BNC Bancorp (BNNC) 10-Q 2011 Q3 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 September 30, 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 x 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  ¨ (Do not check if a smaller reporting company)	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 November 04, 2011, the registrant had outstanding 9,085,580 shares of Common Stock, no par value.

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		Page No.
PART I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements
	Consolidated Balance Sheets
	September 30, 2011 and December 31, 2010	3
	Consolidated Statements of Income
	Three Months and Nine Months Ended September 30, 2011 and 2010	4
	Consolidated Statements of Comprehensive Income
	Three Months and Nine Months Ended September 30, 2011 and 2010	5
	Consolidated Statements of Shareholders’ Equity
	Nine Months Ended September 30, 2011 and 2010	6
	Consolidated Statements of Cash Flows
	Nine Months Ended September 30, 2011 and 2010	7
	Notes to Consolidated Financial Statements	9
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4 -	Controls and Procedures	48
PART II.	Other Information
Item 1A -	Risk Factors	48
Item 6 -	Exhibits	48
SIGNATURES		49
EXHIBIT INDEX		50

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PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

Less allowance for loan losses

BNC BANCORP

CONSOLIDATED BALANCE SHEETS

	September 30, 2011			December 31,
	(Unaudited)			2010*
	(In thousands, except share data)
Assets
Cash and due from banks	$	12,735		$	7,812
Interest-earning deposits in other banks		22,566			22,275
Investment securities available for sale, at fair value		342,989			352,871
Investment securities held to maturity, at amortized cost		6,000			6,000
Federal Home Loan Bank stock, at cost		10,248			9,146
Loans held for sale		6,753			6,751
Loans:
Covered under loss share agreements		262,673			309,342
Not covered under loss share agreements		1,309,893			1,198,838
Less allowance for loan losses		(24,177	)		(24,813	)
Net loans		1,548,389			1,483,367
Accrued interest receivable		7,617			10,363
Premises and equipment, net		38,261			30,550
Other real estate owned:
Covered under loss share agreements		22,747			23,912
Not covered under loss share agreements		22,736			15,825
FDIC indemnification asset		50,685			69,493
Investment in bank-owned life insurance		47,866			46,607
Goodwill		26,129			26,129
Other assets		32,037			38,831
Total assets	$	2,197,758		$	2,149,932
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand	$	130,978		$	107,547
Interest-bearing demand		833,190			841,062
Time deposits		871,436			879,461
Total deposits		1,835,604			1,828,070
Short-term borrowings		96,459			60,207
Long-term debt		93,713			97,713
Accrued expenses and other liabilities		9,407			11,718
Total liabilities		2,035,183			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		30,117			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;
9,085,580 and 9,053,360 issued and outstanding, respectively		87,240			86,791
Common stock warrants		2,412			2,412
Retained earnings		25,272			22,901
Stock in directors rabbi trust		(2,033	)		(1,729	)
Directors deferred fees obligation		2,033			1,729
Accumulated other comprehensive income (loss)		373			(6,798	)
Total shareholders' equity		162,575			152,224
Total liabilities and shareholders' equity	$	2,197,758		$	2,149,932

* Derived from audited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

-3-

BNC BANCORP

CONSOLIDATED STATEMENTS OF INCOME  (Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011		2010			2011			2010
	(In thousands, except per share data)
Interest income:
Interest and fees on loans	$	21,176	$	21,332		$	63,008		$	56,615
Investment securities:
Taxable		1,389		1,738			4,353			5,938
Tax-exempt		2,475		2,441			7,447			6,982
Interest on interest-earning balances and other		25		69			86			146
Total interest income		25,065		25,580			74,894			69,681
Interest expense:
Interest on demand deposits and savings		2,967		2,621			8,351			6,592
Interest on time deposits		4,361		5,280			13,718			16,246
Interest on short-term borrowings		172		34			356			431
Interest on long-term debt		697		799			2,157			2,427
Total interest expense		8,197		8,734			24,582			25,696
Net interest income		16,868		16,846			50,312			43,985
Provision for loan losses		3,524		5,436			10,056			14,382
Net interest income after provision for loan losses		13,344		11,410			40,256			29,603
Non-interest income:
Mortgage fees		581		462			1,186			1,013
Service charges		744		677			2,439			2,093
Investment brokerage fees		357		66			741			133
Earnings on bank-owned life insurance		414		220			1,259			694
Gain (loss) on sales of investment securities available for sale, net		1,032		(63	)		1,168			541
Gain on acquisition		-		-			-			19,289
Other		711		2,544			1,842			3,203
Total non-interest income		3,839		3,906			8,635			26,966
Non-interest expense:
Salaries and employee benefits		8,152		6,892			23,014			17,978
Occupancy		961		837			2,752			2,235
Furniture and equipment		632		505			1,924			1,466
Data processing and supplies		514		560			1,678			1,564
Advertising and business development		326		323			1,252			987
Professional and other services		668		840			2,538			3,039
FDIC insurance assessments		485		780			1,945			2,160
Loan, foreclosure and collection		1,975		3,225			5,967			4,895
Other		1,002		1,517			3,270			3,646
Total non-interest expense		14,715		15,479			44,340			37,970
Income before income tax expense (benefit)		2,468		(163	)		4,551			18,599
Income tax expense (benefit)		46		(823	)		(982	)		4,817
Net income		2,422		660			5,533			13,782
Less preferred stock dividends and discount accretion		601		591			1,803			1,596
Net income available to common shareholders	$	1,821	$	69		$	3,730		$	12,186
Basic earnings per common share	$	0.18	$	0.01		$	0.37		$	1.41
Diluted earnings per common share	$	0.18	$	0.01		$	0.37		$	1.39
Dividends paid per common share	$	0.05	$	0.05		$	0.15		$	0.15

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE  INCOME (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(In thousands)
Net income	$	2,422		$	660		$	5,533		$	13,782
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized holding gains		7,635			6,481			14,681			8,562
Tax effect		(2,943	)		(2,499	)		(5,659	)		(3,301	)
Reclassification of gains(losses) recognized in net income		(1,032	)		63			(1,168	)		(541	)
Tax effect		398			(25	)		450			208
Net of tax amount		4,058			4,020			8,304			4,928
Cash flow hedging activities:
Unrealized holding losses		(2,507	)		(4,523	)		(5,262	)		(18,085	)
Tax effect		966			1,744			2,028			6,972
Reclassification of losses recognized in net income		1,375			599			3,419			1,149
Tax effect		(530	)		(231	)		(1,318	)		(443	)
Net of tax amount		(696	)		(2,411	)		(1,133	)		(10,407	)
Total other comprehensive income (loss), net of tax		3,362			1,609			7,171			(5,479	)
Comprehensive income	$	5,784		$	2,269		$	12,704		$	8,303

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY  (Unaudited)

																	Directors		Accumulated
					Common		Preferred		Preferred					Stock in			deferred		other com-
	Common stock				stock		stock		stock		Retained			directors			fees		prehensive
	Shares		Amount		warrants		Series A		Series B		earnings			rabbi trust			obligation		income (loss)			Total
	(Amounts in thousands, except share and per share data)
Balance, December 31, 2009		7,341,901	$	70,376	$	2,412	$	29,304	$	-	$	19,009		$	(1,388	)	$	1,388	$	5,105		$	126,206
Net income		-		-		-		-		-		13,782			-			-		-			13,782
Directors deferred fees		-		-		-		-		-		-			(95	)		95		-			-
Other comprehensive loss,
net of tax		-		-		-		-		-		-			-			-		(5,479	)		(5,479	)
Common stock issued pursuant to:
Stock-based compensation		3,999		135		-		-		-		-			-			-		-			135
Common stock offering, net		1,695,434		16,122		-		-		-		-			-			-		-			16,122
Preferred stock issued, net		-		-		-		-		17,161		-			-			-		-			17,161
Cash dividends:
Common stock, $0.15 per share		-		-		-		-		-		(1,186	)		-			-		-			(1,186	)
Preferred stock, net of accretion		-		-		-		334		-		(1,596	)		-			-		-			(1,262	)
Balance, September 30, 2010		9,041,334	$	86,633	$	2,412	$	29,638	$	17,161	$	30,009		$	(1,483	)	$	1,483	$	(374	)	$	165,479
Balance, December 31, 2010		9,053,360	$	86,791	$	2,412	$	29,757	$	17,161	$	22,901		$	(1,729	)	$	1,729	$	(6,798	)	$	152,224
Net income		-		-		-		-		-		5,533			-			-		-			5,533
Directors deferred fees		-		-		-		-		-		-			(304	)		304		-			-
Other comprehensive income,
net of tax		-		-		-		-		-		-			-			-		7,171			7,171
Common stock issued pursuant to:
Exercise of stock options		5,000		41		-		-		-		-			-			-		-			41
Stock-based compensation		6,665		254		-		-		-		-			-			-		-			254
Dividend reinvestment plan		20,555		154		-		-		-		-			-			-		-			154
Cash dividends:
Common stock, $0.15 per share		-		-		-		-		-		(1,359	)		-			-		-			(1,359	)
Preferred stock, net of accretion		-		-		-		360		-		(1,803	)		-			-		-			(1,443	)
Balance, September 30, 2011		9,085,580	$	87,240	$	2,412	$	30,117	$	17,161	$	25,272		$	(2,033	)	$	2,033	$	373		$	162,575

See accompanying note to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2011			2010
	(In thousands)
Operating activities
Net income	$	5,533		$	13,782
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		10,056			14,382
Depreciation and amortization		1,684			1,441
Amortization of premiums and discounts, net		61			255
Amortization of core deposit intangible		291			269
Accretion of fair value purchase accounting adjustments		(3,795	)		(4,636	)
Cash flow hedge caplet expense		3,419			1,149
Gain on acquisition		-			(19,289	)
Stock-based compensation		254			135
Deferred compensation		447			600
Earnings on bank-owned life insurance		(1,259	)		(694	)
Gain on sales of investment securities available for sale, net		(1,168	)		(541	)
Losses on other real estate owned		2,915			2,010
Gain on sale of loans / mortgage fees		(1,186	)		(1,013	)
Origination of mortgage loans held for sale		(48,800	)		(69,615	)
Proceeds from sales of mortgage loans held for sale		49,984			70,080
Decrease in accrued interest receivable		2,746			1,677
Decrease in FDIC indemnification asset		21,047			21,690
(Increase) decrease in other assets		(3,358	)		5,169
Increase (decrease) in accrued expenses and other liabilities		(2,666	)		3,389
Other operating activities, net		21			34
Net cash provided by operating activities		36,226			40,274
Investing activities
Purchases of investment securities available for sale		(48,907	)		(40,410	)
Proceeds from sales of investment securities available for sale		49,789			74,746
Proceeds from maturities of investment securities available for sale		23,620			42,883
(Purchase) redemption of Federal Home Loan Bank stock		(1,102	)		580
Investment in bank-owned life insurance		-			(14	)
Net increase in loans		(99,357	)		(75,655	)
Purchase of premises and equipment		(9,339	)		(3,512	)
Proceeds from disposal of premises and equipment		-			14
Net cash received from acquisition		-			61,112
Investment in other real estate owned		(524	)		(1,205	)
Proceeds from sales of other real estate owned		17,629			9,694
Net cash provided (used) by investing activities		(68,191	)		68,233
Financing activities
Net increase in deposits		7,534			6,688
Net increase (decrease) in short-term borrowings		32,252			(40,896	)
Net decrease in long-term debt		-			(24,602	)
Common stock issued, net of issuance costs		-			16,122
Preferred stock issued, net of issuance costs		-			17,161
Common stock issued from exercise of stock options		41			-
Common stock issued pursuant to dividend reinvestment plan		154			-
Cash dividends paid, net of accretion		(2,802	)		(2,448	)
Net cash provided (used) by financing activities		37,179			(27,975	)
Net increase in cash and cash equivalents		5,214			80,532
Cash and cash equivalents, beginning of period		30,087			48,173
Cash and cash equivalents, end of period	$	35,301		$	128,705

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2011		2010
	(In thousands)
Supplemental statement of cash flows disclosure:
Interest paid	$	21,476	$	23,129
Income taxes paid		1,101		1,682
Summary of noncash investing and financing activities:
Transfer of loans to other real estate owned	$	27,755	$	25,141
FDIC indemnification asset increase from losses		1,989		-

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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 and nine months ended September 30, 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 and nine months ended September 30, 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 standby 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 September 30, 2011 and December 31, 2010, the outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk are as follows:

	September 30,		December 31,
	2011		2010
	(In thousands)
Commitments under unfunded loans and lines of credit	$	201,068	$	198,388
Letters of credit		22,388		23,716
Unused credit card lines		6,073		7,577
Commitments to sell loans held for sale		6,753		6,751

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.

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BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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 warrants 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 September 30, are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(Dollars in thousands)
Net income available to common shareholders	$	1,821	$	69	$	3,730	$	12,186
Add:  Convertible preferred stock dividends		90		90		270		90
Net income available to participating common
shareholders	$	1,911	$	159	$	4,000	$	12,276
Weighted average common shares - basic		9,080,235		9,040,566		9,067,224		8,013,857
Add:  Convertible preferred stock		1,804,566		1,804,566		1,804,566		713,894
Weighted average participating common
shares - basic		10,884,801		10,845,132		10,871,790		8,727,751
Effects of dilutive Stock Rights		14,852		127,334		16,381		74,058
Weighted average participating common
shares - diluted		10,899,653		10,972,466		10,888,171		8,801,809
Basic earnings per common share	$	0.18	$	0.01	$	0.37	$	1.41
Diluted earnings per common share	$	0.18	$	0.01	$	0.37	$	1.39

For the three months and nine months ended September 30, 2011, there were 678,990 and 677,590, respectively,  shares of Stock Rights that were excluded in computing diluted common shares outstanding because the exercise price exceeded the average share value for the periods.  For the three months and nine months ended September 30, 2010, there were 116,053 and 121,653 shares of Stock Rights, respectively, excluded in computing diluted common shares outstanding because the exercise price exceeded the average share value for the periods.

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.  Detailed descriptions of these plans were 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.

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BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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 nine months ended September 30, 2011.

A summary of option activity under the stock option plans as of September 30, 2011 and changes during the nine months ended September 30, 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		(5,000	)		8.26
Forfeited or expired		(67,282	)		8.26
Outstanding at September 30, 2011		196,963		$	10.15	3.1 years	$	54
Exercisable at September 30, 2011		182,951		$	10.29	2.7 years	$	54
Share options expected to vest		14,012		$	8.35	8.1 years	$	-

As of September 30, 2011, there was $34,000 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 1.61 years.  There was no intrinsic value of options exercised during the nine months ended September 30, 2011.  There were no stock options exercised during the nine months ended September 30, 2010.  The related compensation expense recognized during the nine months ended September 30, 2011 and 2010 was $11,000 and $10,000, respectively.

Restricted Stock Awards.  A summary of the status of the Company’s non-vested stock awards as of September 30, 2011 and changes during the nine months ended September 30, 2011 is presented below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Non-vested at December 31, 2010		69,443		$	7.64
Granted		48,700			6.93
Vested		(9,665	)		8.18
Non-vested at September 30, 2011		108,478		$	7.27

As of September 30, 2011, there was $472,000 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 1.08 years.  The related compensation expense recognized during the nine months ended September 30, 2011 and 2010 was $243,000 and $125,000, respectively.

NOTE 5 – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of September 30, 2011 and December 31, 2010 are as follows:

-11-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
	(In thousands)
September 30, 2011:
Available for sale:
U.S. government agencies	$	10,074	$	468	$	-	$	10,542
State and municipals		217,942		12,686		80		230,548
Mortgage-backed securities:
Residential government sponsored		81,630		5,678		-		87,308
Other government sponsored		13,466		1,078		-		14,544
Other		47		-		-		47
	$	323,159	$	19,910	$	80	$	342,989
Held to maturity:
Corporate bonds	$	6,000	$	-	$	1,120	$	4,880
			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 securities:
Residential government sponsored		100,117		5,928		176		105,869
Other government sponsored		24,487		1,926		-		26,413
Other Other		47		-		-		47
	$	346,553	$	10,576	$	4,258	$	352,871
Held to maturity:
Corporate bonds	$	6,000	$	-	$	720	$	5,280

The amortized cost and estimated fair value of investment securities at September 30, 2011, by contractual maturity and projected cash flows, are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

			Estimated
	Amortized cost		fair value
	(In thousands)
Available for sale:
Due within one year	$	23,723	$	25,183
Due after one year through five years		62,907		66,267
Due after five through ten years		117,637		124,441
Due after ten years		118,892		127,098
	$	323,159	$	342,989
Held to maturity:
Due after five through ten years	$	6,000	$	4,880

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 September 30, 2011 and December 31, 2010.  At September 30, 2011, the unrealized losses relate to six state and municipal securities and two corporate bonds.  Of those, four 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’s management and the Asset/Liability committee continually monitor the investment securities portfolio to effectively evaluate the temporary impairment.  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 September 30, 2011 and December 31, 2010 are as follows:

-12-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

	September 30, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
	(In thousands)
Available for sale:
State and municipals	$	3,891	$	30	$	2,491	$	50	$	6,382	$	80
Mortgage-backed		-		-		-		-		-		-
	$	3,891	$	30	$	2,491	$	50	$	6,382	$	80
Held to maturity:
Corporate bonds	$	-	$	-	$	4,880	$	1,120	$	4,880	$	1,120
	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)
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
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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(In thousands)
Proceeds from sales	$	22,930		$	5,294		$	49,789		$	74,746
Gross realized gains on sales	$	1,467		$	6		$	2,122		$	614
Gross realized losses on sales		(435	)		(69	)		(954	)		(73	)
Total realized gains (losses), net	$	1,032		$	(63	)	$	1,168		$	541

At September 30, 2011 and December 31, 2010, investment securities with an estimated fair value of $134.5 million and $165.0 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

-13-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans at September 30, 2011 and December 31, 2010 are summarized below:

	September 30, 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	$	108,508	$	650,448	$	758,956		$	120,053	$	557,634	$	677,687
Commercial construction		43,565		186,603		230,168			62,879		170,079		232,958
Commercial and industrial		15,911		114,924		130,835			24,903		111,668		136,571
Leases		-		12,374		12,374			-		10,985		10,985
Total commercial		167,984		964,349		1,132,333			207,835		850,366		1,058,201
Residential construction		170		25,180		25,350			2,402		29,949		32,351
Residential mortgage		90,877		311,374		402,251			94,701		308,615		403,316
Consumer and other		3,642		9,626		13,268			4,404		10,099		14,503
	$	262,673	$	1,310,529		1,573,202		$	309,342	$	1,199,029		1,508,371
Deferred loan costs (fees)						(636	)						(191	)
Total loans, net of deferred loan costs/fees					$	1,572,566						$	1,508,180

A portion of the fair value discount on acquired non-impaired loans has an accretable yield associated with those loans that is accreted into interest income over the estimated remaining life of the loans.  The remaining 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 and nine months ended September 30, 2011 is as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2011						September 30, 2011
	Accretable			Carrying			Accretable			Carrying
	yield			amount			yield			amount
	(In thousands)
Balance at beginning of period	$	(10,484	)	$	283,685		$	(13,009	)	$	309,342
Reductions from payments and foreclosures, net		-			(22,032	)		-			(50,214	)
Accretion		1,020			1,020			3,545			3,545
Balance at end of period	$	(9,464	)	$	262,673		$	(9,464	)	$	262,673

The unpaid principal balance for loans covered under loss share agreements was $318.0 million and $404.2 million at September 30, 2011 and December 31, 2010, respectively.

The Company has the ability to borrow funds from the Federal Home Loan Bank (“FHLB”) and from the Federal Reserve Bank.  At September 30, 2011 and December 31, 2010, real estate loans with carrying values of $497.8 million and $368.8 million, respectively, were pledged to secure borrowing facilities from these institutions.

-14-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The following presents by loan category, the summary of the Company’s allowance for loan losses and recorded investment in loans as of and for three and nine months ended September 30, 2011:

	Commercial			Commercial			Commercial						Residential			Residential			Consumer
	real estate			construction			and industrial			Leases			construction			mortgage			and other			Total
	(In thousands)
Allowance for loan losses:
Three months ended:
Balance at July 1, 2011	$	9,255		$	5,894		$	3,001		$	35		$	579		$	4,440		$	169		$	23,373
Charge-offs		(789	)		(1,506	)		(275	)		-			(267	)		(376	)		(31	)		(3,244	)
Recoveries		85			250			154			-			3			31			1			524
Provision		721			2,021			176			(10	)		324			281			11			3,524
Balance September 30, 2011	$	9,272		$	6,659		$	3,056		$	25		$	639		$	4,376		$	150		$	24,177
Nine months ended:
Balance at January 1, 2011	$	12,972		$	4,525		$	3,525		$	33		$	682		$	2,867		$	209		$	24,813
Charge-offs		(3,896	)		(4,838	)		(1,052	)		-			(876	)		(1,009	)		(51	)		(11,722	)
Recoveries		142			270			511			15			14			61			17			1,030
Provision		54			6,702			72			(23	)		819			2,457			(25	)		10,056
Balance September 30, 2011	$	9,272		$	6,659		$	3,056		$	25		$	639		$	4,376		$	150		$	24,177
Ending balances:
Specific reserves:
Impaired loans	$	733		$	2,401		$	84		$	-		$	-		$	2,036		$	-		$	5,254
Purchase credit
impaired loans		-			-			-			-			-			-			-			-
		733			2,401			84			-			-			2,036			-		$	5,254
General reserves		8,539			4,258			2,972			25			639			2,340			150			18,923
Total	$	9,272		$	6,659		$	3,056		$	25		$	639		$	4,376		$	150		$	24,177
Loans:
Ending balance:
Individually evaluated
for impairment	$	14,132		$	29,137		$	3,127		$	-		$	1,103		$	14,635		$	-		$	62,134
Purchase credit
impaired loans		19,193			18,883			2,382			-			170			25,767			30			66,425
Loans collectively
evaluated for
impairment		725,631			182,148			125,326			12,374			24,077			361,849			13,238			1,444,643
Total	$	758,956		$	230,168		$	130,835		$	12,374		$	25,350		$	402,251		$	13,268		$	1,573,202

The following presents by loan category, the balance of the Company’s allowance for loan losses and recorded investment in loans as of December 31, 2010:

	Commercial		Commercial		Commercial				Residential		Residential		Consumer
	real estate		construction		and industrial		Leases		construction		mortgage		and other		Total
	(In thousands)
Allowance for loan losses:
Specific reserves:
Impaired loans	$	1,414	$	383	$	570	$	-	$	-	$	359	$	-	$	2,726
Purchase credit
impaired loans		-		-		-		-		-		-		-		-
		1,414		383		570		-		-		359		-	$	2,726
General reserves		11,558		4,142		2,955		33		682		2,508		209		22,087
Total	$	12,972	$	4,525	$	3,525	$	33	$	682	$	2,867	$	209	$	24,813
Loans:
Ending balance:
Individually evaluated
for impairment	$	7,170	$	13,560	$	5,957	$	-	$	322	$	2,826	$	-	$	29,835
Purchase credit
impaired loans		31,396		22,810		2,084		-		-		22,723		-		79,013
Loans collectively
evaluated for
impairment		639,121		196,588		128,530		10,985		32,029		377,767		14,503		1,399,523
Total	$	677,687	$	232,958	$	136,571	$	10,985	$	32,351	$	403,316	$	14,503	$	1,508,371

-15-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The following presents by loan category, information related to impaired loans as of September 30, 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)
September 30, 2011:
Commercial real estate - non-covered	$	4,197	$	4,182	$	733	$	9,968	$	9,950
Commercial real estate - covered		-		-		-		19,242		28,824
Commercial construction - non-covered		15,370		15,352		2,401		13,832		13,785
Commercial construction - covered		-		-		-		18,884		26,955
Commercial and industrial - non-covered		207		207		84		2,937		2,920
Commercial and industrial - covered		-		-		-		2,382		3,436
Residential construction - non-covered		-		-		-		1,106		1,103
Residential construction - covered		-		-		-		170		207
Residential mortgage - non-covered		9,062		9,041		2,036		5,602		5,595
Residential mortgage - covered		-		-		-		25,767		32,390
Consumer and other - non-covered		-		-		-		46		49
Consumer and other - covered		-		-		-		30		33
Total loans	$	28,836	$	28,782	$	5,254	$	99,966	$	125,247
Total non-covered loans	$	28,836	$	28,782	$	5,254	$	33,491	$	33,402
Total covered loans		-		-		-		66,475		91,845
Total loans	$	28,836	$	28,782	$	5,254	$	99,966	$	125,247

							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 - non-covered	$	4,534	$	4,534	$	1,414	$	2,636	$	2,636
Commercial real estate - covered		-		-		-		31,396		43,552
Commercial construction - non-covered		1,788		1,788		383		11,772		11,772
Commercial construction -covered		-				-		22,810		39,481
Commercial and industrial - non-covered		1,323		1,323		570		4,634		4,634
Commercial and industrial - covered		-		-		-		2,084		2,915
Residential construction - non-covered		-		-		-		322		322
Residential construction -covered		-		-		-		-		-
Residential mortgage - non-covered		929		929		359		1,937		1,937
Residential mortgage -covered		-		-		-		22,683		38,678
Consumer and other - non-covered		-		-		-		-		-
Consumer and other - covered		-		-		-		-		-
Total	$	8,574	$	8,574	$	2,726	$	100,274	$	145,927
Total non-covered loans	$	8,574	$	8,574	$	2,726	$	21,301	$	21,301
Total covered loans		-		-		-		78,973		124,626
Total loans	$	8,574	$	8,574	$	2,726	$	100,274	$	145,927

-16-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The following presents by loan category, information related to the average investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011:

	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
	Average		Interest		Average		Interest
	recorded		income		recorded		income
	investment		recognized		investment		recognized
	(In thousands)
Impaired loans with allowance:
Commercial real estate	$	4,140	$	43	$	5,778	$	66
Commercial construction		13,985		30		10,688		76
Commercial and industrial		216		-		473		-
Residential construction		-		-		364		4
Residential mortgage		7,158		58		5,477		110
Consumer and other		-		-		-		-
Total impaired loans with allowance	$	25,499	$	131	$	22,780	$	256
Impaired loans with no allowance:
Commercial real estate	$	32,848	$	28	$	35,129	$	66
Commercial construction		33,556		80		37,753		167
Commercial and industrial		5,136		25		5,234		49
Leases		-		-		1		-
Residential construction		1,289		9		2,178		18
Residential mortgage		29,853		16		27,249		23
Consumer and other		28		-		110		-
Total impaired loans with no allowance	$	102,710	$	158	$	107,654	$	323
Impaired loans:
Commercial	$	89,881	$	206	$	95,056	$	424
Consumer		38,328		83		35,378		155
Total impaired loans	$	128,209	$	289	$	130,434	$	579

For the three and nine months ended September 30, 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 and nine months ended September 30, 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.  At September 30, 2010, the recorded investment in loans considered impaired totaled $86.3 million, of which $69.0 million were covered under loss share agreements.  The amount of interest income recognized within the period that the loans were impaired was not material.

-17-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The following presents by loan category, a summary of recorded investment in nonaccrual loans at September 30, 2011 and December 31, 2010, including those that are covered under loss share agreements:

	September 30, 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	$	14,636	$	7,936	$	22,572	$	22,090	$	11,187	$	33,277
Commercial construction		18,753		16,381		35,134		20,474		10,245		30,719
Commercial and industrial		2,357		585		2,942		1,749		1,065		2,814
Leases		-		-		-		-		-		-
Residential construction		170		343		513		-		252		252
Residential mortgage		25,767		4,596		30,363		20,413		3,475		23,888
Consumer and other		29		-		29		27		-		27
Total nonaccrual loans	$	61,712	$	29,841	$	91,553	$	64,753	$	26,224	$	90,977
Accruing greater than 90 days past due:
Commercial real estate	$	-	$	-	$	-	$	3,009	$	-	$	3,009
Commercial construction		-		-		-		267		-		267
Commercial and industrial		23		-		23		337		-		337
Residential construction		-		-		-		-		-		-
Residential mortgage		-		-		-		930		44		974
Consumer and other		-		-		-		11		-		11
Total 90 days past due loans	$	23	$	-	$	23	$	4,554	$	44	$	4,598

-18-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The following presents by loan category, an aging analysis of past due loans as of September 30, 2011 and 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
September 30, 2011:	(In thousands)
Non-covered:
Commercial real estate	$	319	$	337	$	-	$	7,936	$	8,592	$	641,856	$	650,448
Commercial construction		46		141		-		16,381		16,568		170,035		186,603
Commercial and industrial		132		249		-		585		966		113,958		114,924
Leases		-		-		-		-		-		12,374		12,374
Residential construction		-		365		-		343		708		24,472		25,180
Residential mortgage		1,519		304		-		4,596		6,419		304,955		311,374
Consumer and other		11		9		-		-		20		9,606		9,626
Total non-covered		2,027		1,405		-		29,841		33,273		1,277,256		1,310,529
Covered:
Commercial real estate		823		-		-		14,636		15,459		93,049		108,508
Commercial construction		360		1,960		-		18,753		21,073		22,492		43,565
Commercial and industrial		246		151		23		2,357		2,777		13,134		15,911
Leases		-		-		-		-		-		-		-
Residential construction		-		-		-		170		170		-		170
Residential mortgage		671		305		-		25,767		26,743		64,134		90,877
Consumer and other		69		44		-		29		142		3,500		3,642
Total covered		2,169		2,460		23		61,712		66,364		196,309		262,673
Total loans	$	4,196	$	3,865	$	23	$	91,553	$	99,637	$	1,473,565	$	1,573,202

					Greater
					than
	30-59 days		60-89 days		90 days				Total				Total
	past due		past due		past due		Nonaccrual		past due		Current		loans
December 31, 2010:	(In thousands)
Non-covered:
Commercial real estate	$	2,413	$	189	$	-	$	11,187	$	13,789	$	543,845	$	557,634
Commercial construction		146		-		-		10,245		10,391		159,688		170,079
Commercial and industrial		142		-		-		1,065		1,207		110,461		111,668
Leases		98		-		-		-		98		10,887		10,985
Residential construction		2,604		-		-		252		2,856		27,093		29,949
Residential mortgage		2,384		461		43		3,475		6,363		302,252		308,615
Consumer and other		31		-		-		-		31		10,068		10,099
Total non-covered		7,818		650		43		26,224		34,735		1,164,294		1,199,029
Covered:
Commercial real estate		1,616		1,237		3,009		22,090		27,952		92,101		120,053
Commercial construction		460		3,213		267		20,474		24,414		38,465		62,879
Commercial and industrial		371		130		337		1,749		2,587		22,316		24,903
Leases		-		-		-		-		-		-		-
Residential construction		223		-		-		-		223		2,179		2,402
Residential mortgage		1,452		2,644		931		20,413		25,440		69,261		94,701
Consumer and other		13		8		11		27		59		4,345		4,404
Total covered		4,135		7,232		4,555		64,753		80,675		228,667		309,342
Total loans	$	11,953	$	7,882	$	4,598	$	90,977	$	115,410	$	1,392,961	$	1,508,371

-19-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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 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 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. Loans classified as doubtful 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.

Loss.  Loans classified as loss are considered uncollectible and are in the process of being charged off, as soon as practical, once so classified. 

-20-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The following presents by loan category and by credit quality indicator, the recorded investment in the Company’s loans as of September 30, 2011 and December 31, 2010:

			Pass		Special
	Total		credits		mention		Substandard		Doubtful		Loss
September 30, 2011:	(In thousands)
Non-covered:
Commercial real estate	$	650,448	$	590,388	$	15,967	$	44,093	$	-	$	-
Commercial construction		186,603		136,134		7,582		42,887		-		-
Commercial and industrial		114,924		105,100		3,499		6,325		-		-
Leases		12,374		12,374		-		-		-		-
Residential construction		25,180		19,984		700		4,496		-		-
Residential mortgage		311,374		269,835		20,998		20,541		-		-
Consumer and other		9,626		9,023		554		49		-		-
Total non-covered		1,310,529		1,142,838		49,300		118,391		-		-
Covered:
Commercial real estate		108,508		70,629		8,941		17,286		11,643		9
Commercial construction		43,565		12,095		5,740		8,172		17,484		74
Commercial and industrial		15,911		10,156		1,611		1,981		1,462		701
Leases		-		-		-		-		-		-
Residential construction		170		-		-		-		170		-
Residential mortgage		90,877		47,747		9,500		14,469		18,974		187
Consumer and other		3,642		3,313		84		231		13		1
Total covered		262,673		143,940		25,876		42,139		49,746		972
Total loans	$	1,573,202	$	1,286,778	$	75,176	$	160,530	$	49,746	$	972

			Pass		Special
	Total		credits		mention		Substandard		Doubtful		Loss
December 31, 2010:	(In thousands)
Non-covered:
Commercial real estate	$	557,634	$	503,345	$	21,345	$	32,944	$	-	$	-
Commercial construction		170,079		110,810		19,661		39,608		-		-
Commercial and industrial		111,668		102,491		6,594		2,288		150		145
Leases		10,985		10,985		-		-		-		-
Residential construction		29,949		21,454		3,725		4,770		-		-
Residential mortgage		308,615		265,538		30,190		12,887		-		-
Consumer and other		10,099		9,446		379		274		-		-
Total non-covered		1,199,029		1,024,069		81,894		92,771		150		145
Covered:
Commercial real estate		120,053		48,548		29,249		30,199		11,939		118
Commercial construction		62,879		2,963		12,440		29,736		17,518		222
Commercial and industrial		24,903		12,001		7,475		4,361		881		185
Leases		-		-		-		-		-		-
Residential construction		2,402		2,179		223		-		-		-
Residential mortgage		94,701		42,572		15,528		27,327		9,191		83
Consumer and other		4,404		3,819		337		214		31		3
Total covered		309,342		112,082		65,252		91,837		39,560		611
Total loans	$	1,508,371	$	1,136,151	$	147,146	$	184,608	$	39,710	$	756

-21-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

Modifications

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession.  The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted.  Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.  Additional collateral, a co-borrower, or a guarantor is often requested.  Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.  Construction loans modified in a TDR may also involve extending the interest-only payment period.  Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time.  After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly.  Land loans are also included in the class of residential mortgage loans.  Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity.  Land loans modified in a TDR typically involve extending the balloon payment by one to three years, changing the monthly payments from interest-only to principal and interest.  Home equity modifications are made infrequently and are not offered if the Company also holds the first mortgage.  Home equity modifications are uniquely designed to meet the specific needs of each borrower.  Occasionally, the terms will be modified to a standalone second lien mortgage, thereby changing their loan class from home equity to residential mortgage.  Automobile loans modified in a TDR are primarily comprised of loans where the Company has lowered monthly payments by extending the term.

Loans modified in a TDR are, in many cases, already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance.  As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific Allowance associated with the loan.  An Allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.  Management exercises significant judgment in developing these estimates.

The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the current period ended September 30, 2011.  As required, the Company reassessed all restructurings that occurred on or after January 1, 2011 for identification as a TDR.  The Company identified certain TDR’s for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology.  Upon identifying the reassessed receivables as a TDR, the Company also identified them as impaired under the new guidance.  The amendments require prospective application of the impairment measurement guidance for those receivables newly identified as impaired.  At the end of the first interim period of adoption for the Company, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired was $39.3 million, and the allowance for credit losses associated with those TDR’s, on the basis of a current evaluation of loss, was $3.8 million.

At September 30, 2011, loan modifications considered TDR’s totaled $46.4 million, of which $9.4 million is included in nonaccrual loans, and the remaining $37.0 million were not past due and performing to the restructured terms.  At December 31, 2010, TDR’s totaled $8.3 million, of which $3.0 million is included in nonaccrual loans, and the remaining $5.3 million were not past due and performing to the restructured terms.  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 following presents by loan category, a summary of loan modifications as of September 30, 2011 and December 31, 2010:

-22-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

					Total
					number of		Total
	Accrual		Nonaccrual		contracts		modifications
	(Dollars in thousands)
September 30, 2011:
Commercial real estate	$	10,957	$	1,475		10	$	12,432
Commercial construction		12,934		7,208		23		20,142
Commercial and industrial		2,567		91		7		2,658
Residential construction		760		-		2		760
Residential mortgage		9,788		617		17		10,405
Consumer and other		3		-		1		3
Total modifications	$	37,009	$	9,391		60	$	46,400
					Total
					number of		Total
	Accrual		Nonaccrual		contracts		modifications
	(Dollars in thousands)
December 31, 2010:
Commercial real estate	$	1,764	$	2,894		5	$	4,658
Commercial construction		3,314		-		11		3,314
Commercial and industrial		87		14		3		101
Residential construction		-		-		-		-
Residential mortgage		187		43		3		230
Consumer and other		-		-		-		-
Total modifications	$	5,352	$	2,951		22	$	8,303

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

Rate modification - A modification in which the interest rate is changed.

Term modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest only modification – A modification in which the loan is converted to interest only payments for a period of time.

Combination modification – Any other type of modification, including the use of multiple categories above.

-23-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

As of September 30, 2010, no available commitments were outstanding on troubled debt restructurings.  The following tables present new troubled debt restructurings, by modification category, for the three and nine months ended September 30, 2011:

					Interest
	Rate		Term		only		Combination		Total
	modifications		modifications		modifications		modifications		modifications
Three Months Ended	(Dollars in thousands)
September 30, 2011:
Commercial real estate	$	4,588	$	-	$	-	$	-	$	4,588
Commercial construction		-		-		94		48		142
Commercial and industrial		34		-		200		58		292
Residential construction		142		-		238		4,161		4,541
Residential mortgage		-		-		-		-		-
Consumer and other		-		3		-		-		3
Total modifications	$	4,764	$	3	$	532	$	4,267	$	9,566
Total number of contracts		4		1		3		7		15
					Interest
	Rate		Term		only		Combination		Total
	modifications		modifications		modifications		modifications		modifications
Nine Months Ended	(Dollars in thousands)
September 30, 2011:
Commercial real estate	$	4,588	$	659	$	1,606	$	4,136	$	10,989
Commercial construction		783		52		14,092		4,173		19,100
Commercial and industrial		59		-		200		2,342		2,601
Residential construction		-		392		-		368		760
Residential mortgage		878		1,190		1,315		6,987		10,370
Consumer and other		-		3		-		-		3
Total modifications	$	6,308	$	2,296	$	17,213	$	18,006	$	43,823
Total number of contracts		9		8		15		19		51

NOTE 7 – DERIVATIVE INSTRUMENTS

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.

-24-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The Company had previously entered into interest rate swaps designated as cash flow hedges to fix the interest rate received on certain variable rate loans.  These loans exposed the Company to variability in cash flows, primarily from interest receipts due to changes to interest rates.  During the nine months ended September 30, 2011, all of the interest rate swaps had matured, with no fair value at September 30, 2011, or during the three months ended September 30, 2011.  The change in fair value of these derivatives was a decrease of $255,000 for the nine months ended September 30, 2011 when compared to the $255,000 recorded at December 31, 2010.  For the nine months ended September 30, 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 $0 and $600,000 for the three months ended September 30, 2011 and 2010, respectively, and $244,000 and $1.9 million for the nine months ended September 30, 2011 and 2010, respectively.  Net settlement gains are 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.  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 $747,000, which is included in other assets in the accompanying consolidated balance sheet at September 30, 2011.  The change in fair value of this derivative was a decrease of $2.5 million and $5.0 million for the three and nine months ended September 30, 2011, respectively, when compared to the $5.8 million recorded at December 31, 2010.  The Company has recorded an $11.8 million loss, net of tax, as accumulated other comprehensive income at September 30, 2011, and expects $4.7 million, net of tax, to be reclassified into earnings within the next 12 months.  In addition, caplet expense related to this hedge amounted to $1.4 million and $599,000 for the three months ended September 30, 2011 and 2010, respectively, and $3.4 million and $1.1 million for the nine months ended September 30, 2011 and 2010, respectively.  The caplet expense related to this hedge 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 September 30, 2011 and December 31, 2010.

	September 30,		December 31,
	2011		2010
	Estimated		Estimated
	fair value		fair value
	(In thousands)
Interest rate swaps - Other assets	$	-	$	255
Interest rate cap - Other assets		747		5,754
Total derivatives	$	747	$	6,009

-25-

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.  A test for impairment was conducted as of June 30, 2011 and concluded that there was no goodwill impairment.  The carrying amount of goodwill and other intangible assets was $26.1 million and $2.0 million as of September 30, 2011, respectively, and $26.1 million and $2.3 million, as of December 31, 2010, respectively.

NOTE 9 - FAIR VALUE MEASUREMENT

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.

Investment Securities Available for Sale.  The fair values of investment 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.

-26-

 

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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

	Assets
	(Liabilities)
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
			(In thousands)
At September 30, 2011:
Available for sale securities	$	342,989	$	-	$	342,989	$	-
Interest rate cap		747		-		747		-
At December 31, 2010:
Available for sale securities	$	352,871	$	-	$	352,871	$	-
Interest rate swaps		255		-		255		-
Interest rate cap		5,754		-		5,754		-
At September 30, 2010:
Available for sale securities	$	351,555	$	-	$	351,555	$	-
Interest rate swaps		858		-		858		-
Interest rate cap		3,954		-		3,954		-

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.

-27-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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:

	Assets
	(Liabilities)
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
			(In thousands)
At September 30, 2011:
Loans held for sale	$	6,753	$	-	$	6,753	$	-
Impaired loans		123,546		-		-		123,546
Other real estate owned		45,483		-		-		45,483
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 September 30, 2010:
Loans held for sale	$	3,314	$	-	$	3,314	$	-
Impaired loans		85,067		-		-		85,067
Other real estate owned		35,688		-		-		35,688

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 September 30, 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 September 30, 2011, there were no fair value adjustments related to $26.1 million of goodwill and $2.0 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:

-28-

BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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

Investment Securities Available for Sale and Investment Securities Held to Maturity - Fair values for investment 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 Bank-Owned 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.

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BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

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

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	value		fair value		value		fair value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	35,301	$	35,301	$	30,087	$	30,087
Investment securities available for sale		342,989		342,989		352,871		352,871
Investment securities held to maturity		6,000		4,880		6,000		5,280
Federal Home Loan Bank stock		10,248		10,248		9,146		9,146
Loans held for sale		6,753		6,753		6,751		6,751
Loans receivable, net		1,548,389		1,544,933		1,483,367		1,481,315
Accrued interest receivable		7,617		7,617		10,363		10,363
FDIC indemnification asset		50,685		50,685		69,493		69,493
Investment in bank-owned life insurance		47,866		47,866		46,607		46,607
Financial liabilities:
Demand deposits and savings	$	964,168	$	964,168	$	948,609	$	948,609
Time deposits		871,436		887,951		879,461		905,670
Short-term borrowings		96,459		96,459		60,207		60,207
Long-term debt		93,713		85,837		97,713		88,315
Accrued interest payable		1,241		1,241		1,554		1,554
On-balance sheet derivative financial instruments:
Derivative agreements – asset:
Interest rate swap agreements	$	-	$	-	$	255	$	255
Interest rate cap agreement		747		747		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 troubled debt restructurings, the adoption of this ASU did not 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 did not have a material impact on the Company’s consolidated financial statements.

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BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”).   ASU 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale.  Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale.  The provisions of ASU 2011-03 remove from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee.  The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights.  ASU 2011-03 does not change the other existing criteria used in the assessment of effective control.  The provisions of ASU 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012.  As the Company accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The changes to U.S. GAAP as a result of ASU 2011-04 are as follows:  (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets.  ASU 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks.  This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs.  In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed.  The provisions of ASU 2011-04 are effective for the Company’s interim reporting period beginning on or after December 15, 2011.  The adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”).The provisions of ASU 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The statement(s) are required to be presented with equal prominence as the other primary financial statements.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The provisions of ASU 2011-05 are effective for the Company’s interim reporting period beginning on or after December 15, 2011, with retrospective application required.  The adoption of ASU 2011-05 will have no impact on the Company’s consolidated financial statements.

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BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08).  The provisions of ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  The adoption of ASU 2011-08 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.

NOTE 12 – PROSPOSED STOCK PURCHASE

During the third quarter of 2011, the Bank of North Carolina entered into a Stock Purchase Agreement with Regent Bancorp, Inc., a Florida corporation, to purchase all of the outstanding capital stock of Regent Bank, a federal savings association located in Greenville, South Carolina, and a wholly-owned subsidiary of Regent Bancorp, Inc.

Under the terms of the agreement, Regent-FL will receive $9.75 million in cash, a small premium to adjusted book value, for all of the outstanding shares of Regent Bank-SC, subject to certain adjustments, as more fully described in the agreement.  Immediately following closing, it is anticipated that Regent Bank-SC will be merged with and into Bank of North Carolina and become the bank’s first location in the Greenville market.  The Bank of North Carolina expects the closing of this transaction in the first quarter of 2012.

NOTE 13 – SUBSEQUENT EVENTS – ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT

Effective October 14, 2011, Bank of North Carolina (the “Bank”) acquired certain assets and liabilities of Blue Ridge Savings Bank, Inc. a banking association organized under the laws of the state of North Carolina and headquartered in Asheville, North Carolina (“Blue Ridge”), from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver for Blue Ridge (the “Acquisition”), pursuant to a purchase and assumption agreement dated October 14, 2011 (the “Agreement”).

Under the terms of the Agreement, the Bank acquired approximately $168 million in total assets, including approximately $90 million in loans and approximately $50 million in other real estate owned. The Bank also assumed approximately $160 million in customer deposits. The deposits were acquired without a premium.

In connection with the Acquisition, the Bank entered into loss sharing agreements with the FDIC that cover all loans and other real estate owned (referred to collectively as “Covered Assets”).

Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse the Bank for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC will reimburse the Bank for 80% of losses on the Covered Assets. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid the Bank under the loss sharing agreements. The loss sharing agreement applicable to single family residential mortgage loans provides for FDIC loss sharing and the Bank reimbursement to the FDIC, in each case as described above, for ten years. The loss sharing agreement applicable to commercial loans and securities provides for FDIC loss sharing for five years and the Bank reimbursement to the FDIC for eight years, in each case as described above.

The Bank also has agreed to pay to the FDIC, 45 days after October 31, 2021 (or, if later, the time of disposition of all acquired assets pursuant to the shared-loss agreements) (the “True-Up Date”), the excess, if any, of (i) 20% of the intrinsic loss estimate of approximately $41.6 million less (ii) the sum of (A) 20% of the cumulative shared-loss payments (defined as the aggregate of all shared-loss payments made by the FDIC to the Bank under the Blue Ridge shared-loss agreements minus the aggregate of all reimbursement payments made by the Bank to the FDIC under such agreements), plus (B) 25% of the asset discount of total Blue Ridge Covered Assets at the inception of the related shared-loss agreement, plus (C) servicing amounts equal to 3.5% of total Blue Ridge Covered Assets at the inception of the related shared-loss agreement.

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BNC BANCORP

Notes to Consolidated Financial Statements (Unaudited)

The terms of the Agreement provide for the FDIC to indemnify the Bank against certain claims, including claims with respect to liabilities and assets of Blue Ridge or any of its affiliates not assumed or otherwise purchased by the Bank, with respect to claims made by shareholders of Blue Ridge, and with respect to claims based on any action by Blue Ridge’s directors, officers, and other employees.

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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.  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 the 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; commercial real estate loans; and 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 areas 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 34 full-service banking offices in North and South Carolina.

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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 continue to benefit from growth opportunities, both organically and through acquisition.  We continue to see improvements in our core earnings power driven by double-digit growth rates in non-covered loans and improving asset quality metrics.  While we have sacrificed some earnings over the past two years as we invested in new markets, product lines and support infrastructure, we are pleased that these investments in our future have begun to drive gains in both net interest income, non-interest income and core loans over the past four quarters.  With a strong pipeline of relationship-based credits and increasing mortgage and SBA origination volume, we head into the fourth quarter with continued momentum.  As previously reported, 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.  We have integrated the Beach First acquisition successfully, and positioned our Company to take advantage of two recent acquisition opportunities.  We announced in August that we are acquiring Regent Bank in Greenville, South Carolina, in an all cash transaction.  Regent Bank will give us an immediate regional headquarters location in the vibrant upstate of South Carolina on which to expand our retail, commercial, wealth, and mortgage platforms.  In addition, on October 14, 2011 we acquired Blue Ridge Savings Bank in Asheville, North Carolina, in a FDIC-assisted transaction.  We believe that these two acquisitions provide a solid base for future growth with over 10 offices and $210 million in deposits in the Asheville/Spartanburg/Greenville broadcast media market.

During the first nine 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.  Our asset quality metrics continue to show improvement.  The diversity and growth in the loan portfolio have supported a much improved ratio of pass credits to watch and substandard.  Our ongoing aggressive approach to marking assets to recognize impairments continued to pay off as we see a solid pipeline of contracts on other real estate owned properties (“OREO”).   We anticipate a continued reduction in nonperforming assets (“NPA’s”) over the next few quarters and a continued improvement in disposition opportunities.  There continues to be elevated unemployment in many of our legacy markets, however the majority of the larger distressed construction, land, and acquisition & development loans (“A&D”), have been spread across the footprint and not concentrated in any particular real estate market.  Over the past several years we have been able to reduce our construction and A&D loan portfolio and we are aggressively positioning the remaining portfolio for divesture over the next year.  The market continues to be a challenge; however we would anticipate a steady decline in both total NPA’s and expenses associated with the management of those assets as NPA’s seemed to have peaked in the second quarter of this year.

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.

Results of Operations

Our net income available to common shareholders for the third quarter ended September 30, 2011 was $1.8 million, or $0.18 per diluted share, compared to $992,000, or $0.10 per diluted share, for the second quarter ended June 30, 2011 and $69,000, or $0.01 per diluted share, for the third quarter of 2010.  The annualized return on average assets was 0.44% for the third quarter of 2011, compared to 0.30% for the second quarter of 2011 and to 0.12% for the third quarter of 2010.  

For the nine months ended September 30, 2011, net income available to common shareholders was $3.7 million, or $0.37 per diluted share, compared to $12.2 million, or $1.39 per diluted share reported for the same period in 2010.  The 2010 results include $11.8 million of after-tax gains from the Beach First FDIC assisted transaction.

Total assets at September 30, 2011 increased $17.7 million, or 0.8% compared to September 30, 2010.  Period-end loans increased $96.8 million, or 6.6%, from the same prior year period.  Period-end deposits decreased $20.0 million, or 1.1% from September 30, 2010.  When compared to December 31, 2010, total assets increased $47.8 million, period-end loans increased $64.4 million and period-end deposits increased $7.5 million.  We remain well-capitalized with total equity of $162.6 million at September 30, 2011, a decrease of $2.9 million, or 1.8% from September 30, 2010, and an increase of $10.4 million, or 6.8% from December 31, 2010.

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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.

Net interest income for the third quarter of 2011 was $16.9 million, an increase of $22,000, or 0.13%, from the comparable period last year, and an increase of $102,000 from the prior quarter.  Net interest income (FTE) was $18.3 million for the third quarter of 2011, compared to $18.2 million and $18.1 million for the third quarter of 2010 and second quarter of 2011, respectively.  The net interest margin (FTE) increased 3 basis points from the third quarter of 2010 to 3.79%.  Compared to the second quarter of 2011, net interest margin (FTE) decreased 5 basis points from 3.84%.

The Company’s average yield on interest-earning assets (FTE) decreased 9 basis points to 5.48%, while the average rate on interest-bearing liabilities decreased 10 basis points to 1.73% during the third quarter of 2011, when compared to the third quarter of 2010.  Compared to the second quarter of 2011, the Company’s yield on average earning assets decreased by 7 basis points, while the cost of average interest-bearing liabilities remained stable.  

Average loans as a percentage of interest-earning assets increased to 80.7% for the quarter ended September 30, 2011 compared to 75.3% for the prior year quarter.  In addition, the improvement in net interest margin (FTE) was primarily due to the reduction in the average rates for outstanding time deposits.  See the interest rate/volume table below for the individual component changes.

Total interest income (FTE) decreased $496,000 for the third quarter of 2011 when compared to the same quarter of 2010.  During the third quarter of 2011, average loans increased $96.8 million while the average yield decreased by 41 basis points and average investment securities decreased $14.0 million while the average yield decreased 9 basis points compared to the third quarter of 2010.

Total interest expense decreased $537,000 for the third quarter of 2011 when compared to the same quarter of 2010.  Rates paid on time deposits decreased by 20 basis points, while average time deposits decreased by $86.8 million.  The decrease in time deposits was due to the shift in our deposit mix, with average demand and savings deposits increasing $60.8 million at 7 basis points higher than the same prior year period.  Interest expense on borrowings increased by $36,000 due to the average borrowings increasing by $10.5 million during the period.

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The following tables present 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
	September 30, 2011							September 30, 2010
	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Interest-earning assets:
Loans and leases	$	1,544,516	$	21,142		5.43	%	$	1,447,692	$	21,298		5.84	%
Loans held for sale		3,194		34		4.22	%		3,204		34		4.21	%
Investment securities, taxable		115,392		1,389		4.78	%		137,618		1,738		5.01	%
Investment securities, tax-exempt*		219,317		3,867		7.00	%		211,069		3,814		7.17	%
Interest-earning balances and other		31,375		25		0.32	%		121,916		69		0.22	%
Total interest-earning assets		1,913,794		26,457		5.48	%		1,921,499		26,953		5.57	%
Other assets		265,426							265,784
Total assets	$	2,179,220						$	2,187,283
Interest-bearing liabilities:
Demand deposits	$	796,581		2,926		1.46	%	$	754,410		2,612		1.37	%
Savings deposits		35,955		41		0.45	%		17,329		9		0.21	%
Time deposits		889,363		4,361		1.95	%		976,147		5,280		2.15	%
Borrowings		159,213		869		2.17	%		148,755		833		2.22	%
Total interest-bearing liabilities		1,881,112		8,197		1.73	%		1,896,641		8,734		1.83	%
Non-interest-bearing deposits		129,390							109,366
Other liabilities		9,792							14,334
Shareholders' equity		158,926							166,942
Total liabilities and shareholder's equity	$	2,179,220						$	2,187,283
Net interest income and
interest rate spread*			$	18,260		3.76	%			$	18,219		3.74	%
Net interest margin*						3.79	%						3.76	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis.  The taxable-equivalent adjustment was $1.4 million for the three months ended September 30, 2011 and 2010.

Net interest income for the nine months ended September 30, 2011 was $50.3 million, an increase of $6.3 million, or 14.4% from the comparable period last year.  Taxable-equivalent net interest margin increased 20 basis points from the nine months ended September 30, 2010 to 3.83%.  Average interest-earning assets were $1.90 billion for the nine months ended September 30, 2011, an increase of $135.3 million from the same prior year period of 2010.

The Company’s average yield on interest-earning assets decreased 1 basis point for the nine months ended September 30, 2011 when compared to the same prior year period, while the average rate on interest-bearing liabilities decreased 23 basis points.  

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Average loans as a percentage of interest-earning assets increased to 80.4% for the nine months ended September 30, 2011, compared to 74.7% for the same prior year period.  In addition, the improvement in net interest margin (FTE) was primarily due to the reduction in the average rates for outstanding time deposits.  See the interest rate/volume table below for the individual component changes.

	Nine Months Ended							Nine Months Ended
	September 30, 2011							September 30, 2010
	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Interest-earning assets:
Loans and leases	$	1,529,233	$	62,932		5.50	%	$	1,319,256	$	56,546		5.73	%
Loans held for sale		2,507		76		4.05	%		2,115		69		4.36	%
Investment securities, taxable		119,685		4,353		4.86	%		156,358		5,938		5.08	%
Investment securities, tax-exempt*		217,200		11,636		7.16	%		198,392		10,909		7.35	%
Interest-earning balances and other		32,545		86		0.35	%		89,792		146		0.22	%
Total interest-earning assets		1,901,170		79,083		5.56	%		1,765,913		73,608		5.57	%
Other assets		257,072							218,748
Total assets	$	2,158,242						$	1,984,661
Interest-bearing liabilities:
Demand deposits	$	803,052		8,234		1.37	%	$	671,660		6,572		1.31	%
Savings deposits		36,012		117		0.43	%		14,240		20		0.19	%
Time deposits		886,941		13,718		2.07	%		891,079		16,246		2.44	%
Borrowings		147,058		2,513		2.28	%		158,112		2,858		2.42	%
Total interest-bearing liabilities		1,873,063		24,582		1.75	%		1,735,091		25,696		1.98	%
Non-interest-bearing deposits		121,316							91,901
Other liabilities		8,252							12,012
Shareholders' equity		155,611							145,657
Total liabilities and shareholders' equity	$	2,158,242						$	1,984,661
Net interest income and
interest rate spread*			$	54,501		3.81	%			$	47,912		3.59	%
Net interest margin*						3.83	%						3.63	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis.  The taxable-equivalent adjustment was $4.2 million and $3.9 million for the nine months ended September 30, 2011 and 2010, respectively.

The following table presents certain information regarding changes in our interest income (FTE) and interest expense for the periods indicated.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rates and in volume.

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	Three Months Ended									Nine Months Ended
	September 30, 2011 vs. 2010									September 30, 2011 vs. 2010
	Increase (decrease) due to									Increase (decrease) due to
(In thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans and leases	$	1,375		$	(1,531	)	$	(156	)	$	8,821		$	(2,435	)	$	6,386
Loans held for sale		-			-			-			12			(5	)		7
Investment securities, taxable		(274	)		(75	)		(349	)		(1,364	)		(221	)		(1,585	)
Investment securities, tax-exempt*		147			(94	)		53			1,021			(294	)		727
Interest-earning balances and other		(62	)		18			(44	)		(122	)		62			(60	)
Total interest income		1,186			(1,682	)		(496	)		8,368			(2,893	)		5,475
Interest expense:
Demand deposits		150			164			314			1,316			346			1,662
Savings deposits		15			17			32			51			46			97
Time deposits		(447	)		(472	)		(919	)		(70	)		(2,458	)		(2,528	)
Borrowings		58			(22	)		36			(194	)		(151	)		(345	)
Total interest expense		(224	)		(313	)		(537	)		1,103			(2,217	)		(1,114	)
Net interest income increase (decrease)	$	1,410		$	(1,369	)	$	41		$	7,265		$	(676	)	$	6,589

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis.

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 third quarter of 2011 compared to a provision for loan losses of $5.4 million in the third quarter of 2010.  For the nine months ended September 30, 2011, we recorded a provision for loan losses of $10.1 million compared to a provision for loan losses of $14.4 million for the nine months ended September 30, 2010.

The level of our allowance for loan losses expressed as a percentage of total loans increased from 1.28% at September 30, 2010 to 1.54% at September 30, 2011, and as a percent of total loans not covered by loss sharing agreements, the level increased from 1.64% at September 30, 2010 to 1.85% at September 30, 2011.

A summary of activity in the allowance for loan losses for the three and nine months ended September 30 is as follows:

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	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(In thousands)
Balance at beginning of period	$	23,373	$	19,038	$	24,813	$	17,309
Provision charged to operations		3,524		5,436		10,056		14,382
Loans charged-off:
Commercial real estate		789		1,960		3,896		4,736
Commercial construction		1,506		453		4,838		1,296
Commercial and industrial		275		2,129		1,052		4,503
Leases		-		1		-		8
Residential construction		267		210		876		687
Residential mortgage		376		978		1,009		1,752
Consumer and other		31		82		51		233
Total loans charged-off		3,244		5,813		11,722		13,215
Recoveries of loans:
Commercial real estate		85		18		142		29
Commercial construction		250		24		270		26
Commercial and industrial		154		37		511		73
Leases		-		-		15		-
Residential construction		3		15		14		22
Residential mortgage		31		63		61		175
Consumer and other		1		1		17		18
Total  loan recoveries		524		158		1,030		343
Net charge-offs		2,720		5,655		10,692		12,872
Balance at end of period	$	24,177	$	18,819	$	24,177	$	18,819

Allowance for Loan Losses and Asset Quality

At September 30, 2011, the allowance for loan losses was $24.2 million, or 1.85% of loans not covered by loss share agreements, compared to $24.8 million, or 2.07% at December 31, 2010, and $18.8 million, or 1.64%, at September 30, 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 or partially reserved loans being charged-off subsequent to year end.  When compared to September 30, 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.

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 September 30, 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.

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Nonperforming assets include nonaccrual loans, accruing loans 90 days or more past due, and OREO.  At September 30, 2011, nonperforming assets not covered by loss share agreements were $52.6 million, or 2.75% of total assets, compared to $50.2 million, or 2.75% of total assets at December 31, 2010 and $36.7 million, or 1.99% of total assets at September 30, 2010.  Nonperforming assets, including assets covered under loss share agreements, were $137.1 million, or 6.24% of total assets at September 30, 2011, compared to $135.3 million, or 6.29% at December 31, 2010 and $123.5 million, or 5.66% of total assets at September 30, 2010.  For those nonperforming assets covered by loss share agreements, we are provided with 80% loss protection from the FDIC.

Nonaccrual loans not covered by loss share agreements were $29.8 million at September 30, 2011, an increase of $3.6 million from December 31, 2010 and an increase of $19.2 million from September 30, 2010.  Nonaccrual loans, including covered loans, were $91.6 million at September 30, 2011.  At September 30, 2011, OREO increased to $45.5 million, an increase of $5.7 million from December 31, 2010 and an increase of $9.8 million from September 30, 2010.  The increase from September 30, 2010 when compared to September 30, 2011 was due to the higher levels of OREO resulting from the Beach First acquisition that are covered by loss share agreements, partially offset by OREO not covered by loss share agreements that decreased by $3.3 million.  At September 30, 2011, our OREO properties primarily consisted of $12.8 million of commercial and multifamily properties, $12.0 million of residential 1-4 family properties and $20.7 million in construction, land and land development properties.  OREO assets are carried at the lower of carrying value or fair value less estimated 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:

	September 30,		December 31,		September 30,
	2011		2010		2010
	(In thousands)
Commercial real estate	$	22,572	$	33,277	$	31,004
Commercial construction		35,134		30,719		23,744
Commercial and industrial		2,942		2,814		4,574
Total commercial		60,648		66,810		59,322
Residential construction		513		252		1,024
Residential mortgage		30,363		23,888		27,370
Consumer and other		29		27		37
Total nonaccrual loans	$	91,553	$	90,977	$	87,753
Nonaccrual loans covered by loss share	$	61,712	$	64,753	$	77,150

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.  

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

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	September 30,		December 31,		September 30,
	2011		2010		2010
	(In thousands)
Residential 1-4 family properties	$	11,967	$	10,739	$	7,398
Multifamily properties		720		1,101		246
Commercial properties		12,102		10,757		9,818
Construction, land development and other land		20,694		17,140		18,226
Total OREO	$	45,483	$	39,737	$	35,688
OREO covered by loss share	$	22,747	$	15,825	$	9,638

At September 30, 2011, non-covered loans that were restructured or modified and were performing to the restructured terms and not past due totaled $32.3 million, an increase of $27.2 million from December 31, 2010 and an increase of $24.8 million from September 30, 2010.  The significant increase during the nine months ended September 30, 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.

The Company also performs A note/B note workout structures as a subset of the Company’s troubled debt restructuring strategy.  Under an A note/B note workout structure, the new A note is underwritten in accordance with customary troubled debt restructuring underwriting standards and is reasonably assured of full repayment while the B note is not.  The B note is immediately charged off upon restructuring.  If the loan was on accrual prior to the troubled debt restructuring being documented with the loan legally bifurcated into an A note fully supporting accrual status and a B note of the remaining charged-off debt, the A note may remain on accrual status.  If the loan was on nonaccrual at the time the troubled debt restructuring was documented with the loan legally bifurcated into an A note fully supporting accrual status and a B note of the remaining charged-off debt, the A note may be returned to accrual status, and risk rated accordingly, after a reasonable period of performance under the troubled debt restructuring terms.  Six months of payment performance is generally required to return these loans to accrual status. The amount of loans restructured using this structure was $6.5 million as of September 30, 2011.  There were no loans restructured using this methodology at December 31, 2010.

The A note will continue to be classified as a troubled debt restructuring and only may be removed from impaired status in years after the restructuring if (a) the restructuring agreement specifies an interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk and (b) the loan is not impaired based on the terms specified by the restructuring agreement.

Net charge-offs for the third quarter of 2011 were $2.7 million, as compared with net charge-offs of $5.7 million for the third quarter of 2010.  Expressed as an annualized percentage of average loans outstanding, net charge-offs were 0.70% and 1.55% for the three months ended September 30, 2011 and 2010, respectively.  Net charge-offs for the nine months ended September 30, 2011 were $10.7 million, as compared with net charge-offs of $12.9 million for the same period in 2010.  Expressed as an annualized percentage of average loans outstanding, net charge-offs were 0.93% and 1.31% for the nine months ended September 30, 2011 and 2010, respectively.  The majority of the charge-offs are from our commercial loan portfolios.  During 2011, pass rated credits continue to rise as a percentage of the portfolio as watch and special mention credits have decreased.  There continues to be elevated unemployment levels in several of our local markets.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Net charge-offs to average loans (annualized)		0.70	%		1.55	%		0.93	%		1.31	%
Allowance for loan losses to total loans		1.54	%		1.28	%		1.54	%		1.28	%
Not covered by loss share		1.85	%		1.64	%		1.85	%		1.64	%
Nonperforming loans to total loans		5.82	%		5.95	%		5.82	%		5.95	%
Not covered by loss share		2.28	%		0.93	%		2.28	%		0.93	%

Non-Interest Income

Non-interest income was $3.8 million for the third quarter of 2011 compared to $3.9 million for the same quarter in 2010.Included in non-interest income for the third quarter of 2011 was $1.0 million of net gains on sales of investments, compared to $63,000 of loss for the third quarter of 2010.  Also during the third quarter of 2010, the Company reported $2.0 million of income associated with accretion of the discount on the FDIC receivable for payments received and related loss share receipts compared to $250,000 during the third quarter of 2011.  Excluding the FDIC related income and the sales of investment securities, non-interest income was $ 2.6 million for the current quarter, up 32.7% from the $1.9 million reported for the third quarter of 2010.  For the nine months ended September 30, 2011, non-interest income was $8.6 million compared to $27.0 million for the same period in 2010.  Included in non-interest income for the nine months ended September 30, 2010 was $19.3 million of gain on acquisition from a FDIC assisted transaction.

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Mortgage fees generated from our mortgage market operations in the third quarter of 2011 increased $119,000, or 25.8%, compared to the third quarter of 2010.  During the second quarter of 2011, the Company’s original mortgage origination platform was terminated and replaced with a more robust platform that is expected to drive increases in mortgage origination volume and fee income in future periods.  For the nine months ended September 30, 2011, mortgage fees increased $173,000, or 17.1%, compared to the same period in 2010.

Service charges on deposit accounts increased $67,000, or 9.9%, in the third quarter of 2011, compared to the third quarter of 2010.  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.  For the nine months ended September 30, 2011, service charges on deposit accounts increased $346,000, or 16.5%, compared to the same period in 2010, primarily as a result of the above mentioned growth from our April 2010 acquisition.

Investment brokerage fees increased $291,000 in the third quarter of 2011, compared to the third quarter of 2010.  During 2010, we began winding down the original investment platform and had our new investment platform operational during 2011.  For the nine months ended September 30, 2011, investment brokerage fees increased $608,000 compared to the same period in 2010.

Earnings on bank-owned life insurance increased by $194,000, or 88.2%, for the third quarter of 2011, compared to the third quarter of 2010.  This increase was due to the additional purchase of $18.0 million of bank owned life insurance during December 2010.  For the nine months ended September 30, 2011, earnings on bank-owned life insurance increased $565,000 compared to the same period in 2010.

In addition, the Company’s new SBA division became operational during 2011, with $120,000 of SBA fee income recorded during the third quarter of 2011.  This is included in the other non-interest income category.

The following are the components of non-interest income for the periods presented:

	Three Months Ended					Nine Months Ended
	9/30/2011		9/30/2010			9/30/2011		9/30/2010
	(In thousands)
Mortgage fees	$	581	$	462		$	1,186	$	1,013
Service charges		744		677			2,439		2,093
Investment brokerage fees		357		66			741		133
Earnings on bank-owned life insurance		414		220			1,259		694
Gain (loss) on sales of available for sale
investment securities, net		1,032		(63	)		1,168		541
Gain on acquisition		-		-			-		19,289
Other		711		2,544			1,842		3,203
Total non-interest income	$	3,839	$	3,906		$	8,635	$	26,966

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 decreased $764,000, or 4.9%, during the third quarter of 2011 when compared to the third quarter of 2010.  For the nine months ended September 30, 2011, non-interest expenses increased $6.4 million, or 16.8%, when compared to the same period in 2010.

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The Company’s personnel costs have increased $1.3 million, or 18.3%, during the third quarter of 2011 when compared to third quarter of 2010.  All of the increases in personnel costs are attributable to investments in the new mortgage and SBA lending platforms, as well as additions to our teams in Charlotte and Raleigh, all of which are expected to contribute to our long-term focus on driving both top line and fee income growth.  For the nine months ended September 30, 2011, personnel costs increased $5.0 million, or 28.0%, compared to the same period in 2010, primarily as a result of the above mentioned investments in personnel and having a full nine months of expense from the prior year acquisition.

Occupancy and furniture/equipment expenditures increased by $251,000, or 18.7%, for the third quarter of 2011, compared to the third quarter of 2010.  For the nine months ended September 30, 2011, occupancy and furniture/equipment expenditures increased $975,000, or 26.3%, compared to the same period in 2010, primarily due to increased costs and additional facilities associated with our growth into new markets and from our acquisition during the second quarter of 2010.  The increase in the number of locations has also escalated utilities, lease expenses, and property taxes in 2011.

Professional and other service fees decreased $172,000, or 20.5%, for the third quarter of 2011, compared to the third quarter of 2010.  For the nine months ended September 30, 2011, professional and other service fees decreased $501,000, or 16.5%, compared to the same period in 2010, mostly due to increased fees during 2010 associated with our acquisition.

FDIC insurance assessments decreased $295,000, or 37.8%, for the third quarter of 2011, compared to the third quarter of 2010.  For the nine months ended September 30, 2011, FDIC insurance assessments decreased $215,000, or 10.0%, compared to the same period in 2010.  These decreases were due to lower rate assessments as a result of new rules finalized by the FDIC, as required by the Dodd-Frank Act, which redefined the FDIC assessment rates.

Loan, foreclosure and collection expenses decreased $1.3 million for the third quarter of 2011, compared to the third quarter of 2010, primarily from a $765,000 decrease in the valuation adjustment of OREO properties.  For the nine months ended September 30, 2011, loan, foreclosure and collection expenses totaled $6.0 million, increasing $1.1 million from the $4.9 million reported in the same period of 2010.  The higher level of loan, foreclosure and collection expense primarily relates to the valuation adjustments of OREO properties.  For the nine months ended September 30, 2011 and 2010, we recorded $3.0 million and $1.9 million, respectively, of other real estate valuation adjustments.  Included in the nine-month period of 2011 was $2.5 million of other real estate valuation adjustments on covered assets from the 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, the on-going expenses relating to the OREO properties have resulted in increases to this category.

Other non-interest expenses for the third quarter of 2011 decreased $515,000, or 34.0%, compared to the third quarter of 2010.  For the nine months ended September 30, 2011, other non-interest expenses decreased $376,000, or 10.3%, compared to the same period in 2010.  Many of the decreases were associated with our 2010 acquisition.

-44-

The following are the components of non-interest expense for the periods presented:

	Three Months Ended				Nine Months Ended
	9/30/2011		9/30/2010		9/30/2011		9/30/2010
	(In thousands)
Salaries and employee benefits	$	8,152	$	6,892	$	23,014	$	17,978
Occupancy and equipment		1,593		1,342		4,676		3,701
Data processing and supplies		514		560		1,678		1,564
Advertising and business development		326		323		1,252		987
Professional and other services		668		840		2,538		3,039
FDIC insurance assessments		485		780		1,945		2,160
Loan, foreclosure and collection		1,975		3,225		5,967		4,895
Other		1,002		1,517		3,270		3,646
Total  non-interest expense	$	14,715	$	15,479	$	44,340	$	37,970

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.  A tax benefit is recorded if non-taxable income exceeds income before taxes, resulting in a reduction of total income subject to income taxes.  For the quarter ended September 30, 2011, we recorded income tax expense of $46,000 compared to an income tax benefit of $823,000 for the same period in 2010.  For the nine months ended September 30, 2011, we recorded an income tax benefit of $982,000 compared to income tax expense of $4.8 million for the same period in 2010, due to the income tax on the acquisition gain reported during the second quarter of 2010.

Preferred Stock Dividend and Accretion

For the third quarters of 2011 and 2010, dividends on preferred stock and accretion amounted to $601,000 and $591,000, respectively.  For the nine months ending September 30, 2011 and 2010, dividends on preferred stock and accretion amounted to $1.8 million and $1.6 million, 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 September 30, 2011 were $2.20 billion, an increase of $47.8 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 $1.96 billion at September 30, 2011 and $1.91 billion at 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 September 30, 2011 were 17.2% of total assets, or $378.3 million, a $4.7 million decrease from the $383.0 million reported at December 31, 2010.

Investment Securities

Investment securities were $349.0 million at September 30, 2011 and $358.9 million at December 31, 2010.  The decrease of $9.9 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 comprised of high quality securities that are designed to enhance liquidity while providing acceptable rates of return.

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Loans

Loans increased by $64.4 million to $1.57 billion at September 30, 2011 from $1.51 billion at December 31, 2010.  For the nine months ended September 30, 2011, average total loans were $1.53 billion, compared to $1.32 billion for the same period in 2010.  The majority of this increase resulted from the acquisition of Beach First in the second quarter of 2010.  At September 30, 2011, loans covered under loss share agreements amounted to $262.7 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.  Increases in our commercial construction portfolio of $28.6 million were offset by reductions in our residential construction, residential and commercial A&D  and land loans by $16.7 million during the nine months ended September 30, 2011.  The Company’s commercial real estate portfolio increased from $548.8 million at December 31, 2010 to $649.5 million at September 30, 2011, with increases of $66.0 million in our investment commercial real estate portfolio.   Increases in our commercial real estate and construction portfolios have been primarily in single credit tenant fully leased or owner occupied facilities which meet our heightened underwriting standards.  The Company will continue its efforts to diversify and divest A&D exposures as needed and deemed appropriate by management.

Deposits

Deposits continue to be our primary funding source.  At September 30, 2011, deposits totaled $1.84 billion, an increase of $7.5 million, or 0.4%, from year-end 2010.  While overall deposit growth continues to be an emphasis, the more important element is the increase in transactional account deposits.  Over the nine-month period, transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $15.6 million, while time deposits decreased $8.0 million.  At September 30, 2011, time deposits were 47.5% of total deposits, compared to 48.1% at December 31, 2010.  As a percentage of total deposits, wholesale time deposits currently comprise only 25.5% of total deposits, an increase from 19.7% at December 31, 2010.

Borrowings

We continue to utilize borrowings to support balance sheet management and growth, and as such, during the nine months ended September 30, 2011 we increased borrowings by $32.3 million with short-term funding through FHLB advances.  Short-term borrowings increased from $60.2 million at December 31, 2010 to $96.5 million at September 30, 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 September 30, 2011, long-term debt outstanding totaled $93.7 million, compared to $97.7 million outstanding at year-end 2010.  Long-term debt at September 30, 2011 consisted of $62.0 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 September 30, 2011, shareholders’ equity totaled $162.6 million, an increase of $10.4 million from the December 31, 2010 balance.  The primary changes in shareholders’ equity were an increase in net income for the nine-month period in the amount of $5.5 million, a net increase in the unrealized gains on securities available for sale and cash flow hedging activities in the amount of $7.2 million, a decrease of $1.4 million for cash dividends paid to common shareholders and $1.4 million of preferred stock dividends and accretion.  At September 30, 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.

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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 $378.3 million at September 30, 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 $250 million from the FHLB of Atlanta, with $143.6 million outstanding at September 30, 2011.  We also have the ability to borrow from the Federal Reserve Discount Window in the amount of $113 million, with no outstanding balances.  These amounts are based on assets currently pledged.  In addition to the above, we have $208 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 $6.3 million outstanding.  The Company was in compliance with all covenants associated with its unsecured revolving line of credit as of September 30, 2011.

In addition to these liquidity sources, we have access to unsecured lines of credit from correspondent banks for short-term liquidity needs totaling $57 million, and the Promontory Interfinancial Network weekly funds auctions where we have another $330 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.

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 September 30, 2011, the Company and the Bank were “well capitalized” under this regulatory framework.  There have been no conditions or events since September 30, 2011 that management believes have changed either the Company’s or the Bank’s capital classifications.

At September 30, 2011, the Tier I risk-based capital ratio for the Bank was 10.80%, the total risk-based capital ratio was 12.37% and all other capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures.  At September 30, 2011, the Company’s total risk-based capital ratio was 11.98%, 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 September 30, 2011.

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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.

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.

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:   November 9, 2011	By:	/s/ W. Swope Montgomery, Jr.
		W. Swope Montgomery, Jr.
		President and Chief Executive Officer
Date:   November 9, 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.
Exhibit (101) *	The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 9, 2011, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) the Consolidated Statements of Income for the three months and nine months ended September 30, 2011 and 2010, (iii) the Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2011 and 2010, (iv) the Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2011 and 2010, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.

* The XBRL-related information has been furnished electronically herewith. This exhibit, regardless of whether it is an exhibit to a document incorporated by reference into any of our filings and except to the extent specifically stated otherwise, is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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