the statement will include words such as “believe,” “anticipate,” “expect,” “estimates,” “should” or words of similar meaning.  Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements.  Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated, including, without limitation, general and local economic conditions; changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; and other competitive, technological, governmental and regulatory factors affecting our operations, pricing, products, and services.  The Company cautions that the foregoing list of risks and uncertainties is not exhaustive.  The Company undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time by or on behalf of the Company.

Management’s discussion and analysis is intended to assist readers in understanding and evaluating our consolidated financial condition and results of operations.  This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview and Executive Summary

BNC Bancorp (the “Company”) is a bank holding company for Bank of North Carolina (the “Bank”), its wholly owned banking subsidiary.  We also maintain four wholly-owned special-purpose subsidiary trusts that issue trust preferred securities.  The information in the consolidated financial statements relates primarily to the Bank.  The Bank has three subsidiaries: BNC Credit Corp. which serves as the Bank’s trustee on deeds of trust, Sterling Real Estate Holdings, LLC and Sterling Real Estate Development of North Carolina, LLC, which hold and dispose of the Bank’s real estate owned.

We are subject to the rules and regulations of the Board of Governors of the Federal Reserve System.  The Bank is operating under the banking laws of North Carolina, and is subject to the rules and regulations of the North Carolina Commissioner of Banks and Federal Deposit Insurance Corporation (“FDIC”).  Accordingly, the Company and the Bank are examined periodically by those regulatory authorities.

The Bank provides a wide range of banking services tailored to the particular banking needs of the communities it serves in North Carolina and coastal South Carolina.  It is principally engaged in the business of attracting deposits from the general public and using those deposits, together with other funding from the Bank’s lines of credit, to primarily make consumer and commercial loans.  The Bank has pursued a strategy that emphasizes its local affiliations.  This business strategy stresses the provision of high quality banking services to individuals and small to medium-sized local businesses. Specifically, the Bank makes business loans secured by real estate, personal property and accounts receivable; unsecured business loans; consumer loans, which are secured by consumer products, such as automobiles and boats; unsecured consumer loans; and commercial real estate loans.  The Bank also makes residential mortgage loans.  The Bank also offers a wide range of banking services, including checking and savings accounts, commercial, installment and personal loans, safe deposit boxes, and other associated services.  The Company has recruited and developed a private banking group that is working closely with our retail, business services and wealth management area to provide a concierge-type service level for higher need banking relationships.  The Bank's primary source of revenue is derived from loans to customers, who are predominantly individuals and small to medium size businesses through its 24 full-service banking offices in North and South Carolina.

- 27 -

Due to unprecedented asset quality challenges and the prolonged economic downturn, the U.S. banking industry has been experiencing serious financial challenges.  During this time of crisis, we began preparing to benefit from growth opportunities, both organically and through acquisition.  We were fortunate to have the opportunity to participate in the FDIC-assisted acquisition of Beach First National Bank (“Beach First”), headquartered in Myrtle Beach, South Carolina, which enabled us to significantly increase our franchise.  Myrtle Beach and the surrounding beach communities are attractive markets with strong demographics, a vibrant retail economy, and a growing core deposit base.  During the first three months of 2011, with the impact of the economic slowdown ongoing, management has continued to focus on managing credit quality, maintaining adequate liquidity sources and managing the capital of the Company.  We continue our on-going efforts of meeting the financial services needs of our customers and communities, especially in this challenging economic environment.  We are committed to building long-term value for our shareholders, and in the changing regulatory and economic landscape, core deposit growth will be an even more critical element for finding successful and profitable growth initiatives.  We have a retail banking team that oversees product development, sales, training, accountability and consistency and quality of delivery in each of our offices in our banking regions.

Our senior management continues to work closely with credit administration, third-party credit review specialists, and lending staff to insure that adequate resources are in place to proactively manage through the current slowdown in the real estate markets and overall economy.  When a problem is identified, management remains diligent in assessing the situation and moving quickly to minimize losses, while being sensitive to the borrower’s effectiveness as an operator, the long-term viability of the business or project, and the borrower’s commitment to working with the Bank to achieve an acceptable resolution of the credit.  Weaknesses in residential and commercial development and high unemployment levels in our market areas resulted in higher charge-offs during the first quarter of 2011 when compared to the first quarter of 2010, but significantly lower when compared to the fourth quarter of 2010.

Results of Operations

Our net income available to common shareholders for the first quarter ended March 31, 2011 was $917,000, or $0.09 per diluted share, compared to $886,000, or $0.12 per diluted share, for the quarter ended March 31, 2010.  The annualized return on average assets was 0.29% during the first quarter of 2011, compared to 0.34% for first quarter of 2010.  For the quarter ended December 31, 2010, we reported a $6.7 million loss, or $(0.61) per diluted share.

The increased earnings from the preceding quarter was related to the $15.4 million of credit and other real estate owned (“OREO”) related charges recorded in the fourth quarter of 2010 as management aggressively addressed realized and potential impairments in certain sectors of the credit portfolio.

Total assets at March 31, 2011 increased $528.7 million, or 32.5% compared to March 31, 2010.  Period-end loans increased $440.1 million, or 40.4%, from the same prior year period.  Period-end deposits increased $519.6 million, or 38.5% from March 31, 2010.  When compared to December 31, 2010, total assets increased $7.3 million, period-end loans increased $20.5 million and period-end deposits increased $42.8 million.  We remain well-capitalized with total equity of $154.2 million at March 31, 2011, an increase of $30.4 million, or 24.6% from March 31, 2010.  The significant increases were associated with the bargain purchase gain from the acquisition of Beach First in April 2010 and the $35.0 million private placement of our common stock and Series B Preferred Stock in June 2010.

Net Interest Income

Like most financial institutions, our primary component of earnings is net interest income.  Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings.  For internal analytical purposes, management adjusts net interest income to a “fully taxable-equivalent” basis (“(FTE)”) using a 34% federal tax rate on tax exempt items.  Changes in net interest income result from changes in volume, spread and margin.  For this purpose, “volume” refers to the average dollar level of interest-earning assets and interest-bearing liabilities, “spread” refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and “margin” refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities.

- 28 -

Net interest income for the first quarter of 2011 increased by $5.1 million, or 44.5%, to $16.7 million when compared to the first quarter of 2010.  Net interest income on a fully taxable equivalent basis was $18.2 million for the first quarter of 2011, compared to $12.8 million for the first quarter of 2010.  The net interest margin (FTE) was 3.87%, an increase of 40 basis points when compared to 3.47% for the first quarter of 2010.  Growth in average interest-earning assets of $403.3 million and growth in interest-bearing liabilities of $436.3 million was due primarily to the second quarter 2010 acquisition of Beach First.  Average loans as a percentage of interest-earning assets increased to 79.6% for the quarter ended March 31, 2011 compared to 72.4% for the prior year quarter.  In addition, the improvement in net interest margin was primarily due to the reduction in the average rates for outstanding time deposits and borrowings from period to period, as well as the favorable mix of yields and rates on the acquired interest-earning assets and interest-bearing liabilities from Beach First.

The following table presents the average balances of assets, liabilities and shareholders’ equity, interest income (FTE) and interest expense, and average yields and rates by asset and liability component for the periods indicated:

	Three Months Ended							Three Months Ended
	March 31, 2011							March 31, 2010
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans and leases	$	1,513,121	$	20,822		5.58	%	$	1,085,174	$	14,853		5.55	%
Loans held for sale		2,818		27		3.89	%		1,606		20		5.05	%
Investment securities, taxable		127,003		1,538		4.91	%		165,506		2,126		5.21	%
Investment securities, tax-exempt*		225,477		4,097		7.37	%		187,732		3,511		7.58	%
Interest-earning balances and other		33,155		33		0.40	%		58,263		26		0.18	%
Total interest-earning assets		1,901,574		26,517		5.66	%		1,498,281		20,536		5.56	%
Other assets		248,862							147,637
Total assets	$	2,150,436						$	1,645,918
Interest-bearing liabilities:
Deposits:
Demand deposits	$	809,095		2,734		1.37	%	$	574,964		1,619		1.14	%
Savings deposits		36,535		37		0.41	%		12,276		3		0.10	%
Time deposits		887,338		4,780		2.18	%		708,332		5,092		2.92	%
Borrowings		144,783		813		2.28	%		145,919		1,014		2.82	%
Total interest-bearing liabilities		1,877,751		8,364		1.81	%		1,441,491		7,728		2.17	%
Non-interest-bearing deposits		110,957							66,918
Other liabilities		9,478							10,736
Shareholders' equity		152,250							126,773
Total liabilities and shareholders' equity	$	2,150,436						$	1,645,918
Net interest income and interest rate spread*			$	18,153		3.85	%			$	12,808		3.38	%
Net interest margin*						3.87	%						3.47	%

* Yields on tax-exempt investments have been adjusted to a fully taxable equivalent basis.  The taxable equivalent adjustment was $1.5 million and $1.3 million for the three months ended March 31, 2011 and 2010, respectively.

Total interest income (FTE) increased $6.0 million for the first quarter of 2011 when compared to the same quarter of 2010, due to the $403.3 million increase in average interest-earning assets.  The average tax equivalent yield on total interest-earning assets for the current quarter was 5.66%, a 10 basis point increase from the 5.56% in the first quarter of 2010.  During the first quarter of 2011, average loans increased by $427.9 million which was funded by the increase in interest-bearing liabilities of $436.3 million.

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Total interest expense increased $636,000 for the first quarter of 2011 when compared to the same quarter of 2010, due to the $436.3 million increase in average interest-bearing liabilities, offset by a 36 basis point decrease in funding costs, from 2.17% to 1.81%.  Rates paid on time deposits decreased 74 basis points in the first quarter of 2011 compared to the same quarter of 2010, primarily as a result of the re-pricing of time deposits at lower interest rates.  In addition, rates paid on borrowings decreased by 54 basis points in the first quarter of 2011 when compared to the same quarter of 2010, from 2.82% to 2.28%, due to the extremely low interest rate environment.

The following table presents certain information regarding changes in our interest income (FTE) and interest expense for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rate and changes in the volume.

	Three Months Ended March 31, 2011 vs. 2010
	Increase (Decrease) Due to
	Volume			Rate			Total
	(In thousands)
Interest income:
Loans and leases	$	5,873		$	96		$	5,969
Loans held for sale		13			(6	)		7
Investment securities, taxable		(480	)		(108	)		(588	)
Investment securities, tax-exempt*		696			(110	)		586
Interest-earning balances and other		(18	)		25			7
Total interest income		6,084			(103	)		5,981
Interest expense:
Deposits:
Demand deposits		725			390			1,115
Savings deposits		15			19			34
Time deposits		1,126			(1,438	)		(312	)
Borrowings		(7	)		(194	)		(201	)
Total interest expense		1,859			(1,223	)		636
Net interest income increase (decrease)	$	4,225		$	1,120		$	5,345

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management.  In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors.  We recorded a provision for loan losses of $3.5 million in the first quarter of 2011 compared to a provision for loan losses of $2.9 million in the first quarter of 2010.  The level of our allowance for loan losses expressed as a percentage of total loans decreased slightly from 1.60% at March 31, 2010 to 1.59% at March 31, 2011,  and as a percent of total loans not covered by loss sharing agreements, the level increased from 1.60% at March 31, 2010 to 1.98% at March 31, 2011.  For the fourth quarter of 2010, we recorded a provision of $12.0 million and had an allowance for loan losses as a percentage of total loans of 2.07% at December 31, 2010.

Allowance for Loan Losses and Asset Quality

At March 31, 2011, the allowance for loan losses was $24.3 million, or 1.98% of loans not covered by loss share agreements, compared to $24.8 million, or 2.07% at December 31, 2010, and $17.4 million, or 1.60%, at March 31, 2010.  When compared to December 31, 2010, the decrease in the allowance for loan losses to total loans ratio for non-covered loans was primarily due to several fully reserved loans being charged-off during the first quarter of 2011.  When compared to March 31, 2010, the increase in allowance for loan losses to total loans ratio for non-covered loans was primarily due to deterioration in credit quality within the non-covered commercial loans portfolio.

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The amount of the allowance for loan losses equals the cumulative total of the provision for loan losses, reduced by actual loan charge-offs, and increased by recoveries of loans previously charged-off.  A specific loan is charged-off when management believes, after considering, among other things, the borrower’s financial condition and the value of any collateral, that collection of the loan is unlikely. Provisions are made to the allowance to reflect incurred losses associated with the loan portfolio.  Adjustments to the allowance are necessary to fund the reserve at a level dictated by the Company’s reserving methodologies. Management utilizes quantitative methodologies and modeling to determine the adequacy of the allowance for loan losses. A detailed description of our methodology was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  Management believes the March 31, 2011 allowance level is adequate to absorb probable losses inherent in the loan portfolio.

While management considers the allowance for loan losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or management’s assumptions as to future delinquencies, recoveries and losses. In addition, various regulatory agencies periodically review the Company’s loan losses and loan loss reserve methodology and there can be no assurances that the regulatory agencies will not require management to recognize additions to the allowance for loan losses based on their judgments about all relevant information utilized in the methodologies.

Nonperforming assets include nonaccrual loans, accruing loans 90 days or more past due, and OREO.  At March 31, 2011, nonperforming assets not covered by loss share agreements were $55.8 million, or 3.03% of total assets, compared to $50.2 million, or 2.75% of total assets at December 31, 2010 and $32.9 million, or 2.02% of total assets at March 31, 2010.  Nonperforming assets including assets covered under loss share agreements were $141.0 million, or 6.54% of total assets at March 31, 2011, compared to $135.3 million, or 6.29% at December 31, 2010.  For those nonperforming assets covered by loss share agreements, we are provided with significant loss protection from the FDIC.

Nonaccrual loans not covered by loss share agreements were $34.0 million at March 31, 2011, an increase of $7.8 million from December 31, 2010 and an increase of $21.5 million from March 31, 2010.  Nonaccrual loans, including covered loans, were $103.4 million at March 31, 2011.  At March 31, 2011, OREO increased to $37.5 million, a decrease of $2.3 million from December 31, 2010 and an increase of $17.1 million from March 31, 2010. The decrease from the fourth quarter was primarily a result of sales of OREO properties.  The increase from the prior year quarter was due to the higher levels of OREO resulting from the Beach First acquisition that are covered by loss share agreements.  At March 31, 2011, our OREO properties primarily consisted of $18.0 million of commercial properties and $11.0 million in construction, land and land development properties.  OREO assets are carried at the lower of carrying value or fair value less estimating selling costs using current appraisals and/or valuations.  The Company is actively marketing all of its OREO properties.

The following is a summary of nonaccrual loans at the periods presented:

	March 31,		December 31,		March 31,
	2011		2010		2010
	(In thousands)
Commercial real estate	$	35,847	$	33,277	$	4,378
Commercial construction		37,229		30,719		907
Commercial and industrial		3,711		2,814		4,036
Leases		14		-		8
Total commercial		76,801		66,810		9,329
Residential construction		2,247		252		1,117
Residential mortgage		24,297		23,888		2,096
Consumer and other		79		27		-
Total non accrual loans	$	103,424	$	90,977	$	12,542

The Company places loans on nonaccrual status when it is probable that the future collectability of the loan balance and collections of interest are in doubt.  Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance by the borrower.  

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The following is a summary of OREO at the periods presented:

	March 31,		December 31,		March 31,
	2011		2010		2010
	(In thousands)
Residential 1-4 family properties	$	7,354	$	10,739	$	1,736
Multifamily properties		1,063		1,101		-
Commercial properties		18,077		17,140		16,556
Construction, land development and other land		10,980		10,757		2,034
Total OREO	$	37,474	$	39,737	$	20,326

At March 31, 2011, loans that were restructured or modified and were not past due and performing to the restructured terms totaled $25.9 million, an increase of $20.8 million from December 31, 2010 and an increase of $20.5 million from March 31, 2010.  The significant increase during the quarter ended March 31, 2011 was primarily due to $18.1 million in performing A&D and construction loans being renewed at extended amortization terms or interest-only terms deemed to be concessionary in the current economic environment.

Net charge-offs for the first quarter of 2011 were $4.0 million, as compared with net charge-offs of $2.9 million for the first quarter of 2010.  Expressed as an annualized percentage of average loans outstanding, net charge-offs were 1.07% for both the first quarter of 2011 and the same period in 2010.  The majority of the increase in the dollar amount of net charge-offs, as compared to the same prior year period, was caused by the weakening local real estate markets, mostly in commercial loans.  Net charge-offs for the fourth quarter of 2010 were $6.0 million.

The following is selected financial information relating to loans, the loan loss allowance and loan loss provision as of and for the period then ended:  

	Three Months Ended
	March 31,
	2011			2010
Net charge-offs to average loans (annualized)		1.07	%		1.07	%
Allowance for loan losses to total loans		1.59	%		1.60	%
Not covered by loss share		1.98	%		1.60	%
Nonperforming loans to total loans		6.77	%		1.15	%
Not covered by loss share		2.78	%		1.15	%

Non-Interest Income

Non-interest income was $2.4 million for the first quarter of 2011 compared to $1.4 million for the same period in 2010.  Included in non-interest income for the first quarter of 2011 was $300,000 of income associated with FDIC related settlement receipts.  Excluding FDIC related transactions, non-interest income was $2.1 million for the current quarter, up 55.9% from the $1.4 million reported for the 2010 first quarter.

Mortgage fees generated from the our mortgage market operations increased $105,000, or 40.9%, compared to the first quarter of 2010 primarily due to increased originations and refinancing resulting from the continued low mortgage interest rates.

Service charges on deposit accounts increased $172,000, or 26.3%, in the first quarter of 2011, compared to the first quarter of 2010 primarily as a result of the increase in average deposits during 2011 of $437.4 million due to the Beach First acquisition. Our overall growth in volume of the related service charges was partially offset by lower overdraft and NSF fees due to new Federal Reserve Board’s consumer protection regulations.

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Earnings on bank-owned life insurance increased by $179,000, or 72.8%, for the first quarter, compared to the first quarter of 2010 due to the additional purchase of bank owned life insurance during December 2010.  The average balance of bank owned life insurance increased by $19.1 million during the first quarter of 2011 when compared to the prior year quarter.

Investment brokerage fees increased $154,000 in the first quarter of 2011, compared to the first quarter of 2010 primarily as a result of winding down the first quarter 2010 investment platform and having the new investment platform in operations during the first quarter of 2011.

Merchant fee and debit card income totaled $130,000 for the first quarter of 2011.  This revenue source was added from the acquisition of Beach First, and is a significant ongoing source of revenue in the retail-oriented coastal economy.

Non-Interest Expense

The Company strives to maintain levels of non-interest expense that management believes are appropriate given the nature of its operations and the investments in personnel and facilities that have been necessary to generate growth.  One of the keys to the momentum the Company has experienced has been the continuous investment in the core banking franchise, both in people and locations.  As the Company strives to maintain momentum in its growth and strategy, it will incur costs associated with investments in people, facilities and technology that are anticipated to benefit the shareholders as these investments reach their potential.

Non-interest expenses for the first quarter of 2011 increased $5.8 million, or 65.8%, compared to the same quarter of 2010.  The higher level of non-interest expense in the first quarter of 2011 was primarily due to the additional operating expense from the Beach First acquisition. The majority of the non-interest expense categories have seen nominal increases when compared to the same quarter a year ago.

As a result of the acquisition and continued growth of the legacy bank, personnel costs have increased $2.4 million, or 50.6%, compared to the same quarter of 2010.  Our overall growth of our franchise has increased our headcount, including strategic additions to our senior management team.  During 2011, we will continue to invest in our infrastructure for strategic initiatives, new offices and franchise growth.

Occupancy and furniture/equipment expenditures increased $681,000, or 76.4%, due to increased costs and additional facilities associated with the acquisition of Beach First during the second quarter of 2010.  The increase in the number of locations has also escalated utilities, lease expenses, and property taxes in 2011.

Insurance, professional and other service fees increased $355,000, or 55.4%, compared to the same quarter of 2010, mostly due to increased fees associated with the acquisition of Beach First and overall growth of our franchise.

Loan, foreclosure and collection expenses have increased $1.6 million compared to the same quarter of 2010.  The higher level of loan, foreclosure and collection expense primarily relates to the write-down of OREO properties and the on-going expenses relating to these properties.  During the first quarter of 2011, we recorded $1.0 million of other real estate valuation adjustments on non-covered assets, including $2.5 million of other real estate valuation adjustments on covered assets from the Beach First acquisition, with a corresponding increase in the Company’s FDIC indemnification asset given that these losses are 80% insured, which resulted in a net expense of $500,000.  Additionally, as a result of the acquisition and continued growth of the legacy Bank, personnel costs have increased $2.4 million, or 50.6% for the first quarter of 2011, compared to the same quarter a year ago, and were $123,000 lower than the fourth quarter of 2010, and all other non-interest expense categories have seen nominal increases when compared to the same quarter a year ago.

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Income Taxes

The Company generates significant amounts of non-taxable income from tax exempt investment securities and from investments in bank-owned life insurance.  Accordingly, the level of such income in relation to income before taxes significantly affects our effective tax rate.  For the quarter ended March 31, 2011, we recorded an income tax benefit of $647,000 compared to a tax benefit of $316,000 for the same period in 2010.  A tax benefit is recorded if non-taxable income exceeds income before taxes, resulting in a reduction of total income subject to income taxes.  This increase was due to higher levels of bank-owned life insurance and tax exempt securities we have invested in comparison to the prior year quarter.

Preferred Stock Dividend and Accretion

For the first quarters of 2011 and 2010, dividends on preferred stock and accretion amounted to $601,000 and $503,000, respectively.  The increase is associated with the preferred stock dividend paid on the Series B Preferred Stock that was issued during the second quarter of 2010.  The remaining amounts were associated with the Series A Preferred Stock that was issued to the United States Treasury in December 2008, in connection with our participation in the TARP Capital Purchase Program.  

Balance Sheet Analysis

Total assets at March 31, 2011 were $2.16 billion, an increase of $7.3 million when compared to total assets at December 31, 2010.  Total earning assets, which are comprised of interest-earning balances at banks, investment securities, loans held for sale and loans, were $1.91 billion at March 31, 2011 and December 31, 2010.  Earning assets serve as the primary revenue sources for the Company.  Total liquid assets, which include cash and cash equivalents and securities available for sale at March 31, 2011 were 17.4% of total assets, or $375.0 million, a $8.0 million decrease from the $383.0 million reported at December 31, 2010.

Investment Securities

Investment securities were $333.3 million at March 31, 2011 and $358.9 million at December 31, 2010.  The decrease of $25.6 million was used to fund our loan growth.  The majority of securities in the portfolio are bank-qualified municipal government securities and mortgage-backed securities issued or guaranteed by U.S. government agencies.  The Company also maintains portfolios of securities consisting of CMOs issued or guaranteed by U.S. government agencies.  The Company’s investment portfolios are high quality securities that are designed to enhance liquidity while providing acceptable rates of return.

Loans

Loans increased by $20.5 million to $1.53 billion at March 31, 2011 from $1.51 billion at December 31, 2010.  For the first three months of 2011, average total loans were $1.51 billion, compared to $1.09 billion for the first three months of 2010.  The majority of this increase resulted from the acquisition of Beach First in the second quarter of 2010.  At March 31, 2011, loans covered under loss share agreements amounted to $301.4 million.  Excluding loans covered under loss share agreements, the mix and stratification within certain classifications of the Company’s loan portfolio has changed when compared to the loan portfolio composition at December 31, 2010.  The Company’s construction, land, and acquisition & development (“A&D”) portfolios were reduced from $200.9 million at December 31, 2010 to $194.1 million at March 31, 2011.  Residential and commercial A&D exposure was reduced by $3.7 million during the first three months of 2011.  The Company will continue its efforts to divest A&D exposures as needed and deemed appropriate by management.  The Company’s commercial real estate portfolio increased from $557.6 million at December 31, 2010 to $588.5 million at March 31, 2011, with increases of $23.1 million in our investment commercial real estate portfolio.

Deposits

Deposits continue to be our primary funding source.  At March 31, 2011, deposits totaled $1.87 billion, an increase of $42.8 million, or 2.3%, from year-end 2010.  We continue to see positive trends in our emphasis of deposit growth.  While overall deposit growth continues to be an emphasis, the more important element is the shift in the mix of deposits to higher levels of core deposits and away from wholesale CDs.  Over the one-year period core deposits increased by over $635.4 million, while wholesale CD’s declined by over $115.8 million.  As a percentage of total deposits, wholesale CD’s currently comprise only 13.8% of total deposits, down from 27.6% and 14.4% at March 31, 2010 and December 31, 2010, respectively.

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Borrowings

While we continue to utilize borrowings to support balance sheet management and growth, during the quarter ended March 31, 2011 we repaid $37.0 million of borrowings, primarily from the increase in our deposits during the quarter.  Short-term borrowings decreased from $60.2 million at December 31, 2010 to $26.2 million at March 31, 2011.  Short-term borrowings consist of FHLB term advances with remaining maturities of less than one year, Federal funds purchased from correspondent banks, securities sold under repurchase agreements and an unsecured revolving line of credit.  At March 31, 2011, long-term debt outstanding totaled $94.7 million, compared to $97.7 million outstanding at year-end 2010.  Long-term debt at March 31, 2011 consisted of $63.0 million of FHLB advances, and $31.7 million of subordinated debt, of which $23.7 million has been issued through the Company’s trust subsidiaries.

Shareholders’ Equity

Our capital position remains above all regulatory thresholds to be considered well capitalized.  At March 31, 2011, shareholders’ equity totaled $154.2 million, an increase of $2.0 million from the December 31, 2010 balance.  The primary changes in shareholders’ equity were an increase in net income for the three-month period in the amount of $1.5 million, an increase in the unrealized gains on securities available for sale and cash flow hedging activities in the amount of $1.3 million, a net decrease of $402,000 for cash dividends paid to common shareholders and $481,000 of preferred stock dividends and accretion.  At March 31, 2011, the Bank and the Company were considered “well capitalized” as such terms are defined in applicable regulations.

Liquidity

Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources.

Liquidity is defined as our ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis, pay operating expenses and meet regulatory liquidity requirements.  Management measures our liquidity position by giving consideration to both on- and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.

Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities, investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; investments available for sale; loan repayments; loan sales; deposits, both from our local markets and the wholesale markets; borrowings from the FHLB and Federal Reserve discount window; and borrowings from correspondent banks under unsecured overnight federal funds credit lines and secured lines of credit. In addition to interest rate-sensitive deposits, the Bank’s primary demand for liquidity is anticipated funding under credit commitments to customers.

Our liquidity position aggregated $375.0 million at March 31, 2011, compared to $383.0 million at December 31, 2010.  Supplementing customer deposits as a source of funding, we have the ability to borrow up to $211 million from the FHLB of Atlanta, with $66.0 million outstanding at March 31, 2011.  We also have the ability to borrow from the Federal Reserve Discount Window in the amount of $106 million, with no outstanding balances.  These amounts are based on assets currently pledged.  In addition to the above, we have $166 million of investment securities that are available to be pledged that are unencumbered and a significant amount of loans that are available to be pledged that are unencumbered.  We also have an unsecured revolving line of credit of up to $25.0 million, with $4.3 million outstanding.  The Company was in compliance with all covenants associated with its unsecured revolving line of credit as of March 31, 2011.

In addition to these liquidity sources, we have access to unsecured lines of credit from correspondent banks for short-term liquidity needs totaling $47 million, and the Promontory Interfinancial Network weekly funds auctions where we have another $324 million in availability.  We believe that our combined aggregate liquidity position is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

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Contractual Obligations

The Company’s contractual obligations were scheduled in our annual report on Form 10-K for the year ended December 31, 2010.  The most significant obligations, other than obligations under deposit and borrowings, were for operating leases for banking facilities.  Other than the contractual obligations associated with the Beach First acquisition, there have been no material changes since year-end.

Capital Resources

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures.  These measures were established by regulation to ensure capital adequacy.  As of March 31, 2011, the Company and the Bank were “well capitalized” under this regulatory framework.  There have been no conditions or events since March 31, 2011 that management believes have changed either the Company’s or the Bank’s capital classifications.

At March 31, 2011, the Tier I risk-based capital ratio for the Bank was 11.20%, the total risk-based capital ratio was 12.91% and all other capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures.  At March 31, 2011, the Company’s total risk-based capital ratio was 12.57%, thus classifying the Company as “well-capitalized” for regulatory purposes.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

As described in more detail in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2010, asset/liability management involves the evaluation, monitoring and management of interest rate risk, liquidity and funding. While the Board of Directors has overall responsibility for the Company’s asset/liability management policies, the Bank’s Asset and Liability Committee monitors loan, investment, and liability portfolios to ensure comprehensive management of interest rate risk and adherence to the Bank’s policies. The Company has not experienced any material change in the risk of its portfolios of interest-earning assets and interest-bearing liabilities from December 31, 2010 to March 31, 2011.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.  As of the end of the period covered by this quarterly report, our management, together with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation of the effectiveness of our disclosure controls and procedures in accordance with Rule 13a-15 under the Securities Exchange Act of 1934 as amended (the “Exchange Act”).  Based on the  evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report, our CEO and CFO concluded that, as of such date,  our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, and (b) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal control over financial reporting.There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.   OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report and in our other reports and statements that we file with the SEC, including our quarterly reports on Form 10-Q, careful consideration should be given to the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We may not realize the anticipated benefits of the Bank’s acquisition of Beach First, including potential synergies, due to challenges associated with integration  or other factors.

The success of the Bank’s acquisition of Beach First will depend in part on the success of our management in integrating the Bank’s operations, technologies and personnel with those of Beach First. Our inability to meet the challenges involved in successfully integrating the operations of Beach First or otherwise to realize the anticipated benefits of the Beach First acquisition could adversely affect our results of operations. In addition, the overall integration of the acquisition will require substantial attention from our management, which could further adversely affect our results of operations.

The challenges involved in integration include:

•integrating operations, processes, people, technologies and services;

•assimilating and retaining the personnel and integrating the business cultures, operations, systems and customers of both banks; and

•consolidating corporate and administrative infrastructures and eliminating duplicative operations and administrative functions.

We may not be able to successfully integrate Beach First’s operations with ours in a timely manner, or at all, and we may not realize the anticipated benefits of the acquisition, including potential synergies or growth opportunities, to the extent or in the time frame anticipated. The anticipated benefits and synergies of the acquisition are based on assumptions and current expectations, not actual experience, and assume a successful integration without unanticipated costs or effort and no unforeseen or unintended consequences.

Item 6.    Exhibits

The exhibits listed in the accompanying exhibit index are filed as part of this quarterly report.

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SIGNATURES

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

	BNC BANCORP
Date:  May 10, 2011	By:	/s/ W. Swope Montgomery, Jr.
		W. Swope Montgomery, Jr.
		President and Chief Executive Officer
Date:  May 10, 2011	By:	/s/ David B. Spencer
		David B. Spencer
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
Exhibit (31.1)	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and15d-14 (a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit (31.2)	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and15d-14 (a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit (32)	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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