BNC Bancorp (BNNC) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

xQuarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

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

of the Securities Exchange Act of 1934

For the transition period from ________ to _________

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. YesxNo¨

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 xNo¨

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 filerx
Non-accelerated filer¨	Smaller reporting company¨

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

As of May 7, 2012, the registrant had outstanding 9,114,257 shares of Common Stock, no par value.

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets March 31, 2012 and December 31, 2011	3
	Consolidated Statements of Income Three Months Ended March 31, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2012 and 2011	5
	Consolidated Statements of Shareholders’ Equity Three Months Ended March 31, 2012 and 2011	6
	Consolidated Statements of Cash Flows Three Months Ended March 31, 2012 and 2011	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors	42
Item 6.	Exhibits	42
SIGNATURES		43
EXHIBIT INDEX		44

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PART I.Financial Information

Item 1 - Financial Statements

BNC BANCORP
CONSOLIDATED BALANCE SHEETS

	March 31, 2012			December 31,
	(Unaudited)			2011*
	(In thousands, except share data)
Assets
Cash and due from banks	$	12,481		$	14,523
Interest-earning deposits in other banks		35,577			41,306
Investment securities available for sale, at fair value		241,335			282,221
Investment securities held to maturity, at amortized cost		101,404			97,036
Federal Home Loan Bank stock, at cost		9,159			9,159
Loans held for sale		19,967			9,596
Loans:
Covered under loss-share agreements		307,097			320,033
Not covered under loss-share agreements		1,417,529			1,389,450
Less allowance for loan losses		(36,722	)		(31,008	)
Net loans		1,687,904			1,678,475
Accrued interest receivable		8,645			10,174
Premises and equipment, net		45,468			43,220
Other real estate owned:
Covered under loss-share agreements		43,603			47,577
Not covered under loss-share agreements		25,212			20,927
FDIC indemnification asset		73,521			91,851
Investment in bank-owned life insurance		48,704			48,294
Goodwill and other intangible assets, net		28,980			29,115
Other assets		26,930			31,456
Total assets	$	2,408,890		$	2,454,930
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing demand	$	162,857		$	145,688
Interest-bearing demand		956,784			909,402
Time deposits		996,831			1,063,097
Total deposits		2,116,472			2,118,187
Short-term borrowings		24,131			70,211
Long-term debt		93,713			93,713
Accrued expenses and other liabilities		9,211			8,964
Total liabilities		2,243,527			2,291,075
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		30,357			30,237
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; 9,113,501 and 9,100,890 issued and outstanding at March 31, 2012 and December 31, 2011, respectively		87,590			87,421
Common stock warrants		2,412			2,412
Retained earnings		26,282			25,614
Stock in directors rabbi trust		(2,447	)		(2,505	)
Directors deferred fees obligation		2,447			2,505
Accumulated other comprehensive income		1,561			1,010
Total shareholders' equity		165,363			163,855
Total liabilities and shareholders’ equity	$	2,408,890		$	2,454,930

* Derived from audited consolidated financial statements.

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended
	March 31,
	2012			2011
	(In thousands, except
	per share data)
Interest Income
Loans, including fees	$	23,377		$	20,849
Investment securities:
Taxable		1,332			1,538
Tax-exempt		2,427			2,622
Interest-earning balances and other		43			33
Total interest income		27,179			25,042
Interest Expense
Demand deposits		3,659			2,771
Time deposits		4,052			4,780
Short-term borrowings		132			88
Long-term debt		724			725
Total interest expense		8,567			8,364
Net Interest Income		18,612			16,678
Provision for loan losses, net		5,179			3,500
Net interest income after provision for loan losses		13,433			13,178
Non-Interest Income
Mortgage fees		1,116			362
Service charges		738			827
Investment brokerage fees		240			157
Earnings on bank-owned life insurance		410			425
Gain on sale of investment securities available for sale, net		1,619			57
Other		1,686			597
Total non-interest income		5,809			2,425
Non-Interest Expense
Salaries and employee benefits		9,901			7,239
Occupancy		1,120			976
Furniture and equipment		1,074			596
Data processing and supply		697			563
Advertising and business development		388			419
Insurance, professional and other services		1,345			996
FDIC insurance assessments		600			810
Loan, foreclosure and other real estate owned expenses		1,476			2,076
Other		1,224			1,057
Total non-interest expense		17,825			14,732
Income before income tax benefit		1,417			871
Income tax benefit		(308	)		(647	)
Net Income		1,725			1,518
Less preferred stock dividends and discount accretion		601			601
Net Income Available to Common Shareholders	$	1,124		$	917
Basic earnings per common share	$	0.11		$	0.09
Diluted earnings per common share	$	0.11		$	0.09
Dividends paid per common share	$	0.05		$	0.05

See accompanying notes. 

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BNC BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended
	March 31,
	2012			2011
	(In thousands)
Net income	$	1,725		$	1,518
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains on investment securities available for sale		944			770
Tax effect		(364	)		(297	)
Reclassification of gains recognized in net income		(1,619	)		(57	)
Tax effect		624			22
Amortization of unrealized gains on investment securities transferred from available for sale to held to maturitiy		(134	)		-
Tax effect		52			-
Net of tax amount		(497	)		438
Cash flow hedging activities:
Unrealized holding gains (losses)		(214	)		358
Tax effect		83			(138	)
Reclassification of losses recognized in net income		1,919			1,022
Tax effect		(740	)		(394	)
Net of tax amount		1,048			848
Total other comprehensive income		551			1,286
Comprehensive income	$	2,276		$	2,804

See accompanying notes.

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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
	(In thousands, except share and per share data)
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		-			-			-		-		-		1,518			-			-			-			1,518
Directors deferred fees		-			-			-		-		-		-			3			(3	)		-			-
Other comprehensive income, net of tax		-			-			-		-		-		-			-			-			1,286			1,286
Common stock issued pursuant to: Stock-based compensation		-			66			-		-		-		-			-			-			-			66
Dividend reinvestment plan		6,449			51			-		-		-		-			-			-			-			51
Cash dividends:
Common stock, $.05 per share		-			-			-		-		-		(453	)		-			-			-			(453	)
Preferred stock, net of accretion		-			-			-		120		-		(601	)		-			-			-			(481	)
Balance, March 31, 2011		9,059,809		$	86,908		$	2,412	$	29,877	$	17,161	$	23,365		$	(1,726	)	$	1,726		$	(5,512	)	$	154,211
Balance, December 31, 2011		9,100,890		$	87,421		$	2,412	$	30,237	$	17,161	$	25,614		$	(2,505	)	$	2,505		$	1,010		$	163,855
Net income		-			-			-		-		-		1,725			-			-			-			1,725
Directors deferred fees		-			-			-		-		-		-			58			(58	)		-			-
Other comprehensive income, net of tax		-			-			-		-		-		-			-			-			551			551
Common stock issued pursuant to:
Exercise of stock options		2,268			13			-		-		-		-			-			-			-			13
Shares traded to exercise options		(1,799	)		(13	)		-		-		-		-			-			-			-			(13	)
Stock-based compensation		5,488			119			-		-		-		-			-			-			-			119
Dividend reinvestment plan		6,654			50			-		-		-		-			-			-			-			50
Cash dividends:
Common stock, $.05 per share		-			-			-		-		-		(456	)		-			-			-			(456	)
Preferred stock, net of accretion		-			-			-		120		-		(601	)		-			-			-			(481	)
Balance, March 31, 2012		9,113,501		$	87,590		$	2,412	$	30,357	$	17,161	$	26,282		$	(2,447	)	$	2,447		$	1,561		$	165,363

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
	March 31,
	2012			2011
	(In thousands)
Operating Activities
Net income	$	1,725		$	1,518
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,179			3,500
Depreciation and amortization		688			549
Amortization of premiums, net		250			107
Amortization of core deposit intangible		135			101
Accretion of fair value purchase accounting adjustments		(2,180	)		(1,128	)
Stock-based compensation		119			66
Deferred compensation		210			75
Earnings on bank-owned life insurance		(410	)		(425	)
Gain on sale of investment securities available for sale, net		(1,619	)		(57	)
Loss on sale of premises and equipment		183			-
Losses on other real estate owned		526			967
Gain on sale of loans (mortgage fees)		(1,116	)		(362	)
Origination of loans held for sale		(55,148	)		(15,408	)
Proceeds from sales of loans held for sale		45,893			20,842
Decrease in accrued interest receivable		1,529			1,604
Decrease in FDIC indemnification asset		24,102			3,127
(Increase) decrease in other assets		3,753			(2,104	)
Increase (decrease) in accrued expenses and other liabilities		252			(653	)
Other operating activities, net		1,919			1,008
Net cash provided by operating activities		25,990			13,327
Investing Activities
Purchases of investment securities available for sale		(6,419	)		(9,306	)
Purchases of investment securities held to maturity		(4,584	)		-
Proceeds from sales of investment securities available for sale		39,571			23,898
Proceeds from maturities of investment securities available for sale		8,509			11,677
Redemption of Federal Home Loan Bank stock		-			(1,395	)
Net increase in loans		(31,658	)		(27,687	)
Purchases of premises and equipment		(3,402	)		(1,437	)
Proceeds from disposal of premises and equipment		283			18
Investment in other real estate owned		(461	)		(61	)
Proceeds from sales of other real estate owned		13,013			3,644
Net cash provided (used) by investing activities		14,852			(649	)
Financing Activities
Net increase (decrease) in deposits		(1,646	)		42,781
Net decrease in short-term borrowings		(46,080	)		(36,975	)
Common stock issued pursuant to dividend reinvestment plan		50			51
Cash dividends paid, net of accretion		(937	)		(934	)
Net cash provided (used) by financing activities		(48,613	)		4,923
Net increase (decrease) in cash and cash equivalents		(7,771	)		17,601
Cash and cash equivalents, beginning of year		55,829			30,087
Cash and cash equivalents, end of year	$	48,058		$	47,688
Supplemental Statement of Cash Flows Disclosure
Interest paid	$	8,615		$	8,464
Income taxes paid		57			-
Summary of Noncash Investing and Financing Activities
Increase (decrease) in fair value of investment securities available for sale, net of tax	$	(497	)	$	438
Decrease in fair value of cash flow hedge, net of tax		1,048			848
Transfer of loans to foreclosed real estate		15,253			4,276
FDIC indemnification asset increase for losses, net		5,141			1,989

See accompanying notes.

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NOTE 1 - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2012 and 2011, 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, 2011 (the “Annual Report”). This Quarterly Report on Form 10-Q 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 date of the Annual Report on Form 10-K.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. The accounting principles and methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.

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

At March 31, 2012 and December 31, 2011, outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk were as follows (dollars in thousands):

	March 31,		December 31,
	2012		2011
Commitments under unfunded loans and lines of credit	$	215,777	$	199,430
Letters of credit		12,816		13,122
Unused credit card lines		5,670		5,827
Commitments to sell loans held for sale		19,967		9,596

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 and could have potential litigation from the Blue Ridge acquisition, but any resulting losses are covered by the terms of the FDIC’s loss-share indemnification agreement.

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NOTE 3 - EARNINGS PER SHARE

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

The weighted average numbers of shares outstanding or assumed to be outstanding for the periods ended March 31, are as follows (dollars in thousands):

	Three Months Ended March 31,
	2012		2011
Net income available to common shareholders	$	1,124	$	917
Add:  Cash dividends on convertible preferred stock		90		90
Net income available to participating common shareholders	$	1,214	$	1,007
Weighted average common shares - basic		9,105,949		9,055,868
Add:  Effect of convertible preferred stock		1,804,566		1,804,566
Weighted average participating common shares - basic		10,910,515		10,860,434
Effects of dilutive Stock Rights		9,885		18,516
Weighted average participating common shares - diluted		10,920,400		10,878,950
Basic earnings per common share	$	0.11	$	0.09
Diluted earnings per common share	$	0.11	$	0.09

For the three months ended March 31, 2012 and 2011, there were 675,527 and 670,590 shares, respectively, of Stock Rights that were excluded in computing diluted shares outstanding because the exercise price exceeded the market price of the common shares outstanding.

NOTE 4 – SHARE-BASED COMPENSATION

The Company maintains various types of share-based compensation plans. These plans have been approved by the Company’s shareholders. Detail descriptions of the plans are included in Note M of the Company’s consolidated financial statements in the Annual Report for the year ended December 31, 2011.

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

Stock Option Awards. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on the yield at the time of the option grant. There were no grants of options during the three months ended March 31, 2012 and 2011.

- 9 -

A summary of option activity under the stock option plans as of March 31, 2012 and changes during the three months ended March 31, 2012 is presented below (dollars in thousands, except per share data):

						Weighted
				Weighted		average
				average		remaining		Aggregate
				exercise		contractual		intrinsic
	Shares			price		term		value
Outstanding at December 31, 2011		195,125		$	10.19
Granted		-			-
Exercised		(2,268	)		5.95
Forfeited or expired		(2,063	)		11.82
Outstanding at March 31, 2012		190,794		$	10.22		2.7 years	$	111
Exercisable at March 31, 2012		176,783		$	10.37		2.3 years	$	107
Share options expected to vest		14,011		$	8.35		7.6 years	$	4

The related compensation expense recognized for stock option awards for the three months ended March 31, 2012 and 2011 was $4,000 and $3,000, respectively. As of March 31, 2012, there was $27,000 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 1.1 years.

For the three months ended March 31, 2012, the intrinsic value of options exercised amounted to $4,000. There were no options exercised for the three months ended March 31, 2011.

Restricted Stock Awards. A summary of the status of the Company’s non-vested stock awards as of March 31, 2012 and changes during the three months ended March 31, 2012 is presented below (dollars in thousands, except per share data):

				Weighted
				average
	Number of			grant date
	shares			fair value
Non-vested at December 31, 2011		70,124		$	7.42
Granted		15,750			7.38
Vested		(5,061	)		7.64
Non-vested at March 31, 2012		80,813		$	7.40

The related compensation expense recognized for restricted stock awards for the three months ended March 31, 2012 and 2011 was $115,000 and $63,000, respectively. As of March 31, 2012, there was $353,000 of total unrecognized compensation cost related to non-vested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 1.21 years.

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NOTE 5 – INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
March 31, 2012:	cost		gains		losses		value
Available for sale:
U.S. government agencies	$	27,093	$	417	$	59	$	27,451
State and municipals		123,816		7,725		30		131,511
Mortgage-backed securities:
Residential government sponsored		64,148		4,527		31		68,644
Other government sponsored		12,897		832		-		13,729
	$	227,954	$	13,501	$	120	$	241,335
Held to maturity:
State and municipals	$	95,404	$	1,256	$	85	$	96,575
Other debt securities		6,000		-		1,080		4,920
	$	101,404	$	1,256	$	1,165	$	101,495

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
December 31, 2011:	cost		gains		losses		value
Available for sale:
U.S. government agencies	$	22,719	$	482	$	-	$	23,201
State and municipals		152,688		7,996		128		160,556
Mortgage-backed securities:
Residential government sponsored		76,622		4,823		9		81,436
Other government sponsored		16,089		892		-		16,981
Other		47		-		-		47
	$	268,165	$	14,193	$	137	$	282,221
Held to maturity:
State and municipals	$	91,036	$	446	$	20	$	91,462
Other debt securities		6,000		-		1,120		4,880
	$	97,036	$	446	$	1,140	$	96,342

The amortized cost and estimated fair value of investment securities at March 31, 2012, by contractual maturity 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 (dollars in thousands):

	Amortized cost		Fair value
Available for sale:
Due after one year through five years	$	305	$	309
Due after five through ten years		2,566		2,751
Due after ten years		225,083		238,275
	$	227,954	$	241,335
Held to maturity:
Due after one year through five years	$	893	$	887
Due after five through ten years		8,922		7,838
Due after ten years		91,589		92,770
	$	101,404	$	101,495

At March 31, 2012 and December 31, 2011, investment securities with an estimated fair value of approximately $151.5 million and $156.0 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

- 11 -

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

	Three Months Ended March 31,
	2012			2011
Proceeds from sales	$	39,571		$	23,898
Gross realized gains on sales	$	1,720		$	565
Gross realized losses on sales		(101	)		(508	)
Total realized gains, net	$	1,619		$	57

The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011.  At March 31, 2012, the unrealized losses relate to two U.S. government agencies, 19 state and municipal securities, three mortgage-backed securities and two corporate debt securities. Of those, the corporate debt securities had continuous unrealized losses for more than twelve months. At December 31, 2011, the unrealized losses relate to 11 state and municipal securities, three mortgage-backed securities and two corporate debt securities. Of those, three of the state and municipal securities and the corporate debt securities had continuous unrealized losses for more than twelve months. The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a forecasted recovery or until maturity. The temporarily impaired investment securities as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
March 31, 2012:	value		losses		value		losses		value		losses
Available for sale:
U.S. government agencies	$	7,152	$	59	$	-	$	-	$	7,152	$	59
State and municipals		1,995		30		-		-		1,995		30
Mortgage-backed		4,347		31		-		-		4,347		31
	$	13,494	$	120	$	-	$	-	$	13,494	$	120
Held to maturity:
State and municipals	$	10,932	$	85	$	-	$	-	$	10,932	$	85
Other debt securities		-		-		4,920		1,080		4,920		1,080
	$	10,932	$	85	$	4,920	$	1,080	$	15,852	$	1,165

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2011:	value		losses		value		losses		value		losses
Available for sale:
State and municipals	$	7,559	$	98	$	2,289	$	30	$	9,848	$	128
Mortgage-backed		6,232		9		-		-		6,232		9
	$	13,791	$	107	$	2,289	$	30	$	16,080	$	137
Held to maturity:
State and municipals	$	4,149	$	20	$	-	$	-	$	4,149	$	20
Other debt securities		-		-		4,880		1,120		4,880		1,120
	$	4,149	$	20	$	4,880	$	1,120	$	9,029	$	1,140

- 12 -

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major segments of loans, including loans covered under loss-share agreements with the FDIC (“covered”) and loans not covered under loss-share agreements (“non-covered”) at March 31, 2012 and December 31, 2011 are summarized below (dollars in thousands):

	March 31, 2012							December 31, 2011
	Covered		Non-covered					Covered		Non-covered
	loans		loans		Total			loans		loans		Total
Commercial real estate	$	130,839	$	760,595	$	891,434		$	135,242	$	723,268	$	858,510
Commercial construction		45,440		168,830		214,270			51,426		175,823		227,249
Commercial and industrial		15,473		124,540		140,013			16,402		124,557		140,959
Leases		-		12,513		12,513			-		12,815		12,815
Total commercial		191,752		1,066,478		1,258,230			203,070		1,036,463		1,239,533
Residential construction		6,564		25,660		32,224			3,992		25,757		29,749
Residential mortgage		105,371		317,504		422,875			109,058		318,148		427,206
Consumer and other		3,410		8,853		12,263			3,913		9,949		13,862
	$	307,097	$	1,418,495		1,725,592		$	320,033	$	1,390,317		1,710,350
Deferred loan costs (fees)						(966	)						(867	)
Total loans, net of deferred loan costs/fees					$	1,724,626						$	1,709,483

The unpaid principal balance for covered loans was $360.3 million and $385.3 million at March 31, 2012 and December 31, 2011, respectively.

Covered loans acquired will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss-share agreements. The covered loans are reported in loans exclusive of the expected reimbursement from the FDIC. Covered loans are initially recorded at fair value at the acquisition date. The covered loans are and will be subject to the Company’s internal and external credit review and monitoring. Prospective losses incurred on covered loans are eligible for partial reimbursement by the FDIC. Subsequent decreases in the amount expected to be collected result in a provision for loan losses, an increase in the allowance for loan losses, and a proportional increase to the FDIC indemnification asset for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously-recorded provision for loan losses and related allowance for loan losses and decreases to the FDIC indemnification asset, or accretion of certain fair value amounts into interest income in future periods if no provision for loan losses had been recorded.

A portion of the fair value discount on acquired covered 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 months ended March 31, 2012 and 2011 is as follows (dollars in thousands):

- 13 -

	2012						2011
	Accretable			Carrying			Accretable			Carrying
	yield			amount			yield			amount
Balance at beginning of period	$	(8,387	)	$	320,033		$	(13,009	)	$	309,342
Reductions from payments and foreclosures, net		-			(13,720	)		-			(9,027	)
Accretion		784			784			1,121			1,121
Balance at end of period	$	(7,603	)	$	307,097		$	(11,888	)	$	301,436

The Company has the ability to borrow funds from the FHLB and from the Federal Reserve Bank. At March 31, 2012 and December 31, 2011, real estate loans with carrying values of $443.9 million and $496.3 million, respectively, were pledged to secure borrowing facilities from these institutions.

Description of segment risks 

Each loan portfolio segment is subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Management has identified the most significant risks which are generally similar among the segments as follows:

Commercial real estate loans

Commercial real estate loans consist primarily of loans secured by nonresidential (owner occupied and/or non-owner occupied) real estate, multifamily housing, and agricultural loans. Commercial real estate is primarily dependent on successful operation or management of the property. While these loans are normally secured by commercial buildings for office, storage and warehouse space, it is possible that the liquidation of the collateral will not fully satisfy the obligation. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in customers having to provide rental rate concessions to achieve adequate occupancy rates.

Commercial construction loans

Commercial construction loans, including land development loans, are highly dependent on the supply and demand for commercial real estate in the markets served by BNC as well as the demand for newly constructed residential homes and lots that customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.

Commercial and industrial and leases

Each commercial loan or lease is centrally underwritten based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower’s businesses including the experience and background of the principals is obtained prior to approval. To the extent that the loan or lease is secured by collateral, which is usually personal property or business assets such as inventory or accounts receivable, which is true for the majority of commercial loans and leases, the likely value of the collateral and what level of strength the collateral brings to the transaction is evaluated. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed. Common risks include general economic conditions within the markets the Bank serves, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of collateral.

Residential construction loans

Residential construction loans are made to individuals and are typically secured by 1-4 family residential property. Significant and rapid declines in real estate values or demand can result in increased difficulty in converting these construction loans to permanent loans. Such a decline in values has led to unprecedented levels of foreclosures and losses within the banking industry. In addition, there has been an increase in the average time houses are on the market for sale.

- 14 -

Residential mortgage loans

Each residential mortgage loan is underwritten using credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral, the likely value of that collateral is evaluated. Common risks to each class of non-commercial loans include risks that are not specific to individual transactions such as general economic conditions within the markets BNC serves, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to residential mortgage loans. Revolving mortgage loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render a second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken the collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.

Consumer and other loans

Consumer and other loans include loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment. Consumer loan collections are sensitive to job loss, illness and other personal factors.

The following presents by loan segment, the summary of the Company’s allowance for loan losses and carrying value of loans as of and for the three months ended March 31, 2012 and 2011 (dollars in thousands):

	Commercial			Commercial			Commercial					Residential			Residential			Consumer
2012	real estate			construction			and industrial			Leases		construction			mortgage			and other			Total
Allowance for loan losses:
Balance January 1, 2012	$	11,789		$	10,957		$	4,338		$	18	$	699		$	3,058		$	149		$	31,008
Charge-offs		(1,714	)		(2,164	)		(725	)		-		(17	)		(1,339	)		(24	)		(5,983	)
Recoveries		13			189			32			-		-			23			3			260
Provision (a)		282			1,853			953			-		(62	)		2,233			(70	)		5,179
Increase in FDIC indemnification asset (a)		325			2,280			368			-		-			3,275			-			6,258
Balance March 31, 2012	$	10,695		$	13,115		$	4,966		$	18	$	620		$	7,250		$	58		$	36,722
Ending balances:
Specific reserves:
Impaired loans	$	924		$	2,737		$	1,366		$	-	$	-		$	1,434		$	-		$	6,461
Purchase credit impaired loans		3,167			6,236			460			-		-			2,569			-			12,432
Total specific reserves		4,091			8,973			1,826			-		-			4,003			-		$	18,893
General reserves		6,604			4,142			3,140			18		620			3,247			58			17,829
Total	$	10,695		$	13,115		$	4,966		$	18	$	620		$	7,250		$	58		$	36,722
Loans:
Ending balance:
Individually evaluated for impairment	$	16,062		$	21,685		$	3,281		$	-	$	1,171		$	11,648		$	122		$	53,969
Purchase credit impaired loans		25,968			20,477			1,810			-		1,685			25,414			83			75,437
Loans collectively evaluated for impairment		849,404			172,108			134,922			12,513		29,368			385,813			12,058			1,596,186
Total	$	891,434		$	214,270		$	140,013		$	12,513	$	32,224		$	422,875		$	12,263		$	1,725,592

(a) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $1.6 million. This resulted in an increase in the FDIC indemnification asset of $6.2 million, which is the difference between the net provision on covered loans and the total additions to the allowance for loan losses allocable to the covered loans portfolio of $7.8 million.

- 15 -

	Commercial			Commercial			Commercial						Residential			Residential			Consumer
2011	real estate			construction			and industrial			Leases			construction			mortgage			and other			Total
Allowance for loan losses:
Balance January 1, 2011	$	12,972		$	4,525		$	3,525		$	33		$	682		$	2,867		$	209		$	24,813
Charge-offs		(573	)		(2,698	)		(287	)		-			(508	)		(303	)		-			(4,369	)
Recoveries		1			19			353			-			4			3			1			381
Provision		(1,786	)		2,889			(193	)		(33	)		553			2,078			(8	)		3,500
Balance March 31, 2011	$	10,614		$	4,735		$	3,398		$	-		$	731		$	4,645		$	202		$	24,325
Ending balances:
Specific reserves:
Impaired loans	$	1,454		$	1,134		$	494		$	-		$	141		$	2,176		$	-		$	5,399
Purchase credit impaired loans		-			-			-			-			-			-			-			-
Total specific reserves		1,454			1,134			494			-			141			2,176			-		$	5,399
General reserves		9,160			3,601			2,904			-			590			2,469			202			18,926
Total	$	10,614		$	4,735		$	3,398		$	-		$	731		$	4,645		$	202		$	24,325
Loans:
Ending balance:
Individually evaluated for impairment	$	17,995		$	28,731		$	3,519		$	-		$	2,507		$	8,454		$	-		$	61,206
Purchase credit impaired loans		26,007			25,047			2,472			-			225			21,733			-			75,484
Loans collectively evaluated for impairment		660,442			173,116			131,750			11,192			25,561			376,018			14,220			1,392,299
Total	$	704,444		$	226,894		$	137,741		$	11,192		$	28,293		$	406,205		$	14,220		$	1,528,989

The following presents by loan segment, information related to impaired loans as of March 31, 2012 and December 31, 2011 (dollars in thousands):

							Impaired loans - with
	Impaired loans - with allowance						no allowance
			Unpaid		Allowance for				Unpaid
	Recorded		principal		loan losses		Recorded		principal
March 31, 2012:	investment		balance		allocated		investment		balance
Non-covered:
Commercial real estate	$	5,771	$	5,740	$	924	$	10,347	$	10,322
Commercial construction		10,135		10,120		2,737		11,622		11,565
Commercial and industrial		2,664		2,629		1,366		658		652
Residential construction		-		-		-		1,173		1,171
Residential mortgage		5,991		5,979		1,434		5,675		5,669
Consumer and other		-		-		-		123		122
Total non-covered		24,561		24,468		6,461		29,598		29,501
Covered:
Commercial real estate		12,767		14,543		3,167		13,217		19,790
Commercial construction		9,895		12,925		6,236		10,581		16,611
Commercial and industrial		457		458		460		1,354		1,359
Residential construction		-		-		-		1,685		3,166
Residential mortgage		2,124		4,001		2,569		23,291		32,124
Consumer and other		-		-		-		83		119
Total covered		25,243		31,927		12,432		50,211		73,169
Total loans	$	49,804	$	56,395	$	18,893	$	79,809	$	102,670

- 16 -

							Impaired loans - with
	Impaired loans - with allowance						no allowance
			Unpaid		Allowance for				Unpaid
	Recorded		principal		loan losses		Recorded		principal
December 31, 2011:	investment		balance		allocated		investment		balance
Non-covered:
Commercial real estate	$	5,030	$	5,010	$	1,899	$	13,027	$	13,000
Commercial construction		10,604		10,563		2,095		13,171		13,116
Commercial and industrial		2,622		2,606		1,340		627		625
Residential construction		-		-		-		901		899
Residential mortgage		8,413		8,401		819		4,568		4,554
Consumer and other		122		122		12		-		-
Total non-covered		26,791		26,702		6,165		32,294		32,194
Covered:
Commercial real estate		10,916		12,748		1,583		11,985		16,055
Commercial construction		5,612		8,366		3,549		17,100		27,002
Commercial and industrial		-		-		9		2,619		3,439
Residential construction		-		-		-		1,584		2,591
Residential mortgage		580		945		268		21,655		30,928
Consumer and other		-		-		-		91		94
Total covered		17,108		22,059		5,409		55,034		80,109
Total loans	$	43,899	$	48,761	$	11,574	$	87,328	$	112,303

The following presents by loan segment, information related to the average investment and interest income recognized on impaired loans for the three months ended March 31, 2012 and 2011 (dollars in thousands):

	2012				2011
	Average		Interest		Average		Interest
	recorded		income		recorded		income
	investment		recognized		investment		recognized
Impaired loans with allowance:
Commercial real estate	$	18,358	$	50	$	6,667	$	42
Commercial construction		20,085		52		7,235		6
Commercial and industrial		3,027		28		851		-
Residential construction		-		-		273		-
Residential mortgage		8,548		41		2,411		-
Total impaired loans with allowance	$	50,018	$	171	$	17,437	$	48
Impaired loans with no allowance:
Commercial real estate	$	23,982	$	112	$	41,049	$	70
Commercial construction		23,667		82		44,965		54
Commercial and industrial		2,099		3		5,666		-
Residential construction		2,954		9		1,996		-
Residential mortgage		29,223		13		25,755		48
Consumer and other		205		-		258		-
Total impaired loans with no allowance	$	82,130	$	219	$	119,689	$	172
Impaired loans:
Commercial	$	91,218	$	327	$	106,433	$	172
Consumer		40,930		63		30,693		48
Total impaired loans	$	132,148	$	390	$	137,126	$	220

For the three months ended March 31, 2012 and 2011, the amount of interest income recognized within the period that the loans were impaired was primarily related to loans modified in a troubled debt restructuring that remained on accrual status. For the three months ended March 31, 2012 and 2011, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

- 17 -

The following presents by loan segment, a summary of recorded investment in nonaccrual loans, at March 31, 2012 and December 31, 2011 (dollars in thousands):

	March 31, 2012						December 31, 2011
	Covered		Non-covered				Covered		Non-covered
	loans		loans		Total		loans		loans		Total
Nonaccrual loans:
Commercial real estate	$	21,354	$	2,973	$	24,327	$	19,692	$	6,197	$	25,889
Commercial construction		19,445		7,919		27,364		21,634		6,562		28,196
Commercial and industrial		1,810		401		2,211		2,619		513		3,132
Residential construction		1,685		427		2,112		1,584		143		1,727
Residential mortgage		25,414		5,761		31,175		22,234		6,028		28,262
Consumer and other		89		-		89		91		-		91
Total nonaccrual loans		69,797		17,481		87,278		67,854		19,443		87,297
Accruing greater than 90 days past due:
Commercial real estate	$	-	$	-	$	-	$	858	$	-	$	858
Commercial construction		166		-		166		585		-		585
Commercial and industrial		131		-		131		14		-		14
Residential mortgage		242		-		242		3,943		-		3,943
Consumer and other		113		-		113		25		-		25
Total 90 days past due loans	$	652	$	-	$	652	$	5,425	$	-	$	5,425

The following presents by loan segment, an aging analysis of past due loans as of March 31, 2012 and December 31, 2011 (dollars in thousands):

					Greater
					than
	30-59 days		60-89 days		90 days				Total				Total
March 31, 2012:	past due		past due		past due		Nonaccrual		past due		Current		loans
Non-covered
Commercial real estate	$	1,519	$	872	$	-	$	2,973	$	5,364	$	755,231	$	760,595
Commercial construction		3,491		1,929		-		7,919		13,339		155,491		168,830
Commercial and industrial		2,632		643		-		401		3,676		120,864		124,540
Leases		-		-		-		-		-		12,513		12,513
Residential construction		-		-		-		427		427		25,233		25,660
Residential mortgage		1,871		2,436		-		5,761		10,068		307,436		317,504
Consumer and other		36		-		-		-		36		8,817		8,853
Total non-covered		9,549		5,880		-		17,481		32,910		1,385,585		1,418,495
Covered:
Commercial real estate		5,721		34		-		21,354		27,109		103,730		130,839
Commercial construction		2,252		2,892		166		19,445		24,755		20,685		45,440
Commercial and industrial		52		-		131		1,810		1,993		13,480		15,473
Residential construction		363		-		-		1,685		2,048		4,516		6,564
Residential mortgage		4,695		414		242		25,414		30,765		74,606		105,371
Consumer and other		131		-		113		89		333		3,077		3,410
Total covered		13,214		3,340		652		69,797		87,003		220,094		307,097
Total loans	$	22,763	$	9,220	$	652	$	87,278	$	119,913	$	1,605,679	$	1,725,592

- 18 -

					Greater
					than
	30-59 days		60-89 days		90 days				Total				Total
December 31, 2011:	past due		past due		past due		Nonaccrual		past due		Current		loans
Non-covered
Commercial real estate	$	1,668	$	-	$	-	$	6,197	$	7,865	$	715,403	$	723,268
Commercial construction		1,068		99		-		6,562		7,729		168,094		175,823
Commercial and industrial		10		11		-		513		534		124,023		124,557
Leases		122		-		-		-		122		12,693		12,815
Residential construction		-		-		-		143		143		25,614		25,757
Residential mortgage		749		445		-		6,028		7,222		310,926		318,148
Consumer and other		18		-		-		-		18		9,931		9,949
Total non-covered		3,635		555		-		19,443		23,633		1,366,684		1,390,317
Covered:
Commercial real estate		6,297		1,515		858		19,692		28,362		106,880		135,242
Commercial construction		670		2,660		585		21,634		25,549		25,877		51,426
Commercial and industrial		54		19		14		2,619		2,706		13,696		16,402
Residential construction		-		-		-		1,584		1,584		2,408		3,992
Residential mortgage		1,455		667		3,943		22,234		28,299		80,759		109,058
Consumer and other		71		81		25		91		268		3,645		3,913
Total covered		8,547		4,942		5,425		67,854		86,768		233,265		320,033
Total loans	$	12,182	$	5,497	$	5,425	$	87,297	$	110,401	$	1,599,949	$	1,710,350

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.

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The following presents by loan segment and by credit quality indicator, the recorded investment in the Company’s loans as of March 31, 2012 and December 31, 2011 (dollars in thousands):

			Pass		Special
March 31, 2012:	Total		credits		mention		Substandard			Doubtful		Loss
Non-covered
Commercial real estate	$	760,595	$	677,925	$	24,801	$	57,794		$	75	$	-
Commercial construction		168,830		122,491		15,498		30,841			-		-
Commercial and industrial		124,540		115,741		3,321		5,478			-		-
Leases		12,513		12,513		-		-			-		-
Residential construction		25,660		21,906		498		3,256			-		-
Residential mortgage		317,504		274,164		23,127		20,213			-		-
Consumer and other		8,853		8,373		301		179			-		-
Total non-covered		1,418,495		1,233,113		67,546		117,761			75		-
Covered:									��
Commercial real estate		130,839		69,312		13,137		32,166			15,733		491
Commercial construction		45,440		6,619		4,391		13,453			20,952		25
Commercial and industrial		15,473		9,773		2,438		1,731			819		712
Residential construction		6,564		487		1,914		4,163			-		-
Residential mortgage		105,371		39,339		24,681		20,102			21,108		141
Consumer and other		3,410		3,031		110		244			25		-
Total covered		307,097		128,561		46,671		71,859			58,637		1,369
Total loans	$	1,725,592	$	1,361,674	$	114,217	$	189,620		$	58,712	$	1,369

			Pass		Special
December 31, 2011:	Total		credits		mention		Substandard		Doubtful		Loss
Non-covered
Commercial real estate	$	723,268	$	662,070	$	17,558	$	43,640	$	-	$	-
Commercial construction		175,823		134,341		7,358		34,124		-		-
Commercial and industrial		124,557		115,519		3,485		5,470		83		-
Leases		12,815		12,815		-		-		-		-
Residential construction		25,757		21,574		275		3,908		-		-
Residential mortgage		318,148		276,712		20,705		20,731		-		-
Consumer and other		9,949		9,347		432		170		-		-
Total non-covered		1,390,317		1,232,378		49,813		108,043		83		-
Covered:
Commercial real estate		135,242		87,891		10,661		26,532		10,148		10
Commercial construction		51,426		17,497		3,856		13,360		16,621		92
Commercial and industrial		16,402		10,405		2,066		1,589		1,317		1,025
Residential construction		3,992		1,641		592		1,571		188		-
Residential mortgage		109,058		59,268		14,949		21,872		12,850		119
Consumer and other		3,913		3,574		98		226		13		2
Total covered		320,033		180,276		32,222		65,150		41,137		1,248
Total loans	$	1,710,350	$	1,412,654	$	82,035	$	173,193	$	41,220	$	1,248

Modifications

A modification of a loan constitutes a 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. 

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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.

During 2011, the Company adopted the amendments in Accounting Standards Update No. 2011-02. 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.

In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. The following table provides a summary of loans modified as TDRs at March 31, 2012 (dollars in thousands):

			Pre-modification		Post-modification
	Number of		outstanding		outstanding
	contracts		loan balance		loan balance
Commercial real estate		14	$	8,718	$	8,718
Commercial construction		21		20,963		18,408
Commercial and industrial		5		2,680		2,680
Residential construction		1		277		277
Residential mortgage		15		8,018		7,209
Consumer and other		1		122		122
Total modifications		57	$	40,778	$	37,414

The following presents loans modified in a TDR that defaulted during the three months ended March 31, 2012, and within twelve months of their modification date (dollars in thousands):

	Number of		Recorded
	contracts		investment
Commercial construction		4	$	3,986

At March 31, 2012, loan modifications considered TDR’s totaled $37.4 million, of which $7.8 million is included in nonaccrual loans, and the remaining $29.6 million were not past due and performing to the restructured terms. At December 31, 2011, TDR’s totaled $46.3 million, of which $4.8 million is included in nonaccrual loans, and the remaining $41.5 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 segment, a summary of loan modifications as of March 31, 2012 and December 31, 2011 (dollars in thousands):

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					Total				Allowance for
					number of		Total		loan losses
	Accrual		Nonaccrual		contracts		modifications		allocated
March 31, 2012:
Commercial real estate	$	8,394	$	324		14	$	8,718	$	306
Commercial construction		13,297		5,110		21		18,407		2,250
Commercial and industrial		2,680		-		5		2,680		1,366
Residential construction		-		277		1		277		-
Residential mortgage		5,126		2,084		15		7,210		552
Consumer and other		122		-		1		122		-
Total modifications	$	29,619	$	7,795		57	$	37,414	$	4,474

					Total				Allowance for
					number of		Total		loan losses
	Accrual		Nonaccrual		contracts		modifications		allocated
December 31, 2011:
Commercial real estate	$	12,869	$	1,694		12	$	14,563	$	584
Commercial construction		18,187		1,118		25		19,305		1,193
Commercial and industrial		2,718		-		5		2,718		1,203
Residential construction		755		-		2		755		-
Residential mortgage		6,864		1,989		17		8,853		590
Consumer and other		122		-		1		122		-
Total modifications	$	41,515	$	4,801		62	$	46,316	$	3,570

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.

As of March 31, 2012, no available commitments outstanding on TDRs. The following table presents new troubled debt restructurings, by modification category, for the three months ended March 31, 2012 (dollars in thousands):

					Interest
	Rate		Term		only		Combination		Total
	modifications		modifications		modifications		modifications		modifications
Commercial real estate	$	-	$	493	$	-	$	2,029	$	2,522
Commercial construction		-		629		-		-		629
Residential mortgage		-		-		-		118		118
Total modifications	$	-	$	1,122	$	-	$	2,147	$	3,269
Total number of contracts		-		2		-		6		8

Loans held for sale

The Company originates certain single family, residential first mortgage loans for sale on a presold basis. Loan sale activity for the three months ended March 31, 2012 and 2011 is summarized below (dollars in thousands):

	2012		2011
Loans held for sale at March 31,	$	19,967	$	1,679
Proceeds from sales of loans held for sale		45,893		20,842
Mortgage fees		1,116		362

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NOTE 7 – FDIC INDEMNIFICATION ASSET

The FDIC indemnification asset activity for the three months ended March 31, 2012 and 2011 is summarized as follows (dollars in thousands):

	2012			2011
Balance at beginning of period	$	91,851		$	69,493
Accretion of present value discount, net		631			-
Post acquisition adjustments		5,141			1,989
Receipt of payments from FDIC		(24,102	)		(3,127	)
Balance at end of period	$	73,521		$	68,355

The FDIC indemnification asset is measured separately from the related covered assets and is recorded at fair value. The fair value was estimated using projected cash flows related to the loss-share agreements based on the expected reimbursements for losses and the applicable loss-share percentages.

NOTE 8 – DERIVATIVES

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

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

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 2011, all of the interest rate swaps had matured. At March 31, 2011, the aggregate fair value of these derivatives of $6,000 was included in other assets in the accompanying consolidated balance. The change in fair value of these derivatives was a decrease of $249,000 for the quarter ended March 31, 2011. For the quarter ended March 31, 2011, no hedge ineffectiveness was recognized on these loan cash flow hedges and the amount of net settlement gains recorded from the interest rate swaps totaled $238,000, and was included in loan interest income in the accompanying consolidated statements of income.

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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 achieved 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, which is designated as a hedging instrument under ASC 815, was an asset of $419,000, which is included in other assets in the accompanying consolidated balance sheet at March 31, 2012. The change in fair value of this derivative was a decrease of $215,000 for the quarter ended March 31, 2012, when compared to the $634,000 recorded at December 31, 2011. The Company has recorded a $9.8 million loss, net of tax, as accumulated other comprehensive income at March 31, 2012, and expects $5.1 million, net of tax, to be reclassified into earnings within the next 12 months. In addition, the net of tax caplet expense related to this hedge amounted to $1.2 million and $628,000 for the quarters ended March 31, 2012 and 2011, 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 risk of 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.

NOTE 9 – GOODWILL AND OTHER INTANGIBLES

Goodwill and identified intangible assets, with indefinite lives, are subject to impairment testing annually or more frequently if events or circumstances indicate possible impairment. When appropriate, a projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by a valuation model. The most recent test for goodwill impairment, conducted as of December 31, 2011, concluded that there was no goodwill impairment. No impairment charges were recognized as of March 31, 2012. The carrying amount of goodwill and other intangible assets was $26.1 million and $2.9 million as of March 31, 2012, respectively, and $26.1 million and $3.0 million, as of December 31, 2011, respectively.

NOTE 10 - FAIR VALUE MEASUREMENTS

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

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

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

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement, and requires 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.

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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 investment 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 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Investment 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 derivatives instruments held or issued for risk management purposes as Level 2 valuation.

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

	Assets
	measured at		Fair value measured using
Description	fair value		Level 1		Level 2		Level 3
At March 31, 2012:
Investment securities available for sale:
U.S. government agencies	$	27,451	$	-	$	27,451	$	-
State and municipals		131,511		-		131,511		-
Mortgage-backed securities:
Residential government sponsored		68,644		-		68,644		-
Other government sponsored		13,729		-		13,729		-
Total investment securities available for sale		241,335		-		241,335		-
Interest rate cap		419		-		419		-
Total assets measured at fair value on a recurring basis	$	241,754	$	-	$	241,754	$	-
At December 31, 2011:
Investment securities available for sale:
U.S. government agencies	$	23,201	$	-	$	23,201	$	-
State and municipals		160,556		-		160,556		-
Mortgage-backed securities:
Residential government sponsored		81,436		-		81,436		-
Other government sponsored		16,981		-		16,981		-
Other		47		-		47		-
Total investment securities available for sale		282,221		-		282,221		-
Interest rate cap		634		-		634		-
Total assets measured at fair value on a recurring basis	$	282,855	$	-	$	282,855	$	-

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.

Investment Securities Held to Maturity. The fair values of investment securities held to maturity 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 investment 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 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Investment securities classified as Level 3 valuation include asset-backed securities in less liquid markets.

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. At March 31, 2012 and December 31, 2011, 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. At March 31, 2012 and December 31, 2011, all of the impaired loans were recorded as Level 3 valuation.

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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. At March 31, 2012 and December 31, 2011, all of the other real estate owned were recorded as Level 3 valuation.

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

	Assets
	measured at		Fair value measured using
Description	fair value		Level 1		Level 2		Level 3
At March 31, 2012:
Investment securities held to maturity:
State and municipals	$	96,575	$	-	$	96,575	$	-
Other debt securities		4,920		-		4,920		-
Total investment securities held to maturity		101,495		-		101,495		-
Loans held for sale		19,967		-		19,967		-
Impaired loans		110,513		-		-		110,513
Other real estate owned		68,815		-		-		68,815
Total assets measured at fair value on a nonrecurring basis	$	300,790	$	-	$	121,462	$	179,328
At December 31, 2011:
Investment securities held to maturity:
State and municipals	$	91,462	$	-	$	91,462	$	-
Other debt securities		4,880		-		-		-
Total investment securities held to maturity		96,342		-		91,462		-
Loans held for sale		9,596		-		9,596		-
Impaired loans		119,449		-		-		119,449
Other real estate owned		68,504		-		-		68,504
Total assets measured at fair value on a nonrecurring basis	$	293,891	$	-	$	101,058	$	187,953

The fair values of investment securities held to maturity are recorded at fair value on a nonrecurring basis when an impairment in value that is deemed to be other than temporary occurs. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. At March 31, 2012 and December 31, 2011, there were no fair value adjustments related to $101.4 million and $97.0 million, respectively, of investment securities held to maturity.

Goodwill and other intangible assets are subject to impairment testing. When appropriate, a projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, the Company classifies goodwill and other intangible assets as Level 3 valuation. At March 31, 2012 and December 31, 2011 there were no fair value adjustments related to $26.1 million of goodwill, and other intangible assets of $2.9 million and $3.0 million, respectively.

Below is a table that presents the valuation and unobservable inputs for Level 3 assets and liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2012 (dollars in thousands):

	Fair value at				Range of
Description	March 31, 2012		Valuation methodology	Unobservable inputs	inputs
Impaired loans	$	2,801	Discounted cash flows	Constant payment rate		0%
		107,712	Collateral based	Discount to reflect current		0% - 20%
			measurements and	market conditions and
			market comparables	ultimate collectibility
		110,513
Other real estate owned		68,815	Appraisals andmarket comparables	Discount to reflect current		0% - 18%
				market conditions

NOTE 11 – 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.

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

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

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 loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms and credit ratings for the same remaining maturities, adjusted for the allowance for loan losses.

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

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

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

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

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

Derivative Financial Instruments- Fair values for derivatives are based 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, as discussed in Note P in the 2011 Annul Report on Form 10-K, is not material.

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The estimated carrying and fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

	March 31, 2012				December 31, 2011
	Carrying		Estimated		Carrying		Estimated
	value		fair value		value		fair value
Financial assets:
Cash and cash equivalents	$	48,058	$	48,058	$	55,829	$	55,829
Investment securities available for sale		241,335		241,335		282,221		282,221
Investment securities held to maturity		101,404		101,495		97,036		96,342
Federal Home Loan Bank stock		9,159		9,159		9,159		9,159
Loans held for sale		19,967		19,967		9,596		9,596
Loans receivable, net		1,687,904		1,678,911		1,678,475		1,670,586
Accrued interest receivable		8,645		8,645		10,174		10,174
FDIC indemnification asset		73,521		73,521		91,851		91,851
Investment in bank-owned life insurance		48,704		48,704		48,294		48,294
Financial liabilities:
Demand deposits and savings	$	1,119,641	$	1,119,641	$	1,055,090	$	1,055,090
Time deposits		996,831		1,010,426		1,063,097		1,080,175
Short-term borrowings		24,131		24,131		70,211		70,211
Long-term debt		93,713		85,814		93,713		86,144
Accrued interest payable		1,225		1,225		1,379		1,379
On-balance sheet derivative financial instruments:
Derivative agreements – asset:
Interest rate cap agreement	$	419	$	419	$	634	$	634

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2011, the FASB issued ASU No. 2011-11,“Disclosures About Offsetting Assets and Liabilities.”  This project began as an attempt to converge the offsetting requirements under U.S. GAAP and IFRS.  However, as the Boards were not able to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS.  The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement.  ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements.  ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013.  As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the adoption will have no 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 13 – OTHER EVENTS – ENTRY INTO A MATERIAL DEFINITIVE AGREEMENTS

KeySource Agreement

On December 21, 2011, the Company entered into an Agreement and Plan of Merger (the “KeySource Agreement”) with KeySource Financial, Inc., a North Carolina corporation (“KeySource”), pursuant to which KeySource will, on the terms and subject to the conditions set forth in the KeySource Agreement, merge with and into the Company so that the Company is the surviving corporation in the merger (the “Merger”). Simultaneous with the Merger, or as soon as is practicable thereafter, KeySource Commercial Bank, a North Carolina banking corporation and a wholly-owned subsidiary of KeySource, will be merged with and into BNC. The Company and KeySource anticipate that the Merger will close in the second quarter of 2012, subject to customary closing conditions, including regulatory approval.

At the effective time of the Merger (the “Effective Time”), each share of common stock, par value $1.00 per share, of KeySource issued and outstanding immediately before the Effective Time (the “KeySource Common Stock”), except for shares of KeySource Common Stock owned by KeySource or the Company or any of their respective wholly owned subsidiaries (other than certain trust account shares), shall be converted into the right to receive one share of common stock, no par value per share, of the Company. Any holder of shares of KeySource Common Stock who perfects such holders’ dissenters’ rights of appraisal in accordance with and as contemplated by the North Carolina Business Corporation Act (“NCBCA”) shall be entitled to receive the value of such shares in cash as determined pursuant to such provision of the NCBCA.

The KeySource Agreement requires KeySource to call a meeting of its shareholders to be held as soon as reasonably practicable after the date of the KeySource Agreement for the purpose of obtaining the requisite shareholder approval required in connection with the Merger. The KeySource Agreement also requires the Company to offer one member of the KeySource board of directors (the “KeySource Board”) a seat as a non-management member on the Company’s board of directors until the Company’s next annual meeting of shareholders following the Effective Time, and the Company shall use all reasonable efforts to arrange for such member to sit for election to a regular term at the Company’s next annual meeting of shareholders. The Company is also required to offer, for a concurrent period of time, one member of the KeySource Board a seat as a non-management member on the board of directors of each subsidiary of the Company the composition of which is the same as the Company’s then-current board of directors.

28

Pursuant to the KeySource Agreement, prior the Effective Time, Donald R. Draughon, Chief Executive Officer of KeySource, shall have entered into an employment agreement with the Company and BNC, which shall become effective only upon consummation of the Merger. The obligation of the Company to effect the Merger is subject to the satisfaction or waiver by the Company, at or before the Effective Time, of certain conditions, including, but not limited to, (i) each member of the KeySource Board having executed and delivered a support agreement to the Company; (ii) each member of the KeySource Board having executed and delivered a noncompete agreement to the Company; (iii) each member of the KeySource Board (and the boards of directors of KeySource’s subsidiaries) having submitted their resignations to be effective as of the Effective Time and (iv) KeySource’s classified assets (as defined in the Merger Agreement) not exceeding $20 million as of the Effective Time.

The KeySource Agreement includes detailed representations, warranties and covenants of the Company and KeySource and termination provisions customary for transactions of this type. From the date of the KeySource Agreement to the Effective Time, KeySource has agreed to, among other things, conduct its business and the business of its subsidiaries in the ordinary course in all material respects and use commercially reasonable best efforts to maintain and preserve intact their business organization and advantageous business relationships and retain the services of their key officers and employees. KeySource has also agreed not to solicit or initiate discussions with third parties regarding other proposals to acquire KeySource and it has agreed to certain restrictions on its ability to respond to such proposals, as more fully described in the Merger Agreement.

The separate existence of KeySource Commercial Bank shall cease upon the effective time of the Bank Merger. BNC shall be the surviving bank in the Bank Merger and shall remain a wholly-owned subsidiary of the Company.

BNR Purchase Agreement

On April 27, 2012, the Company issued a press release announcing that its wholly owned banking subsidiary, Bank of North Carolina, had entered into a purchase and assumption agreement with The Bank of Hampton Roads (“BHR”), a subsidiary of Hampton Roads Bankshares, Inc. (the “Purchase Agreement”). Under the terms of the Purchase Agreement, the Bank of North Carolina will purchase the deposits and certain other assets of BHR’s banking operations located at Preston Corners in Cary, North Carolina and Meadowmont Village Circle in Chapel Hill, North Carolina. Consummation of the transaction is subject to numerous conditions as well as regulatory approvals. Bank of North Carolina intends to operate the branches if acquired.

The above summary of the Purchase Agreement is not complete and is qualified in its entirety by reference to the text of the Purchase Agreement filed as Exhibit 10.1 on Form 8-K on May 1, 2012.

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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; our ability to integrate and achieve expected synergies from acquired entities; 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, 2011.

Overview and Executive Summary

BNC Bancorp (the “Company”) is a one-bank holding company for Bank of North Carolina (“BNC”). BNC is a full service commercial bank, incorporated under the laws of the State of North Carolina. The Company maintains four wholly-owned special-purpose subsidiary trusts that issue trust preferred securities. Because BNC is our sole banking subsidiary, the majority of our income is derived from BNC operations. Throughout this Quarterly Report, results of operations will relate to BNC’s operation, unless a specific reference is made to the Company and its operating results other than through BNC’s business and activities. The terms “we” and “ours” will be used throughout this report when discussing our operations except in circumstances where a reference is specific to either the Company and/or BNC.

We are registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”) and the bank holding company laws of North Carolina. BNC operates under the rules and regulations of and is subject to examination by the FDIC and the North Carolina Office of the Commissioner of Banks, North Carolina Department of Commerce (the “NCOCB”). BNC is also subject to certain regulations of the Federal Reserve governing the reserves to be maintained against deposits and other matters. Our administrative office is located at 1226 Eastchester Drive, High Point, North Carolina 27265 and BNC’s main office is located at 831 Julian Avenue, Thomasville, North Carolina 27360.

We have experienced steady, primarily organic growth over our twenty-one year history. With numerous banks still in a weakened condition because of the slow rebound of the economy, we decided to expand our franchise through beneficial acquisitions. In 2010, we acquired one institution and in 2011, we acquired two other institutions, with the acquisition of a third institution expected to close in the second or third quarter of 2012. The 2011 acquisitions affect the comparability of prior periods.

On October 14, 2011, in a FDIC-assisted transaction, we acquired certain assets and assumed certain liabilities of Blue Ridge Savings Bank, Inc. (“Blue Ridge”) headquartered in Asheville, North Carolina, under agreements which included loss-share arrangements which protect BNC from losses on covered loans and other real estate owned up to stated limits. The Blue Ridge acquisition enabled us to expand our franchise into Western North Carolina through six branches located in Western North Carolina.

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On December 30, 2011, we acquired Regent Bank of South Carolina (“Regent”), a commercial bank organized under the banking laws of South Carolina. Regent has one branch in Greenville, South Carolina, which will operate under the name BNC Bank, as our other South Carolina branches. This acquisition gives us an entry into what is known as the Upstate region of South Carolina, located in the commerce-rich I-85 corridor in the northwest corner of South Carolina. The Upstate is the fastest growing region in the state, and given its strategic position between Atlanta and Charlotte, future development and growth prospects are bright.

On December 21, 2011, we entered into an Agreement and Plan of Merger with KeySource Financial, Inc., a North Carolina corporation serving as a one bank holding company for KeySource Commercial Bank, a North Carolina banking corporation (“KeySource”), with one branch in Durham, North Carolina. We anticipate that the Merger will close in the second or third quarter of 2012, subject to customary closing conditions, including regulatory and shareholder approval. This combination with KeySource increases our presence in the combined Raleigh-Durham Metropolitan Statistical Area, the market with the highest forecasted five-year growth rate in North Carolina.

On April 27, 2012, we entered into a purchase and assumption agreement with The Bank of Hampton Roads ("BHR"), a subsidiary of Hampton Roads Bankshares, Inc. (the "Purchase Agreement"). Under the terms of the Purchase Agreement, we will purchase the deposits and certain other assets of BHR's banking operations located at Preston Corners in Cary, North Carolina and Meadowmont Village Circle in Chapel Hill, North Carolina. Consummation of the transaction is subject to numerous conditions as well as regulatory approvals. We intend to operate the branches if acquired.

We provide a wide range of banking services tailored to the particular banking needs of the communities we serve. We are principally engaged in the business of attracting deposits from the general public and using those deposits, together with other funding from our lines of credit, to make primarily consumer and commercial loans. We have pursued a strategy that emphasizes our local affiliations. This business strategy stresses the provision of high quality banking services to individuals and small to medium-sized local businesses. Specifically, we make 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 other loans. We also offer a wide range of banking services, including checking and savings accounts, safe deposit boxes, and other associated services. We have 31 banking offices in North and South Carolina.

Our primary sources of revenue are interest and fee income from our lending and investing activities, primarily consisting of making business loans for small to medium-sized businesses, and, to a lesser extent, from our investment portfolio. In prior years, investments have not been a primary source of income for us.

During the first three months of 2012, with the impact of the economic slowdown ongoing, management has continued to focus on managing credit quality, maintaining adequate liquidity sources and managing our capital. 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. Credit costs remain high due to elevated nonperforming asset levels and our continuing efforts to resolve asset quality issues. Weaknesses in residential development and rising unemployment levels in our market areas resulted in higher charge-offs, and a higher allowance for loan losses in 2012 also impacted earnings. We continue to focus on accelerating the sales cycle for OREO, including taking substantial discounts on the larger OREO properties.

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Our senior management continues to work closely with credit administration, third-party credit review specialists, and lending staff to insure that adequate resources are in place to proactively manage through the current slowdown in the real estate markets and overall economy. When a problem is identified, management remains diligent in assessing the situation and moving quickly to minimize losses, while being sensitive to the borrower’s effectiveness as an operator, the long-term viability of the business or project, and the borrower’s commitment to working with the Bank to achieve an acceptable resolution of the credit.

Results of Operations

Our net income available to common shareholders for the first quarter ended March 31, 2012 was $1.1 million, or $0.11 per diluted share, compared to $917,000, or $0.09 per diluted share, for the first quarter in 2011. In the first quarter of 2012, the Company incurred $1.2 million of one-time expenses associated with merger and acquisition activities, which reduced after-tax diluted earnings per share by $0.07. The annualized return on average assets was 0.29% for the first quarters of 2012 and 2011.

Total assets at March 31, 2012 increased $251.6 million, or 11.7% compared to March 31, 2011. Period-end loans increased $195.9 million, or 12.8%, from the same prior year period. Period-end deposits increased $245.6 million, or 13.1% from March 31, 2011.The above increases were due to strong organic growth in our North Carolina franchise, along with the acquisition and integration of Blue Ridge and Regent during the fourth quarter of 2011.When compared to December 31, 2011, total assets decreased $46.0 million, period-end loans increased $15.1 million and period-end deposits decreased $1.7 million. We remain well-capitalized with total equity of $165.4 million at March 31, 2012, an increase of $11.2 million from March 31, 2011, and an increase of $1.5 million from December 31, 2011.

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 first quarter of 2012 was $18.6 million, an increase of $1.9 million from the comparable period last year, and a decrease of $1.5 million from the prior quarter. Fourth quarter 2011 net interest income (FTE) was impacted by a significant increase in the accretion of yield and fair value discounts on the acquired loan portfolios. Our net interest margin (FTE) decreased by 7 basis points from the first quarter of 2011 to 3.80%. Compared to the fourth quarter of 2011, our net interest margin (FTE) decreased 38 basis points from 4.18%.

During the first quarter of 2012, the accretion of yield and fair value discounts totaled $1.5 million, compared to $1.4 million in the first quarter of 2011, and $3.1 million in the fourth quarter of 2011. The additional accretion during the fourth quarter of 2011 was due to accretion on the performing Blue Ridge loan portfolio, utilizing a level-yield basis over the economic life of the loans, and the adjustment of cash flows on the Beach First loan portfolio.

During the first quarter of 2012, our average yield on interest-earning assets (FTE) decreased 22 basis points while the cost of average interest-bearing liabilities decreased 16 basis points when compared to the first quarter of 2011. When compared to the fourth quarter of 2011, our yield on average earning assets decreased by 37 basis points, while the cost of average interest-bearing liabilities increased 2 basis points.

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Total interest income (FTE) increased $2.0 million for the first quarter of 2012 when compared to the same quarter of 2011. During the first quarter of 2012, average loans increased $191.3 million while the average yield on loans decreased by 9 basis points and average investment securities decreased $6.3 million while the average yield on investment securities decreased 53 basis points compared to the first quarter of 2011. Average loans as a percentage of interest-earning assets increased to 80.7% for the quarter ended March 31, 2012, compared to 79.6% for the prior year quarter. In addition, the slight decrease in net interest margin (FTE) was primarily due to the continued low rate environment and the overall decrease in average rates for interest-earning assets. See the interest rate/volume table below for the individual component changes.

Total interest expense increased $203,000 for the first quarter of 2012 when compared to the same quarter of 2011. Rates paid on time deposits decreased by 61 basis points, while average time deposits increased by $146.9 million, primarily from our fourth quarter 2011 acquisitions. Our average demand deposits increased by $88.2 million, with rates paid on demand deposits increasing 25 basis points. Interest expense on borrowings increased by $43,000, with lower average outstanding balances being off-set by an increase of 46 basis points in the average rate during the comparable periods.

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 (dollars in thousands):

	Three Months Ended							Three Months Ended
	March 31, 2012							March 31, 2011
	Average				Average			Average				Average
	balance		Interest		rate			balance		Interest		rate
Interest-earning assets:
Loans and leases	$	1,704,459	$	23,260		5.49	%	$	1,513,121	$	20,822		5.58	%
Loans held for sale		15,491		117		3.04	%		2,818		27		3.89	%
Investment securities, taxable		119,347		1,332		4.49	%		127,003		1,538		4.91	%
Investment securities, tax-exempt*		226,845		3,792		6.72	%		225,477		4,097		7.37	%
Interest-earning balances and other		46,849		43		0.37	%		33,155		33		0.40	%
Total interest-earning assets		2,112,991		28,544		5.43	%		1,901,574		26,517		5.66	%
Other assets		302,648							248,862
Total assets	$	2,415,639						$	2,150,436
Interest-bearing liabilities:
Demand deposits	$	897,284		3,616		1.62	%	$	809,095		2,734		1.37	%
Savings deposits		39,587		43		0.44	%		36,535		37		0.41	%
Time deposits		1,034,249		4,052		1.58	%		887,338		4,780		2.18	%
Borrowings		125,624		856		2.74	%		144,783		813		2.28	%
Total interest-bearing liabilities		2,096,744		8,567		1.64	%		1,877,751		8,364		1.81	%
Non-interest-bearing deposits		152,239							110,957
Other liabilities		8,542							9,478
Shareholders' equity		158,114							152,250
Total liabilities and shareholder's equity	$	2,415,639						$	2,150,436
Net interest income and
interest rate spread*			$	19,977		3.79	%			$	18,153		3.85	%
Net interest margin*						3.80	%						3.87	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $1.4 million and $1.5 million for the three months ended March 31, 2012 and 2011, 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 (dollars in thousands).

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	Three Months Ended March 31, 2012 vs. 2011
	Increase (decrease) due to
	Volume			Rate			Total
Interest income:
Loans and leases	$	2,611		$	(173	)	$	2,438
Loans held for sale		108			(18	)		90
Investment securities, taxable		(89	)		(117	)		(206	)
Investment securities, tax-exempt*		24			(329	)		(305	)
Interest-earning balances and other		13			(3	)		10
Total interest income		2,667			(640	)		2,027
Interest expense:
Deposits:
Demand deposits		325			557			882
Savings deposits		3			3			6
Time deposits		681			(1,409	)		(728	)
Borrowings		(119	)		162			43
Total interest expense		890			(687	)		203
Net interest income increase	$	1,777		$	47		$	1,824

* 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 $5.2 million in the first quarter of 2012 compared to a provision for loan losses of $3.5 million in the first quarter of 2011.Of the $5.2 million in provision expense, $3.6 million related to legacy non-covered loans and $1.6 million in related loss-share loans. We recorded a $7.8 million allowance for loan losses for loss-share loans, of which $6.3 million was recorded through a FDIC indemnification asset and the remaining $1.6 million, representing 20% of the total provision, was recorded through our provision expense.

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A summary of activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011 is as follows (dollars in thousands):

	Three Months Ended
	March 31,
	2012		2011
Balance at beginning of period	$	31,008	$	24,813
Provision charged to operations		5,179		3,500
Provision provided from indemnification asset		6,258		-
Loans charged-off:
Commercial real estate		1,714		573
Commercial construction		2,164		2,698
Commercial and industrial		725		287
Residential construction		17		508
Residential mortgage		1,339		303
Consumer and other		24		-
Total loans charged-off		5,983		4,369
Recoveries of loans:
Commercial real estate		13		1
Commercial construction		189		19
Commercial and industrial		32		353
Residential construction		-		4
Residential mortgage		23		3
Consumer and other		3		1
Total  loan recoveries		260		381
Net charge-offs		5,723		3,988
Balance at end of period	$	36,722	$	24,325

Allowance for Loan Losses and Asset Quality

The allowance for loan losses was $36.7 million at March 31, 2012, and $31.0 million at December 31, 2011. Loan loss reserves to total period-end loans were 2.13% and 1.81% at March 31, 2012 and December 31, 2011, respectively, compared to 1.59% reported at March 31, 2011. The increased levels of allowance for loan losses are from our continued identification and workout efforts to move forward with the highest priority. We are still experiencing elevated credit costs due to a soft economy, and the local and national economies have yet to produce a robust recovery. Excluding the loans acquired that are marked to fair value, loan loss reserves to period-end loans not covered by loss-share decreased from 1.76% and 1.98% reported at December 31, 2011 and March 31, 2011,respectively, to 1.75% at March 31, 2012.

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 our Annual Report.

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 our 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 March 31, 2012, nonperforming assets not covered by loss-share agreements were $42.8 million, or 2.08% of total assets, compared to $40.4 million, or 1.93% of total assets at December 31, 2011 and $55.8 million, or 3.03% of total assets at March 31, 2011. Nonperforming assets, including assets covered under loss-share agreements, were $157.2 million, or 6.53% of total assets at March 31, 2012, compared to $161.2 million, or 6.57% at December 31, 2011 and $141.0 million, or 6.54% of total assets at March 31, 2011. 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 $17.6 million at March 31, 2012, a decrease of $1.9 million from December 31, 2011 and a decrease of $16.5 million from March 31, 2011. Nonaccrual loans, including covered loans, were $87.9 million at March 31, 2012. At March 31, 2012, OREO increased to $68.8 million, an increase of $311,000 from December 31, 2011 and an increase of $31.3 million from March 31, 2011. The increase from March 31, 2012 when compared to March 31, 2011 was primarily due to the $30.1 million of OREO resulting from the Blue Ridge acquisition that are covered by loss-share agreements. At March 31, 2012, our OREO properties primarily consisted of $31.1 million of commercial and multifamily properties, $23.9 million of residential 1-4 family properties and $13.8 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. We are actively marketing all of its OREO properties.

The following is a summary of nonaccrual loans at the periods presented (dollars in thousands):

	March 31,		December 31,		March 31,
	2012		2011		2011
Commercial real estate	$	24,769	$	25,889	$	35,847
Commercial construction		27,377		28,196		37,229
Commercial and industrial		2,212		3,132		3,711
Total commercial		54,358		57,217		76,787
Residential construction		2,112		1,727		2,247
Residential mortgage		31,181		28,263		24,297
Consumer and other		208		89		93
Total nonaccrual loans	$	87,859	$	87,296	$	103,424
Nonaccrual loans covered by loss-share	$	70,305	$	67,854	$	69,377

We place 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 (dollars in thousands):

	March 31,		December 31,		March 31,
	2012		2011		2011
Residential 1-4 family properties	$	23,862	$	29,617	$	7,354
Multifamily properties		459		385		1,063
Commercial properties		30,661		26,796		18,077
Construction, land development and other land		13,833		11,706		10,980
Total OREO	$	68,815	$	68,504	$	37,474
OREO covered by loss-share	$	43,603	$	47,577	$	15,811

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At March 31, 2012, non-covered loans that were restructured or modified and were performing to the restructured terms and not 90 days past due totaled $29.6 million, a decrease of $11.9 million from December 31, 2011 and an increase of $3.8 million from March 31, 2011. The decrease during the first quarter of 2012, when compared to the fourth quarter of 2011, was due to performing TDRs that were removed from reporting disclosure due to satisfactory performance and reporting requirements.

Net charge-offs for the first quarter of 2012 were $5.7 million, as compared with net charge-offs of $4.0 million for the first quarter of 2011. Expressed as an annualized percentage of average loans outstanding to non-covered portion of charge-offs, net charge-offs were 0.89% and 1.07% for the three months ended March 31, 2012 and 2011, respectively. The non-covered portion represents the non-covered charge-offs and the 20% portion of the charge-offs relating to loans covered under loss-share agreements. The majority of the charge-offs are from our commercial loan portfolios.

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:

	March 31,
	2012			2011
Net charge-offs to average loans, non-covered portion (annualized)		0.89	%		1.07	%
Allowance for loan losses to total loans		2.13	%		1.59	%
Not covered by loss-share		1.75	%		1.98	%
Nonperforming loans to total loans		5.13	%		6.77	%
Not covered by loss-share		1.24	%		2.78	%

Non-Interest Income

Non-interest income was $5.8 million for the first quarter of 2012 and $12.2 million for the fourth quarter of 2011, compared to $2.4 million for the prior year first quarter. Included in non-interest income for the first quarter of 2012 was $1.6 million of net gains on sales of investment securities, and $1.2 million of income associated with FDIC receivable and related loss-share receipts. Excluding the sales of investment securities and the FDIC related income, non-interest income was $3.0 million for the current quarter, an increase of 45.2% from the $2.1 million reported for the first quarter of 2011 and consistent with the $3.0 million reported in the fourth quarter of 2011.

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In late 2008, we entered into a leverage transaction that resulted in investment securities being purchased, with yields in excess of 5%, and Fed Funds based funding being locked in at an effective cost of 2.95% over the five-year period. Much of this income was used to fund organic expansion in the Charlotte and Raleigh markets. As we enter the final two years of the transaction term, as planned, we are liquidating the purchased investment securities to fund core loan growth in these markets. During the quarter, the caplet costs associated with the hedged funding transaction was $1.9 million, which is included in interest expense on demand deposits, while the gains on sales of securities associated with the related liquidation of the hedged investment securities totaled $1.6 million. As we continue to liquidate our hedged securities position, it is anticipated that these gains will partially offset the related cap cost over the coming quarters.

Mortgage fees generated from our mortgage market operations in the first quarter of 2012 increased $754,000, or 208%, compared to the first quarter of 2011.During the second quarter of 2011, our original mortgage origination platform was terminated and replaced with a more robust platform that increased mortgage origination volume and fee income.

Service charges on deposit accounts decreased $89,000, or 10.8%, in the first quarter of 2012, compared to the first quarter of 2011. Our overall growth in volume of the related service charges was offset by lower overdraft and NSF fees due to new Federal Reserve Board’s consumer protection regulations.

Investment brokerage fees increased $83,000 in the first quarter of 2012, compared to the first quarter of 2011. During 2010, we began winding down the original investment platform and had our new investment platform operational during 2011.

In addition, our new SBA division became operational in the third quarter of 2011, with $228,000 of SBA fee income recorded during the first quarter of 2012. This is included in the other non-interest income category.

The following are the components of non-interest income for the periods presented (dollars in thousands):

	Three Months Ended
	3/31/2012		3/31/2011
Mortgage fees	$	1,116	$	362
Service charges		738		827
Investment brokerage fees		240		157
Earnings on bank-owned life insurance		410		425
Gain on sale of available for sale investment securities, net		1,619		57
Other		1,686		597
Total non-interest income	$	5,809	$	2,425

Non-Interest Expense

We strive 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 we have experienced has been the continuous investment in the core banking franchise, both in people and locations. As we strive 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 increased $3.1 million, or 21.0%, during the first quarter of 2012 when compared to the first quarter of 2011. During the first quarter of 2012, there was $1.2 million of additional non-interest expense associated with acquisition and project related costs, including the Blue Ridge and Regent acquisitions.

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Our personnel costs have increased $2.7 million, or 36.8%, during the first quarter of 2012 when compared to first quarter of 2011. These increases in personnel costs are attributable to the additional full-time equivalent employees from the fourth quarter 2011 acquisitions, as well as increases attributable to continued investments in the mortgage originations and SBA lending platforms, and overall franchise growth. All of these personnel additions are expected to contribute to our long-term focus on driving both top line and fee income growth.

Occupancy and furniture/equipment expenditures increased by $622,000, or 39.6%, for the first quarter of 2012 when compared to the first quarter of 2011. These increases are primarily due to increased costs and additional facilities associated with our growth into new markets and from our acquisitions during the fourth quarter of 2011. The increase in the number of locations has also escalated utilities, lease expenses, and property taxes in 2012.

Data processing and supply expenses increased by $134,000, or 23.8%, for the first quarter of 2012 when compared to the first quarter of 2011. These increases are due to the additional processing costs from account volume from the fourth quarter 2011 acquisitions and successful systems conversions of Blue Ridge and Regent during the first quarter of 2012.

Professional and other services increased by $349,000, or 35.0%, for the first quarter of 2012 when compared to the same quarter a year ago, primarily from costs associated with our acquisitions and franchise growth.

FDIC insurance assessments decreased $210,000, or 25.9%, for the first quarter of 2012 when compared to the first quarter of 2011. These decreases were due to lower rate assessments as a result of new rules finalized by the FDIC, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which redefined the FDIC assessment rates.

Loan, foreclosure and collection expenses decreased $600,000 for the first quarter of 2012 when compared to the first quarter of 2011,primarily from lower valuation adjustments on OREO properties. For the first quarters of 2012 and 2011, we recorded $703,000 and $1.0 million, respectively, of other real estate valuation adjustments.

Other non-interest expenses for the first quarter of 2012 increased $167,000, or 15.8%, compared to the first quarter of 2011. This increase was primarily froman $183,000 loss from the sale of a vacant bank branch.

The following are the components of non-interest expense for the periods presented (dollars in thousands):

	Three Months Ended
	3/31/2012		3/31/2011
Salaries and employee benefits	$	9,901	$	7,239
Occupancy and equipment		2,194		1,572
Data processing and supply		697		563
Advertising and business development		388		419
Professional and other services		1,345		996
FDIC insurance assessments		600		810
Loan, foreclosure and collection		1,476		2,076
Other		1,224		1,057
Total  non-interest expense	$	17,825	$	14,732

Income Taxes

We generate 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 March 31, 2012, we recorded income tax benefit of $308,000 compared to an income tax benefit of $647,000 for the same period in 2011. The change in benefit is attributable to the increased income that was recorded during the periods.

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Balance Sheet Analysis

Total assets at March 31, 2012 were $2.41 billion, a decrease of $46.0 million when compared to total assets at December 31, 2011. Total earning assets, which are comprised of interest-earning balances at banks, investment securities, loans held for sale and loans, were $2.13 billion at March 31, 2012 and $2.15 billion at December 31, 2011. Earning assets serve as our primary revenue source. Total liquid assets, which include cash and cash equivalents and securities available for sale at March 31, 2012 were 12.0% of total assets, or $289.4 million, a $48.7 million decrease from the $338.1 million reported at December 31, 2011.

Investment Securities

Investment securities were $342.7 million at March 31, 2012 and $379.3 million at December 31, 2011. The decrease of $36.5 million was used to fund our loan growth and to reduce our short-term borrowings. 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. We also maintain portfolios of securities consisting of CMOs issued or guaranteed by U.S. government agencies. Our investment portfolios are comprised of high quality securities that are designed to enhance liquidity while providing acceptable rates of return.

Loans

Loans increased by $15.1 million to $1.72 billion at March 31, 2012 from $1.71 billion at December 31, 2011. For the three months ended March 31, 2012, average total loans were $1.70 billion, compared to $1.51 billion for the same period in 2011. The majority of this increase resulted from the acquisitions of Blue Ridge and Regent in the fourth quarter of 2011. At March 31, 2012, loans covered under loss-share agreements amounted to $307.1 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, 2011. Increases in our residential construction portfolio of $2.5 million were offset by reductions in our commercial construction by $13.0 million during the three months ended March 31, 2012. The Company’s commercial real estate portfolio increased from $858.5 million at December 31, 2011 to $891.4 million at March 31, 2012, with increases of $28.2 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. AtMarch 31, 2012, deposits totaled $2.12 billion, a decrease of $1.7 million, or 0.08%, from year-end 2011.While overall deposit growth continues to be an emphasis, the more important element is the increase in transactional account deposits. Over the three-month period, transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $64.6 million, while time deposits decreased $66.3 million. For the three months ended March 31, 2012, average deposits were $2.12 billion, compared to $1.84 billion for the same period in 2011.The majority of this increase resulted from the acquisitions of Blue Ridge and Regent in the fourth quarter of 2011.At March 31, 2012, time deposits were 47.1% of total deposits, compared to 50.2% at December 31, 2011.

Borrowings

We continue to utilize borrowings to support balance sheet management and growth, and as such, during the three months ended March 31, 2012 we decreased short-term borrowings by $46.1 million, primarily from the repayment of short-term funding through FHLB advances. Short-term borrowings decreased from $70.2 million at December 31, 2011 to $24.1 million at March 31, 2012.Short-term borrowings consist of FHLB term advances with remaining maturities of less than one year, Federal funds purchased from correspondent banks, securities sold under repurchase agreements and an unsecured revolving line of credit. At March 31, 2012 and December 31, 2011, long-term debt outstanding totaled $93.7 million. Long-term debt at March 31, 2012 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.

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Shareholders’ Equity

Our capital position remains above all regulatory thresholds to be considered “well capitalized”. At March 31, 2012, shareholders’ equity totaled $165.4 million, an increase of $1.5 million from the December 31, 2011 balance. The primary changes in shareholders’ equity were an increase in net income for the three-month period in the amount of $1.7 million, a net increase in the unrealized gains on securities available for sale and cash flow hedging activities in the amount of $551,000, a decrease of $456,000 for cash dividends paid to common shareholders and $481,000 of preferred stock dividends and accretion, net. At March 31, 2012,the Bank’s and Company’s capital ratios exceeded the minimum thresholds established for a “well-capitalized” bank by regulatory measures.

Liquidity

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

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

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

Our cash liquidity position aggregated $289.4 million at March 31, 2012, compared to $338.1 million at December 31, 2011. Supplementing customer deposits as a source of funding, we have the ability to borrow up to $237 million from the FHLB of Atlanta, with $66.0 million outstanding at March 31, 2012. We also have the ability to borrow from the Federal Reserve Discount Window in the amount of $100 million, with no outstanding balances. These amounts are based on assets currently pledged. In addition to the above, we have $186 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 $10.0 million, with $10.0 million outstanding. The Company was in compliance with all covenants associated with its unsecured revolving line of credit as of March 31, 2012.

In addition to these liquidity sources, we have access to unsecured lines of credit from correspondent banks for short-term liquidity needs totaling $61 million, and the Promontory Interfinancial Network weekly funds auctions where we have another $361 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

Our contractual obligations were scheduled in our Annual Report on Form 10-K for the year ended December 31, 2011. 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 and Blue Ridge acquisitions, there have been no material changes since year-end.

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Capital Resources

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation to ensure capital adequacy. As of March 31, 2012, the Company and the Bank were “well capitalized” under this regulatory framework. There have been no conditions or events since March 31, 2012 that management believes have changed either the Company’s or the Bank’s capital classifications.

AtMarch 31, 2012, the Tier I risk-based capital ratio for the Bank was 10.20%, the total risk-based capital ratio was 11.76% and all other capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures. AtMarch 31, 2012, the Company’s total risk-based capital ratio was 11.17%, 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, 2011, 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, 2011 to March 31, 2012.

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, 2011, 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:	May 10, 2012	By:	/s/ W. Swope Montgomery, Jr.
			W. Swope Montgomery, Jr.
			President and Chief Executive Officer
Date:	May 10, 2012	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) and 15d-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) and 15d-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 March 31, 2012, filed on May 10, 2012, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011, (iv) the Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, 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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