BNC Bancorp 10Q 2012 Q2 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 June 30, 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). YesxNo¨

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 August 6, 2012, the registrant had outstanding 15,324,186 shares of Common Stock, no par value.

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2012 and December 31, 2011	3

	Consolidated Statements of Income Three Months and Six Months Ended June 30, 2012 and 2011	4

	Consolidated Statements of Comprehensive Income Three Months and Six Months Ended June 30, 2012 and 2011	5

	Consolidated Statements of Shareholders’ Equity Six Months Ended June 30, 2012 and 2011	6

	Consolidated Statements of Cash Flows Six Months Ended June 30, 2012 and 2011	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	49

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 6.	Exhibits	50

SIGNATURES		51

EXHIBIT INDEX		52

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PART I.Financial Information

Item 1 - Financial Statements

BNC BANCORP
CONSOLIDATED BALANCE SHEETS

	June 30, 2012			December 31,
	(Unaudited)			2011*
	(In thousands, except share data)
Assets
Cash and due from banks	$	23,123		$	14,523
Interest-earning deposits in other banks		46,765			41,306
Investment securities available for sale, at fair value		233,198			282,221
Investment securities held to maturity, at amortized cost (fair value of $102,831 and $96,342 at June 30, 2012 and December 31, 2011, respectively)		101,184			97,036
Federal Home Loan Bank stock, at cost		7,359			9,159
Loans held for sale		17,793			9,596
Loans:
Covered under loss-share agreements		284,579			320,033
Not covered under loss-share agreements		1,475,708			1,389,450
Less allowance for loan losses		(40,856	)		(31,008	)
Net loans		1,719,431			1,678,475
Accrued interest receivable		9,110			10,174
Premises and equipment, net		46,044			43,220
Other real estate owned:
Covered under loss-share agreements		35,105			47,577
Not covered under loss-share agreements		23,655			20,927
FDIC indemnification asset		72,483			91,851
Investment in bank-owned life insurance		49,099			48,294
Goodwill and other intangible assets, net		28,943			29,115
Other assets		29,523			31,456
Total assets	$	2,442,815		$	2,454,930
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing demand	$	180,238		$	145,688
Interest-bearing demand		960,597			909,402
Time deposits		948,658			1,063,097
Total deposits		2,089,493			2,118,187
Short-term borrowings		12,471			70,211
Long-term debt		93,713			93,713
Accrued expenses and other liabilities		9,599			8,964
Total liabilities		2,205,276			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		30,477			30,237
Series B, Mandatorily Convertible Non-Voting Preferred Stock, $10 stated value, 1,804,566 shares issued and outstanding		17,161			17,161
Series B-1, Mandatorily Convertible Cumulative Non-Voting Perpetual Preferred Stock, $1,000 liquidation value per share, 29,315 shares issued and outstanding		40,688			-
Series C, Mandatorily Convertible Cumulative Non-Voting Perpetual Preferred Stock, $1,000 liquidation value per share, 43,185 shares issued and outstanding		27,620			-
Common stock, no par value; authorized 80,000,000 shares; 9,153,886 and 9,100,890 issued and outstanding at June 30, 2012 and December 31, 2011, respectively		87,914			87,421
Common stock warrants		2,412			2,412
Retained earnings		27,517			25,614
Stock in directors rabbi trust		(3,018	)		(2,505	)
Directors deferred fees obligation		3,018			2,505
Accumulated other comprehensive income		3,750			1,010
Total shareholders' equity		237,539			163,855
Total liabilities and shareholders’ equity	$	2,442,815		$	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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(In thousands, except per share data)
Interest Income
Loans, including fees	$	22,745		$	20,983		$	46,122		$	41,832
Investment securities:
Taxable		1,193			1,426			2,525			2,964
Tax-exempt		2,312			2,350			4,739			4,972
Interest-earning balances and other		48			28			91			61
Total interest income		26,298			24,787			53,477			49,829
Interest Expense
Demand deposits		3,484			2,613			7,143			5,384
Time deposits		3,810			4,577			7,862			9,357
Short-term borrowings		129			96			261			184
Long-term debt		719			735			1,443			1,460
Total interest expense		8,142			8,021			16,709			16,385
Net Interest Income		18,156			16,766			36,768			33,444
Provision for loan losses, net		8,330			3,032			13,509			6,532
Net interest income after provision for loan losses		9,826			13,734			23,259			26,912
Non-Interest Income
Mortgage fees		1,378			243			2,494			605
Service charges		749			868			1,487			1,695
Investment brokerage fees		229			227			469			384
Earnings on bank-owned life insurance		395			420			805			845
Gain of sale of investment securities, net		-			79			1,619			136
Gain on acquisition		7,734			-			7,734			-
Other		1,197			534			2,883			1,131
Total non-interest income		11,682			2,371			17,491			4,796
Non-Interest Expense
Salaries and employee benefits		9,692			7,623			19,593			14,862
Occupancy		1,078			815			2,198			1,791
Furniture and equipment		952			696			2,026			1,292
Data processing and supply		696			601			1,393			1,164
Advertising and business development		375			507			763			926
Insurance, professional and other services		1,221			874			2,566			1,870
FDIC insurance assessments		500			810			1,100			1,620
Loan, foreclosure and other real estate owned expenses		3,145	��		1,916			4,621			3,992
Other		1,518			1,051			2,742			2,108
Total non-interest expense		19,177			14,893			37,002			29,625
Income before income tax expense (benefit)		2,331			1,212			3,748			2,083
Income tax expense (benefit)		40			(381	)		(268	)		(1,028	)
Net Income		2,291			1,593			4,016			3,111
Less preferred stock dividends and discount accretion		601			601			1,202			1,202
Net Income Available to Common Shareholders	$	1,690		$	992		$	2,814		$	1,909

Basic earnings per common share	$	0.13		$	0.10		$	0.24		$	0.19
Diluted earnings per common share	$	0.13		$	0.10		$	0.24		$	0.19
Dividends declared and paid per common share	$	0.05		$	0.05		$	0.10		$	0.10

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(In thousands)

Net income	$	2,291		$	1,593		$	4,016		$	3,111

Other comprehensive income:
Investment securities:
Unrealized holding gains on investment securities available for sale		2,041			6,276			2,985			7,046
Tax effect		(786	)		(2,419	)		(1,150	)		(2,716	)
Reclassification of gains recognized in net income		-			(79	)		(1,619	)		(136	)
Tax effect		-			30			624			52
Amortization of unrealized gains on investment securities transferred from available for sale to held to maturitiy		(135	)		-			(269	)		-
Tax effect		52			-			104			-
Net of tax amount		1,172			3,808			675			4,246

Cash flow hedging activities:
Unrealized holding losses		(218	)		(3,113	)		(432	)		(2,755	)
Tax effect		83			1,200			166			1,062
Reclassification of losses recognized in net income		1,874			1,022			3,793			2,044
Tax effect		(722	)		(394	)		(1,462	)		(788	)
Net of tax amount		1,017			(1,285	)		2,065			(437	)
Total other comprehensive income		2,189			2,523			2,740			3,809
Total comprehensive income	$	4,480		$	4,116		$	6,756		$	6,920

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

																							Directors		Accumulated
							Common		Preferred		Preferred		Preferred		Preferred					Stock in			deferred		other com-
	Common stock						stock		stock		stock		stock		stock		Retained			directors			fees		prehensive
	Shares			Amount			warrants		Series A		Series B		Series B-1		Series C		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		-			-			-		-		-		-		-		3,111			-			-		-			3,111
Directors deferred fees		-			-			-		-		-		-		-		-			(93	)		93		-			-
Other comprehensive income, net of tax		-			-			-		-		-		-		-		-			-			-		3,809			3,809
Common stock issued pursuant to:
Exercise of stock options		5,000			41			-		-		-		-		-		-			-			-		-			41
Stock-based compensation		3,999			148			-		-		-		-		-		-			-			-		-			148
Dividend reinvestment plan		13,036			103			-		-		-		-		-		-			-			-		-			103
Cash dividends:
Common stock, $.10 per share		-			-			-		-		-		-		-		(905	)		-			-		-			(905	)
Preferred stock, net of accretion		-			-			-		240		-		-		-		(1,202	)		-			-		-			(962	)
Balance, June 30, 2011		9,075,395		$	87,083		$	2,412	$	29,997	$	17,161	$	-	$	-	$	23,905		$	(1,822	)	$	1,822	$	(2,989	)	$	157,569

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		-			-			-		-		-		-		-		4,016			-			-		-			4,016
Directors deferred fees		-			-			-		-		-		-		-		-			(513	)		513		-			-
Other comprehensive income, net of tax		-			-			-		-		-		-		-		-			-			-		2,740			2,740
Common stock issued pursuant to:
Exercise of stock options		48,092			286			-		-		-		-		-		-			-			-		-			286
Current income tax benefit		-			17			-		-		-		-		-		-			-			-		-			17
Shares traded to exercise options		(19,189	)		(148	)		-		-		-		-		-		-			-			-		-			(148	)
Stock-based compensation		10,823			237			-		-		-		-		-		-			-			-		-			237
Dividend reinvestment plan		13,270			101			-		-		-		-		-		-			-			-		-			101
Preferred stock issued, net		-			-			-		-		-		40,688		27,620		-			-			-		-			68,308
Cash dividends:
Common stock, $.10 per share		-			-			-		-		-		-		-		(911	)		-			-		-			(911	)
Preferred stock, net of accretion		-			-			-		240		-		-		-		(1,202	)		-			-		-			(962	)
Balance, June 30, 2012		9,153,886		$	87,914		$	2,412	$	30,477	$	17,161	$	40,688	$	27,620	$	27,517		$	(3,018	)	$	3,018	$	3,750		$	237,539

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended
	June 30,
	2012			2011
	(In thousands)
Operating Activities
Net income	$	4,016		$	3,111
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		13,509			6,532
Depreciation and amortization		1,384			996
Amortization of premiums, net		447			246
Amortization of core deposit intangible		265			196
Accretion of fair value purchase accounting adjustments		(2,173	)		(2,537	)
Stock-based compensation		237			148
Deferred compensation		420			236
Earnings on bank-owned life insurance		(805	)		(845	)
Gain on acquisition		(7,734	)		-
Net gain on investment securities available for sale		(1,619	)		(136	)
Loss on sale of premises and equipment		183			-
Losses on other real estate owned		2,631			1,818
Gain on sale of loans (mortgage fees)		(2,494	)		(605	)
Origination of loans held for sale		(113,304	)		(25,279	)
Proceeds from sales of loans held for sale		107,601			30,726
Decrease in accrued interest receivable		1,189			1,655
Decrease in FDIC indemnification asset		33,331			10,310
(Increase) decrease in other assets		847			(1,737	)
Increase (decrease) in accrued expenses and other liabilities		240			(2,832	)
Other operating activities, net		3,793			2,049
Net cash provided by operating activities		41,964			24,052
Investing Activities
Purchases of investment securities available for sale		(9,395	)		(17,741	)
Purchases of investment securities held to maturity		(4,584	)		-
Proceeds from sales of investment securities available for sale		39,571			26,859
Proceeds from maturities and prepayments of investment securities available for sale		21,552			17,172
(Purchase) redemption of Federal Home Loan Bank stock		1,912			(202	)
Net increase in loans		(54,341	)		(47,685	)
Purchases of premises and equipment		(4,686	)		(4,939	)
Proceeds from sales of premises and equipment		283			-
Investment in other real estate owned		(780	)		(261	)
Proceeds from sales of other real estate owned		25,600			10,486
Net cash received from acquisitions		29,794			-
Net cash provided by (used in) investing activities		44,926			(16,311	)
Financing Activities
Net increase (decrease) in deposits		(81,765	)		22,513
Net decrease in short-term borrowings		(57,740	)		(28,075	)
Preferred stock issued, net of issuance costs		68,308			-
Common stock issued from exercise of stock options		138			41
Common stock issued pursuant to dividend reinvestment plan		101			103
Cash dividends paid, net of accretion		(1,873	)		(1,867	)
Net cash used in financing activities		(72,831	)		(7,285	)
Net increase in cash and cash equivalents		14,059			456
Cash and cash equivalents, beginning of period		55,829			30,087
Cash and cash equivalents, end of period	$	69,888		$	30,543

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)

	Six Months Ended
	June 30,
	2012		2011
	(In thousands)

Supplemental Statement of Cash Flows Disclosure
Interest paid	$	16,856	$	14,606
Income taxes paid		1,606		1,101
Summary of Noncash Investing and Financing Activities
Increase in fair value of investment securities available for sale, net of tax	$	675	$	4,246
Increase (decrease) in fair value of cash flow hedge, net of tax		2,065		(437	)
Transfer of loans to foreclosed real estate		23,716		21,932
FDIC indemnification asset increase for losses, net		9,520		1,820
Acquisition:				.
Fair value of assets acquired		60,915		-
Fair value of liabilities assumed		56,163		-
Net assets acquired (net after-tax gain)		4,752		-

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BNC BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and six months ended June 30, 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 (“BNC”). All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts for prior periods have been reclassified to conform to current period presentation.

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 Annual Report on Form 10-K.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. The accounting principles and methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.

NOTE 2 – ACQUISITIONS

FDIC-Assisted Acquisition

On June 8, 2012, BNC acquired certain assets and liabilities of Carolina Federal Savings Bank, Charleston, South Carolina, a federal thrift organized under the laws of the United States and headquartered in Charleston, South Carolina (“Carolina Federal”), from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver of Carolina Federal (the “Acquisition”), pursuant to a purchase and assumption agreement dated as of June 8, 2012 (the “Agreement”). Carolina Federal operated two branches in the Charleston market, allowing BNC to further expand its geographical footprint throughout coastal South Carolina.

Under the terms of the Agreement, BNC acquired approximately $32 million in performing loans and assumed approximately $53 million in local deposits from the FDIC as receiver of Carolina Federal. There is no loss sharing arrangement with the FDIC with respect to this transaction. The FDIC paid BNC an asset discount amount of $10.7 million at closing and the deposits were acquired without a premium.

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

BNC has determined this acquisition constitutes a business combination as defined by FASB ASC Topic 805:Business Combinations(“ASC Topic 805”), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. BNC has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with ASC Topic 805.

The estimated fair value is subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair value becomes available. During this one year period, the causes of any changes in cash flow estimates are considered to determine whether the change results from circumstances that existed as of the acquisition date or if the change results from an event that occurred after the date of acquisition.

- 9 -

A summary of the assets received and liabilities assumed from the FDIC for Carolina Federal and the estimated fair value adjustments resulting in the net after-tax gain are as follows (dollars in thousands):

	June 8, 2012
	As recorded by			Fair value			As recorded
	Carolina Federal			adjustments			by BNC
Assets
Cash and due from banks	$	8,394		$	-		$	8,394
Federal Home Loan Bank stock, at cost		112			-			112
Loans		32,328			(2,862	)(1)		29,466
Accrued interest receivable		124			-			124
Core deposit intangible		-			93	(2)		93
Other assets		35			1,291	(3)		1,326
Total assets acquired	$	40,993		$	(1,478	)	$	39,515
Liabilities
Deposits	$	52,992		$	148	(4)	$	53,140
Deferred tax liability		-			2,981	(5)		2,981
Other liabilities		42			-			42
Total liabilities assumed		53,034			3,129			56,163
Excess of liabilitites assumed over assets acquired	$	(12,041	)
Aggregate fair value adjustments				$	(4,607	)
Cash received from the FDIC								21,400
Net assets acquired (net after-tax gain)							$	4,752

Explanation of fair value adjustments:

(1)- Adjustment for the fair value of the acquired loan portfolio.

(2)- Adjustment for the estimated value of the core deposit intangible.

(3)- Adjustment for amount due to BNC from the FDIC.

(4)- Adjustment for fair value of time deposits.

(5)- Adjustment for the deferred tax liability from the acquisition gain.

In connection with the transaction, BNC recorded $4.8 million in net after-tax gain ($7.7 million pre-tax gain) associated with the acquisition. The net gain represents the excess of the estimated fair value of the assets acquired, including cash received from the FDIC, over the estimated fair value of the liabilities assumed and is influenced significantly by the FDIC-assisted transaction process. Under the FDIC-assisted transaction process, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer. To the extent there are additional adjustments to the respective acquisition date fair values up to one year following the respective acquisition, there will be additional adjustments to the gain currently recorded.

NOTE 3 – ISSUANCE OF COMMON AND PREFERRED STOCK

On May 31, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with approximately 19 accredited investors and certain directors of the Company and their affiliates (the “Investors”). Pursuant to the Purchase Agreement, the Investors agreed to purchase an aggregate of 38,885 shares of the Company’s Mandatorily Convertible Cumulative Non-Voting Preferred Stock, Series C (the “Series C Preferred Stock”) at a price of $1,000 per share, and an aggregate of 8,200 shares of the Company’s Mandatorily Convertible Cumulative Non-Voting Preferred Stock, Series B-1 (the “Series B-1 Preferred Stock” and, together with the Series C Preferred Stock, the “Preferred Stock”) at a price of $1,000 per share. The purchase of the Series C Preferred Stock and the Series B-1 Preferred Stock was part of a private placement in which Aquiline BNC Holdings LLC (“Aquiline”) also participated (the “Private Placement”). As part of the Private Placement, Aquiline has agreed to purchase 21,115 shares of the Series B-1 Preferred Stock at a price of $1,000 per share and 4,300 shares of the Series C Preferred Stock at a price of $1,000 per share. The Aquiline Agreement also amends the terms of the Investment Agreement, dated June 14, 2010, by and between the Company and Aquiline.

- 10 -

The above private placement totaled $72.5 million and closed on June 8, 2012. Proceeds from the private placement, after deducting issuance costs, were $40.7 million and $27.6 million for Series B-1 Preferred Stock issued and Series C Preferred Stock issued, respectively. The amount of issuance costs for the Series B-1 Preferred Stock and Series C Preferred Stock was $2.5 million and $1.7 million, respectively.

On July 17, 2012, the Company’s shareholders approved, pursuant to NASDAQ Marketplace Rule 5635 and the terms of the Preferred Stock, the conversion of the Series C Preferred Stock into 6,168,966 shares of no par value Common Stock, and the conversion of the Series B-1 Preferred Stock into 4,187,646 shares of no par value Non-Voting Common Stock, in each case, at the conversion price of $7.00035. The conversion was effective on July 20, 2012.

NOTE 4 - 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 issued pursuant to 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 Company’s basic and diluted earnings per share amounts were calculated as follows (amounts in thousands, except per share data):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011

Net income available to common shareholders	$	1,690	$	992	$	2,814	$	1,909
Add: Cash dividends on convertible preferred stock		90		90		180		180
Net income available to participating common shareholders	$	1,780	$	1,082	$	2,994	$	2,089

Weighted average common shares - basic		11,744,896		9,065,302		10,425,423		9,060,611
Add: Effect of convertible preferred stock		1,804,566		1,804,566		1,804,566		1,804,566
Weighted average participating common shares - basic		13,549,462		10,869,868		12,229,989		10,865,177
Effects of dilutive Stock Rights		6,972		16,294		7,833		17,148
Weighted average participating common shares - diluted		13,556,434		10,886,162		12,237,822		10,882,325

Basic earnings per common share	$	0.13	$	0.10	$	0.24	$	0.19
Diluted earnings per common share	$	0.13	$	0.10	$	0.24	$	0.19

For the three and six months ended June 30, 2012, there were 669,927 shares of Stock Rights excluded from computing diluted shares outstanding because the exercise price exceeded the market price of the common shares outstanding. For the three and six months ended June 30, 2011, there were 677,590 shares of Stock Rights excluded in computing diluted shares outstanding because the exercise price exceeded the average share value for the periods.

- 11 -

NOTE 5 – INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities as of June 30, 2012 and December 31, 2011 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
June 30, 2012:	cost		gains		losses		value
Available for sale:
U.S. government agencies	$	26,901	$	562	$	-	$	27,463
State and municipals		120,889		9,818		8		130,699
Mortgage-backed securities:
Residential government sponsored		58,598		4,339		-		62,937
Other government sponsored		11,388		711		-		12,099
	$	217,776	$	15,430	$	8	$	233,198
Held to maturity:
State and municipals	$	95,184	$	2,833	$	26	$	97,991
Other debt securities		6,000		-		1,160		4,840
	$	101,184	$	2,833	$	1,186	$	102,831

			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 June 30, 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 in one year or less	$	1,342	$	1,387
Due after five through ten years		2,600		2,831
Due after ten years		213,834		228,980
	$	217,776	$	233,198

Held to maturity:
Due after one year through five years	$	887	$	895
Due after five through ten years		9,554		8,466
Due after ten years		90,743		93,470
	$	101,184	$	102,831

- 12 -

At June 30, 2012 and December 31, 2011, investment securities with an estimated fair value of approximately $142.0 million and $156.0 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

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 June 30,					Six Months Ended June 30,
	2012		2011			2012			2011

Proceeds from sales	$	-	$	2,961		$	39,571		$	26,859

Gross realized gains on sales	$	-	$	90		$	1,720		$	655
Gross realized losses on sales		-		(11	)		(101	)		(519	)
Total realized gains, net	$	-	$	79		$	1,619		$	136

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 June 30, 2012 and December 31, 2011 (dollars in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2012:	value		losses		value		losses		value		losses
Available for sale:
State and municipals	$	546	$	8	$	-	$	-	$	546	$	8
Mortgage-backed		-		-		-		-		-		-
	$	546	$	8	$	-	$	-	$	546	$	8
Held to maturity:
State and municipals	$	3,096	$	26	$	-	$	-	$	3,096	$	26
Other debt securities		-		-		4,840		1,160		4,840		1,160
	$	3,096	$	26	$	4,840	$	1,160	$	7,936	$	1,186

	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

At June 30, 2012, the unrealized losses relate to five state and municipal securities and two corporate debt securities. Of those, the corporate debt securities had continuous unrealized losses for more than twelve months. In determining if any credit losses were evident, the Company noted all of the state and municipal securities are investment grade as of June 30, 2012. In addition, the Company noted that the issuers of the corporate debt securities are financially sound and well capitalized. The Company does not intend to sell, and it is more likely than not that the Company would not be required to sell, these debt securities before the anticipated recovery of the amortized cost basis.

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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 June 30, 2012 and December 31, 2011, net of unearned income, are summarized below (dollars in thousands):

	June 30, 2012						December 31, 2011
	Covered		Non-covered				Covered		Non-covered
	loans		loans		Total		loans		loans		Total

Commercial real estate	$	126,143	$	803,193	$	929,336	$	135,242	$	722,826	$	858,068
Commercial construction		40,294		166,971		207,265		51,426		175,710		227,136
Commercial and industrial		13,493		127,196		140,689		16,402		124,479		140,881
Leases		-		12,492		12,492		-		12,806		12,806
Total commercial		179,930		1,109,852		1,289,782		203,070		1,035,821		1,238,891
Residential construction		5,713		22,171		27,884		3,992		25,740		29,732
Residential mortgage		95,966		333,968		429,934		109,058		317,949		427,007
Consumer and other		2,970		9,717		12,687		3,913		9,940		13,853
Total loans	$	284,579	$	1,475,708		1,760,287	$	320,033	$	1,389,450		1,709,483

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 and accretable yield of covered acquired loans as of and for the six months ended June 30, 2012 and the year ended December 31, 2011 is as follows (dollars in thousands):

	June 30, 2012						December 31, 2011
	Accretable			Carrying			Accretable			Carrying
	yield			amount			yield			amount

Balance at beginning of period	$	(8,387	)	$	320,033		$	(13,009	)	$	309,342
Additions due to acquisitions		-			-			-			65,587
Reductions from payments and foreclosures, net		-			(36,968	)		-			(62,573	)
Reclasses from non-accretable to accretable yield		-			-			(3,055	)		-
Accretion		1,514			1,514			7,677			7,677
Balance at end of period	$	(6,873	)	$	284,579		$	(8,387	)	$	320,033

The unpaid principal balance for covered loans was $323.2 million and $385.3 million at June 30, 2012 and December 31, 2011, respectively.

For the six months ended June 30, 2012, the acquisition date unpaid balance of loans acquired that did not have credit deterioration was $32.3 million with an estimated fair value of $29.4 million. The discount of $2.9 million will be amortized on a level-yield basis over the economic life of the loans. There were no loans acquired that were considered-credit impaired during the same period.

- 14 -

The Company has the ability to borrow funds from the FHLB and the Federal Reserve Bank. At June 30, 2012 and December 31, 2011, real estate loans with carrying values of $380.1 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 BNC 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.

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.

- 15 -

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.

An analysis of the allowance for loan losses for the three and six months ended June 30, 2012 and 2011 is as follows (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:
Three months ended:
Balance April 1, 2012	$	10,695		$	13,115		$	4,966		$	18	$	620		$	7,250		$	58		$	36,722
Charge-offs		(2,075	)		(5,525	)		(1,405	)		-		(163	)		(1,248	)		(87	)		(10,503	)
Recoveries		4			676			185			-		-			555			6			1,426
Provision (a)		2,630			2,864			1,845			-		193			681			117			8,330
Increase in FDIC indemnification asset (a)		3,081			-			-			-		-			1,800			-			4,881
Balance June 30, 2012	$	14,335		$	11,130		$	5,591		$	18	$	650		$	9,038		$	94		$	40,856

Six months ended:
Balance January 1, 2012	$	11,789		$	10,957		$	4,338		$	18	$	699		$	3,058		$	149		$	31,008
Charge-offs		(3,789	)		(7,689	)		(2,130	)		-		(180	)		(2,587	)		(111	)		(16,486	)
Recoveries		17			865			217			-		-			578			9			1,686
Provision (a)		2,912			4,717			2,798			-		131			2,904			47			13,509
Increase in FDIC indemnification asset (a)		3,406			2,280			368			-		-			5,085			-			11,139
Balance June 30, 2012	$	14,335		$	11,130		$	5,591		$	18	$	650		$	9,038		$	94		$	40,856

(a)

The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $1.0 million and $2.7 million for the three and six months ended June 30, 2012, respectively. This resulted in an increase in the FDIC indemnification asset of $4.9 million and $11.1 million for the three and six months ended June 30, 2012, respectively , 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 $5.9 million and $13.8 million for the three and six months ended June 30, 2012, respectively.

	Commercial			Commercial			Commercial						Residential			Residential			Consumer
2011	real estate			construction			and industrial			Leases			construction			mortgage			and other			Total
Allowance for loan losses:
Three months ended:
Balance April 1, 2011	$	10,614		$	4,735		$	3,398		$	-		$	731		$	4,645		$	202		$	24,325
Charge-offs		(2,533	)		(634	)		(491	)		-			(101	)		(330	)		(21	)		(4,110	)
Recoveries		56			-			3			16			7			27			17			126
Provision		1,118			1,793			91			19			(58	)		98			(29	)		3,032
Balance June 30, 2011	$	9,255		$	5,894		$	3,001		$	35		$	579		$	4,440		$	169		$	23,373

Six months ended:
Balance January 1, 2011	$	12,972		$	4,525		$	3,525		$	33		$	682		$	2,867		$	209		$	24,813
Charge-offs		(3,106	)		(3,332	)		(778	)		-			(609	)		(633	)		(21	)		(8,479	)
Recoveries		57			19			356			16			11			30			18			507
Provision		(668	)		4,682			(102	)		(14	)		495			2,176			(37	)		6,532
Balance June 30, 2011	$	9,255		$	5,894		$	3,001		$	35		$	579		$	4,440		$	169		$	23,373

- 16 -

The following tables provide a breakdown of the recorded investment in loans and the allowance for loan losses based on the method for determining the allowance:

	Commercial		Commercial		Commercial				Residential		Residential		Consumer
June 30, 2012	real estate		construction		and industrial		Leases		construction		mortgage		and other		Total
Ending balances:
Specific reserves:
Impaired loans	$	1,575	$	2,962	$	1,374	$	-	$	-	$	1,144	$	-	$	7,055
Purchase credit impaired loans		5,978		2,994		458		-		-		4,142		-		13,572
Total specific reserves		7,553		5,956		1,832		-		-		5,286		-	$	20,627
General reserves		6,782		5,174		3,759		18		650		3,752		94		20,229
Total	$	14,335	$	11,130	$	5,591	$	18	$	650	$	9,038	$	94	$	40,856
Loans:
Ending balance:
Individually evaluated for impairment	$	24,357	$	20,889	$	3,783	$	-	$	786	$	18,456	$	122	$	68,393
Purchase credit impaired loans		22,061		19,917		1,361		-		1,095		22,815		84		67,333
Loans collectively evaluated for impairment		882,918		166,459		135,545		12,492		26,003		388,663		12,481		1,624,561
Total	$	929,336	$	207,265	$	140,689	$	12,492	$	27,884	$	429,934	$	12,687	$	1,760,287

December 31, 2011
Ending balances:
Specific reserves:
Impaired loans	$	1,899	$	2,095	$	1,340	$	-	$	-	$	819	$	12	$	6,165
Purchase credit impaired loans		1,583		3,549		9		-		-		268		-		5,409
Total specific reserves		3,482		5,644		1,349		-		-		1,087		12	$	11,574
General reserves		8,307		5,313		2,989		18		699		1,971		137		19,434
Total	$	11,789	$	10,957	$	4,338	$	18	$	699	$	3,058	$	149	$	31,008
Loans:
Ending balance:
Individually evaluated for impairment	$	18,010	$	23,679	$	3,231	$	-	$	899	$	12,955	$	122	$	58,896
Purchase credit impaired loans		22,895		22,704		2,619		-		1,584		22,234		91		72,127
Loans collectively evaluated for impairment		817,163		180,753		135,031		12,806		27,249		391,818		13,640		1,578,460
Total	$	858,068	$	227,136	$	140,881	$	12,806	$	29,732	$	427,007	$	13,853	$	1,709,483

- 17 -

The following presents by loan segment, information related to impaired loans as of June 30, 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
June 30, 2012:	investment		balance		allocated		investment		balance
Non-covered:
Commercial real estate	$	12,605	$	10,316	$	1,575	$	14,083	$	14,041
Commercial construction		12,484		11,315		2,962		9,640		9,574
Commercial and industrial		3,261		3,194		1,374		596		589
Residential construction		364		363		-		437		423
Residential mortgage		8,531		8,386		1,144		10,218		10,070
Consumer and other		-		-		-		124		122
Total non-covered		37,245		33,574		7,055		35,098		34,819
Covered:
Commercial real estate		12,736		17,449		5,978		7,174		11,898
Commercial construction		5,132		8,345		2,994		13,870		17,820
Commercial and industrial		458		458		458		902		936
Residential construction		-		-		-		1,095		2,168
Residential mortgage		7,711		10,761		4,142		15,104		18,635
Consumer and other		-		-		-		84		88
Total covered		26,037		37,013		13,572		38,229		51,545
Total loans	$	63,282	$	70,587	$	20,627	$	73,327	$	86,364

							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 and six months ended June 30, 2012 and 2011 (dollars in thousands):

- 18 -

	Three Months Ended June 30,								Six Months Ended June 30,
	2012				2011				2012				2011
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	recorded		income		recorded		income		recorded		income		recorded		income
	investment		recognized		investment		recognized		investment		recognized		investment		recognized
Impaired loans with allowance:
Commercial real estate	$	7,375	$	90	$	6,527	$	23	$	12,867	$	140	$	6,597	$	65
Commercial construction		10,042		105		10,844		46		15,064		157		9,049		52
Commercial and industrial		2,783		17		351		-		2,905		45		600		-
Residential construction		121		1		6,863		4		61		1		3,586		4
Residential mortgage		5,824		57		820		52		7,186		98		1,611		52
Total impaired loans with allowance	$	26,145	$	270	$	25,405	$	125	$	38,083	$	441	$	21,443	$	173
Impaired loans with no allowance:
Commercial real estate	$	16,497	$	182	$	31,544	$	38	$	20,240	$	294	$	36,270	$	108
Commercial construction		10,512		106		34,793		87		17,090		188		39,851		141
Commercial and industrial		1,013		12		4,904		24		1,556		15		5,283		24
Leases		-		-		-		-		-		-		2		-
Residential construction		1,060		14		3,247		9		2,007		23		2,622		9
Residential mortgage		8,468		97		26,138		7		18,846		110		25,948		55
Consumer and other		41		1		46		-		123		1		151		-
Total impaired loans with no allowance	$	37,591	$	412	$	100,672	$	165	$	59,862	$	631	$	110,127	$	337
Impaired loans:
Commercial	$	48,222	$	512	$	88,963	$	218	$	69,722	$	839	$	97,652	$	390
Consumer		15,514		170		37,114		72		28,223		233		33,918		120
Total impaired loans	$	63,736	$	682	$	126,077	$	290	$	97,945	$	1,072	$	131,570	$	510

For the three and six months ended June 30, 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 (“TDR”) that remained on accrual status. For the three and six months ended June 30, 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.

The following presents by loan segment, an aging analysis of past due loans as of June 30, 2012 and December 31, 2011 (dollars in thousands):

					Greater
					than
	30-59 days		60-89 days		90 days				Total				Total
June 30, 2012:	past due		past due		past due		Nonaccrual		past due		Current		loans
Non-covered:
Commercial real estate	$	1,572	$	3,439	$	-	$	4,181	$	9,192	$	794,001	$	803,193
Commercial construction		99		1,128		-		8,683		9,910		157,061		166,971
Commercial and industrial		66		-		-		3,100		3,166		124,030		127,196
Leases		-		-		-		-		-		12,492		12,492
Residential construction		-		-		-		423		423		21,748		22,171
Residential mortgage		2,412		1,971		-		8,959		13,342		320,626		333,968
Consumer and other		16		57		-		5		78		9,639		9,717
Total non-covered		4,165		6,595		-		25,351		36,111		1,439,597		1,475,708
Covered:
Commercial real estate		4,635		35		-		17,430		22,100		104,043		126,143
Commercial construction		38		286		-		18,913		19,237		21,057		40,294
Commercial and industrial		35		45		-		1,361		1,441		12,052		13,493
Residential construction		-		-		-		1,095		1,095		4,618		5,713
Residential mortgage		853		953		-		22,815		24,621		71,345		95,966
Consumer and other		10		17		5		81		113		2,857		2,970
Total covered		5,571		1,336		5		61,695		68,607		215,972		284,579
Total loans	$	9,736	$	7,931	$	5	$	87,046	$	104,718	$	1,655,569	$	1,760,287

- 19 -

					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	$	714,961	$	722,826
Commercial construction		1,068		99		-		6,562		7,729		167,981		175,710
Commercial and industrial		10		11		-		513		534		123,945		124,479
Leases		122		-		-		-		122		12,684		12,806
Residential construction		-		-		-		143		143		25,597		25,740
Residential mortgage		749		445		-		6,028		7,222		310,727		317,949
Consumer and other		18		-		-		-		18		9,922		9,940
Total non-covered		3,635		555		-		19,443		23,633		1,365,817		1,389,450
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	$	1,599,082	$	1,709,483

Credit quality indicators

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

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

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

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

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

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

- 20 -

The following presents by loan segment and by credit quality indicator, the recorded investment in the Company’s loans as of June 30, 2012 and December 31, 2011 (dollars in thousands):

			Pass		Special
June 30, 2012:	Total		credits		mention		Substandard		Doubtful		Loss
Non-covered
Commercial real estate	$	803,193	$	724,409	$	38,645	$	40,139	$	-	$	-
Commercial construction		166,971		122,979		22,009		21,952		31		-
Commercial and industrial		127,196		118,115		4,235		4,846		-		-
Leases		12,492		12,492		-		-		-		-
Residential construction		22,171		19,265		223		2,683		-		-
Residential mortgage		333,968		285,204		24,587		24,177		-		-
Consumer and other		9,717		9,212		318		187		-		-
Total non-covered		1,475,708		1,291,676		90,017		93,984		31		-
Covered:
Commercial real estate		126,143		79,666		15,715		18,616		12,016		130
Commercial construction		40,294		16,721		2,087		11,254		10,232		-
Commercial and industrial		13,493		8,535		2,299		1,790		869		-
Residential construction		5,713		2,031		2,012		1,554		116		-
Residential mortgage		95,966		51,676		15,885		19,643		8,442		320
Consumer and other		2,970		2,662		219		65		24		-
Total covered		284,579		161,291		38,217		52,922		31,699		450
Total loans	$	1,760,287	$	1,452,967	$	128,234	$	146,906	$	31,730	$	450

			Pass		Special
December 31, 2011:	Total		credits		mention		Substandard		Doubtful		Loss
Non-covered
Commercial real estate	$	722,826	$	661,628	$	17,558	$	43,640	$	-	$	-
Commercial construction		175,710		134,228		7,358		34,124		-		-
Commercial and industrial		124,479		115,441		3,485		5,470		83		-
Leases		12,806		12,806		-		-		-		-
Residential construction		25,740		21,557		275		3,908		-		-
Residential mortgage		317,949		276,513		20,705		20,731		-		-
Consumer and other		9,940		9,338		432		170		-		-
Total non-covered		1,389,450		1,231,511		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	$	1,709,483	$	1,411,787	$	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.

- 21 -

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

The following table provides a summary of loans modified as TDRs at June 30, 2012 and December 31, 2011 (dollars in thousands):

							Allowance for
					Total		loan losses
	Accrual		Nonaccrual		TDRs		allocated
June 30, 2012:
Commercial real estate	$	11,895	$	8,840	$	20,735	$	394
Commercial construction		11,828		5,026		16,854		2,034
Commercial and industrial		484		2,339		2,823		1,167
Residential mortgage		9,732		5,734		15,466		801
Consumer and other		122		-		122		-
Total modifications	$	34,061	$	21,939	$	56,000	$	4,396

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

As of June 30, 2012 and December 31, 2011 the Company had no available commitments outstanding on TDRs.

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.

- 22 -

The following table presents new TDRs, by modification category, for the three and six months ended June 30, 2012 and 2011 (dollars in thousands). All balances represent the recorded investment as of the end of the period in which the modification was made.

					Interest
Three Months Ended	Rate		Term		only		Combination		Total
June 30, 2012:	modifications		modifications		modifications		modifications		modifications

Commercial real estate	$	-	$	2,024	$	1,141	$	8,596	$	11,761
Commercial construction		-		12		1,313		-		1,325
Commercial and industrial		-		34		-		294		328
Residential mortgage		-		456		3,233		2,778		6,467
Total modifications	$	-	$	2,526	$	5,687	$	11,668	$	19,881
Total number of contracts		-		4		10		6		20

					Interest
Six Months Ended	Rate		Term		only		Combination		Total
June 30, 2012:	modifications		modifications		modifications		modifications		modifications

Commercial real estate	$	-	$	2,517	$	1,141	$	10,625	$	14,283
Commercial construction		-		641		1,313		-		1,954
Commercial and industrial		-		34		-		294		328
Residential mortgage		-		456		3,233		2,896		6,585
Total modifications	$	-	$	3,648	$	5,687	$	13,815	$	23,150
Total number of contracts		-		6		10		12		28

					Interest
Three Months Ended	Rate		Term		only		Combination		Total
June 30, 2011:	modifications		modifications		modifications		modifications		modifications

Commercial construction	$	-	$	52	$	155	$	2,652	$	2,859
Residential construction		-		715		-		-		715
Residential mortgage		-		1,191		-		515		1,706
Total modifications	$	-	$	1,958	$	155	$	3,167	$	5,280
Total number of contracts		-		7		2		2		11

					Interest
Six Months Ended	Rate		Term		only		Combination		Total
June 30, 2011:	modifications		modifications		modifications		modifications		modifications

Commercial real estate	$	-	$	659	$	1,606	$	4,136	$	6,401
Commercial construction		783		52		13,998		4,125		18,958
Commercial and industrial		25		-		-		2,284		2,309
Residential construction		-		392		-		-		392
Residential mortgage		878		1,190		1,315		6,987		10,370
Total modifications	$	1,686	$	2,293	$	16,919	$	17,532	$	38,430
Total number of contracts		5		7		12		12		36

The following table summarizes the period end balance for modifications that experienced a payment default that have been classified as a TDR during the previous 12 months (dollars in thousands). The Company defines payment default as movement of the TDR to non-accrual status.

- 23 -

			Three Months				Six Months
	Number of		Ended		Number of		Ended
	contracts		June 30, 2012		contracts		June 30, 2012
Commercial real estate		2	$	1,684		2	$	1,684
Commercial construction		-		-		4		3,986
Comercial and industrial		2		2,339		2		2,339

			Three Months				Six Months
	Number of		Ended		Number of		Ended
	contracts		June 30, 2011		contracts		June 30, 2011
Commercial real estate		-	$	-		1	$	1,126
Commercial construction		2		176		3		6,297

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 and six months ended June 30, 2012 and 2011 is summarized below (dollars in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Loans held for sale at June 30,	$	17,793	$	1,909	$	17,793	$	1,909
Proceeds from sales of loans held for sale		61,708		9,884		107,601		30,726
Mortgage fees		1,378		243		2,494		605

NOTE 7 – FDIC INDEMNIFICATION ASSET

The FDIC indemnification asset activity for the three and six months ended June 30, 2012 and 2011 is summarized as follows (dollars in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011

Balance at beginning of period	$	73,521		$	68,355		$	91,851		$	69,493
Accretion of present value discount, net		-			-			631			-
Post-acquisition adjustments		8,191			(169	)		13,332			1,820
Receipt of payments from FDIC		(9,229	)		(7,183	)		(33,331	)		(10,310	)
Balance at end of period	$	72,483		$	61,003		$	72,483		$	61,003

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.

- 24 -

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.

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 Topic 815:Derivatives and Hedging, is a follows (dollars in thousands):

June 30, 2012

December 31, 2011

Notional

Balance Sheet

amount

location

Fair value

location

Fair value

Derivative designated as hedging instrument

250,000

Other assets

202

Other assets

634

The Company has recorded $8.8 million loss, net of tax, as accumulated other comprehensive income at June 30, 2012, and expects $5.2 million, net of tax, to be reclassified into earnings within the next 12 months. The following table presents the losses recorded in the Consolidated Statements of Income and other comprehensive income (“OCI”) in the Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges (dollars in thousands, net of tax):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011

Amount of net loss recorded in OCI (effective portion)	$	135	$	1,913	$	266	$	1,693
Amount of net loss reclassified from OCI to earnings (1)		1,152		628		2,331		1,256
Amount of ineffectiveness recorded		-		-		-		-

(1) Amount recorded in interest expense on demand deposits in the 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.

- 25 -

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 goodwill and other intangible activity for the six months ended June 30, 2012 is summarized as follows (dollars in thousands):

			Other
	Goodwill		Intangibles			Total

Balance at December 31, 2011	$	26,129	$	2,986		$	29,115
Acquisitions		-		93			93
Amortization		-		(265	)		(265	)
Balance at June 30, 2012	$	26,129	$	2,814		$	28,943

The most recent test for goodwill impairment, conducted as of June 30, 2012, concluded that there was no goodwill impairment. No impairment charges were recognized during the six months ended June 30, 2012.

NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The balances in accumulated other comprehensive income at June 30, 2012 and December 31, 2011 are as follows (dollars in thousands):

	June 30,			December 31,
	2012			2011
Unrealized holding gains – investment securities available for sale, net of tax	$	9,477		$	8,637
Unrealized holding gains – investment securities transferred from available for sale to held to maturity, net of tax		3,046			3,211
Unrealized holding losses – cash flow hedge instruments, net of tax		(8,773	)		(10,838	)
Total accumulated other comprehensive income	$	3,750		$	1,010

NOTE 11 - FAIR VALUE MEASUREMENTS

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

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

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

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

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

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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 June 30, 2012:
Investment securities available for sale:
U.S. government agencies	$	27,463	$	-	$	27,463	$	-
State and municipals		130,699		-		130,699		-
Mortgage-backed securities:
Residential government sponsored		62,937		-		62,937		-
Other government sponsored		12,099		-		12,099		-
Total investment securities available for sale		233,198		-		233,198		-
Interest rate cap		202		-		202		-
Total assets measured at fair value on a recurring basis	$	233,400	$	-	$	233,400	$	-

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.

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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 June 30, 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 June 30, 2012 and December 31, 2011, all of the impaired loans were recorded as Level 3 valuation.

Other Real Estate Owned.Fair values of other real estate owned are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as Level 2 valuation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation. At June 30, 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 June 30, 2012:
Loans held for sale		17,793		-		17,793		-
Impaired loans		115,099		-		-		115,099
Other real estate owned		58,760		-		-		58,760
Total assets measured at fair value on a nonrecurring basis	$	191,652	$	-	$	17,793	$	173,859

At December 31, 2011:
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	$	197,549	$	-	$	9,596	$	187,953

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 June 30, 2012 and December 31, 2011 there were no fair value adjustments related to $26.1 million of goodwill, and other intangible assets of $2.8 million and $3.0 million, respectively.

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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 six months ended June 30, 2012 (dollar in thousands):

	Fair value at				Range of
Description	June 30, 2012		Valuation methodology	Unobservable inputs	inputs

Impaired loans	$	115,099	Appraised value	Discount to reflect current market conditions and ultimate collectibility	0% - 20%

Other real estate owned		58,760	Appraised value	Discount to reflect current market conditions	0% - 18%

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

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

The carrying value and estimated fair value of our financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the dates indicated are as follows:

	June 30, 2012
	Carrying		Estimated
	value		fair value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	69,888	$	69,888	$	69,888	$	-	$	-
Investment securities available for sale		233,198		233,198		-		233,198		-
Investment securities held to maturity		101,184		102,831		-		102,831		-
Federal Home Loan Bank stock		7,359		7,359		-		7,359		-
Loans held for sale		17,793		17,793		-		17,793		-
Loans receivable, net		1,719,431		1,709,764		-		1,594,665		115,099
Accrued interest receivable		9,110		9,110		-		9,110		-
FDIC indemnification asset		72,483		72,483		-		-		72,483
Investment in bank-owned life insurance		49,099		49,099		-		49,099		-
Interest rate cap derivative		202		202		-		202		-
Financial liabilities:
Demand deposits and savings	$	1,140,835	$	1,140,835	$	-	$	1,140,835	$	-
Time deposits		948,658		961,854		-		961,854		-
Short-term borrowings		12,471		12,471		-		12,471		-
Long-term debt		93,713		85,805		-		85,805		-
Accrued interest payable		1,126		1,126		-		1,126		-

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	December 31, 2011
	Carrying		Estimated
	value		fair value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	55,829	$	55,829	$	55,829	$	-	$	-
Investment securities available for sale		282,221		282,221		-		282,221		-
Investment securities held to maturity		97,036		96,342		-		96,342		-
Federal Home Loan Bank stock		9,159		9,159		-		9,159		-
Loans held for sale		9,596		9,596		-		9,596		-
Loans receivable, net		1,678,475		1,670,586		-		1,551,137		119,449
Accrued interest receivable		10,174		10,174		-		10,174		-
FDIC indemnification asset		91,851		91,851		-		-		91,851
Investment in bank-owned life insurance		48,294		48,294		-		48,294		-
Interest rate cap derivative		634		634		-		634		-
Financial liabilities:
Demand deposits and savings	$	1,055,090	$	1,055,090	$	-	$	1,055,090	$	-
Time deposits		1,063,097		1,080,175		-		1,080,175		-
Short-term borrowings		70,211		70,211		-		70,211		-
Long-term debt		93,713		86,144		-		86,144		-
Accrued interest payable		1,379		1,379		-		1,379		-

The following methods and assumptions were used to estimate the fair value of financial instruments that have not been previously discussed:

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 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.

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 receivable, net - 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 bank-owned life insurance- The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Accrued interest receivable and accrued interest payable - The carrying amount of accrued interest is assumed to approximate fair value.

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

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Short-term borrowings –The carrying amount of short-term borrowings is assumed to approximate fair value.

Long-term debt – The fair value is estimated by discounting the future contractual cash flows using current market interest rates for similar debt over the same remaining term.

NOTE 12 – 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 June 30, 2012 and December 31, 2011, outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk were as follows (dollars in thousands):

	June 30,		December 31,
	2012		2011

Commitments under unfunded loans and lines of credit	$	224,159	$	199,430
Standby letters of credit		11,582		13,122
Unused credit card lines		4,869		5,827
Commitments to sell loans held for sale		17,793		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 and Carolina Federal acquisitions, but any resulting losses are covered by the terms of the FDIC’s purchase and assumption agreement.

NOTE 13 – 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.

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A summary of option activity under the stock option plans as of June 30, 2012 and changes during the six months ended June 30, 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		(48,092	)		5.95
Forfeited or expired		(12,040	)		6.95
Outstanding at June 30, 2012		134,993		$	11.99		3.5 years	$	10
Exercisable at June 30, 2012		123,787		$	12.31		3.1 years	$	7
Share options expected to vest		11,206		$	8.36		7.4 years	$	3

The related compensation expense recognized for stock option awards for the six months ended June 30, 2012 and 2011 was $7,000 and $7,000, respectively. As of June 30, 2012, there was $24,000 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 six months ended June 30, 2012, the intrinsic value of options exercised amounted to $85,000.

Restricted Stock Awards. A summary of the status of the Company’s non-vested stock awards as of June 30, 2012 and changes during the six months ended June 30, 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		(10,395	)		8.37
Non-vested at June 30, 2012		75,479		$	7.29

The related compensation expense recognized for restricted stock awards for the six months ended June 30, 2012 was $230,000. As of June 30, 2012, there was $238,000 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 1.04 years.

NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS

In July 2012 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02,Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30,Intangibles—Goodwill and Other, General Intangibles Other than Goodwill. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not believe the adoption of this ASU will have a material impact on the consolidated financial statements.

- 32 -

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. The Company does not believe the adoption of this ASU will have a material impact on the 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 15 – 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 third 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.

- 33 -

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.

BHR Purchase Agreement

On April 27, 2012, the Company’s wholly owned banking subsidiary, Bank of North Carolina, 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.

First Trust Agreement

On June 4, 2012, the Company, BNC and First Trust Bank (“First Trust”) entered into an Agreement and Plan of Merger (the “First Trust Agreement”). Pursuant to the First Trust Agreement, First Trust will, on the terms and subject to the conditions set forth in the First Trust Agreement, merge with and into BNC, so that BNC is the surviving banking corporation in the merger (the “Merger”). BNC will continue to be a wholly-owned subsidiary of the Company. The Company, BNC and First Trust anticipate that the Merger will close in the fourth quarter of 2012, subject to customary closing conditions, including regulatory approval and approval of First Trust’s shareholders.

At the effective time of the Merger (the “Effective Time”), each share of common stock, par value $2.50 per share, of First Trust issued and outstanding immediately before the Effective Time (the “First Trust Common Stock”), except for shares of First Trust Common Stock owned by First Trust or the Company (other than certain trust account shares), will be converted, at the election of the shareholder of such stock, into the right to receive either: (i) cash in the amount of $7.25 per share or (ii) 0.98 shares of the Common Stock of the Company. The Company will issue a maximum of 3,276,266 shares of Common Stock in connection with the Merger. Any holder of shares of First Trust Common Stock who perfects such holders’ dissenters’ rights of appraisal in accordance with and as contemplated by the North Carolina Business Corporation Act (the “NCBCA”) shall be entitled to receive the value of such shares in cash as determined pursuant to such provision of the NCBCA.

The First Trust Agreement requires First Trust to call a meeting of its shareholders to be held after the date of the First Trust Agreement for the purpose of obtaining the requisite shareholder approval required in connection with the Merger. Pursuant to the First Trust Agreement, prior the Effective Time, James T. Bolt, Jr., President and Chief Executive Officer of First Trust, shall have entered into an employment agreement with the Company and BNC, Mr. Bolt and John J. Keane, Senior Vice President and Chief Credit Officer of First Trust, shall have each entered into noncompetition agreements that will begin upon their termination of employment with First Trust and Jean R. Galloway, Senior Vice President and Chief Financial Officer of First Trust, shall have entered into a consulting agreement that will begin upon her termination of employment with First Trust. All of the foregoing agreements will become effective only upon consummation of the Merger at the Effective Time.

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In addition to Mr. Bolt, who shall be appointed to the Company’s board of directors upon the Effective Time, the First Trust Agreement also requires the Company to offer one member of the First Trust board of directors (the “First Trust 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 (but not to exceed two years), one member of the First Trust 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.

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 First Trust Board having executed and delivered a support agreement to the Company; (ii) each member of the First Trust Board having executed and delivered a non-compete agreement to the Company; (iii) each member of the First Trust Board (and the boards of directors of First Trust’s subsidiaries) having submitted their resignations to be effective as of the Effective Time; and (iv) First Trust’s classified assets (as defined in the First Trust Agreement), at the Effective Time, not exceeding 115% of the aggregate balance of classified assets set forth in the First Trust Agreement.

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

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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 acquisitions; 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 principal executive offices are located at 1226 Eastchester Drive, High Point, North Carolina 27265.

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 select acquisitions. A summary of the acquisitions we have entered into in 2012 and 2011 is as follows:

Completed Acquisitions

On June 8, 2012, we acquired certain assets and liabilities of Carolina Federal Savings Bank (“Carolina Federal”) pursuant to a Purchase and Assumption agreement with the FDIC. Under the terms of the agreement, we acquired certain assets and deposits from the FDIC as receiver of Carolina Federal. There was no loss-sharing arrangement with the FDIC in regards to this transaction.

On December 30, 2011, we acquired Regent Bank of South Carolina (“Regent”), a commercial bank organized under the banking laws of South Carolina. Regent had one branch in Greenville, South Carolina, which now operates under the name BNC Bank, as do our other South Carolina branches. This acquisition gave 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.

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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.

Pending Transactions

On June 4, 2012, we entered into an Agreement and Plan of Merger with First Trust Bank (“First Trust”), a commercial bank serving small businesses and professionals in the Charlotte Metro area.TheAgreement and Plan of Mergerprovides for First Trust shareholders to receive 0.98 shares of our voting common stock for each share of First Trust common stock, or cash in the amount of $7.25 per share. As a result of the transaction, we will add three new branches in metro Charlotte, as well as $228 million in loans and $374 million in deposits. We expect the merger will close in the fourth quarter of 2012, subject to customary closing conditions, including regulatory approval and approval of First Trust’s shareholders.

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. Under the terms of the purchase and assumption 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.We expect the purchase will close in the third quarter of 2012,subject to numerous conditions as well as regulatory approvals.

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 third quarter of 2012, subject to customary closing conditions, including regulatory and shareholder approval. This merger 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.

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 32 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 six 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. During the second quarter of 2012, we closed on a $72.5 million institutionally-based capital raise that provided enhanced capital levels to continue our strategic and opportunistic expansion plans. As we are building our franchise throughout the Carolinas, 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.

Analysis of Results of Operations

Consolidated net income for the second quarter of 2012 was $2.3 million, an increase of $700,000 from the $1.6 million of net income from the comparable period of 2011. Our net income available to common shareholders for the second quarter of 2012 was $1.7 million, or $0.13 per diluted share, compared to $992,000, or $0.10 per diluted share, for the second quarter of 2011.

For the six months ended June 30, 2012, consolidated net income was $4.0 million, an increase of $900,000 from the $3.1 million from the comparable period of 2011. Net income available to common shareholders for the six months ended June 30, 2012 was $2.8 million, or $0.24 per diluted share, compared to $1.9 million, or $0.19 per diluted share, for the six months ended June 30, 2011.

The annualized return on average assets was 0.38% for the second quarter of 2012, compared to 0.30% for the second quarter of 2011. The annualized return on average assets was 0.33% for the six months ended June 30, 2012, compared to 0.29% for the comparable period of 2011.

Net Interest Income and Net Interest Margin

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 our blended statutory tax rate, as applicable, 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 second quarter of 2012 was $18.2 million, an increase of $1.4 million, or 8.3%, from the comparable period last year. For the six-months ended June 30, 2012 our net interest income totaled $36.8 million, an increase of $3.3 million, or 9.9%, from the comparable period in 2011. During the second quarter of 2102, our net interest margin (FTE) decreased by 13 basis points from the second quarter of 2011 to 3.71%. Excluding the costs associated with our interest rate cap, our net interest margin for the second quarter was 4.08%, an increase of 2 basis points from the comparable period in 2011.

During the second quarter of 2012, the accretion of yield and fair value discounts totaled $1.0 million, a decrease of $375,000 from $1.4 million in the second quarter of 2011. Accretion for the six months ended June 30, 2012 and 2011, respectively, was $2.5 million.

During the second quarter of 2012, our average yield on interest-earning assets (FTE) decreased 29 basis points while the cost of average interest-bearing liabilities decreased 13 basis points when compared to the second quarter of 2011. For the six months ended June 30, 2012, our average yield on interest-earning assets (FTE) decreased 26 basis points while the cost of average interest-bearing liabilities decreased 15 basis points from the comparable period in 2011.

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Total interest income (FTE) increased $1.7 million for the second quarter of 2012 when compared to the same quarter of 2011. This increase in interest income (FTE) is primarily driven by increases in our average loan balances, which have increased $218.1 million for the three months ended June 30, 2012 as compared to the same period in 2011. This increase is due to the acquisitions of Carolina Federal, Regent and Blue Ridge. Increases in average loans were offset by a 25 basis point decrease in average interest rates as compared to second quarter of 2011. Average total loans as a percentage of average interest-earning assets increased to 82.3% for the quarter ended June 30, 2012, compared to 81.1% for the prior year quarter. Average investment securities increased $349,000 while the average yield on investment securities decreased 16 basis points as compared to the second quarter of 2011.

Total interest income (FTE) increased $3.7 million for the six months ended June 30, 2012 when compared to the comparable period of 2011. This increase in interest income (FTE) is primarily driven by increases in our average loan balances, which have increased $211.1 million for the six months ended June 30, 2012 as compared to the same period in 2011. This increase is due to the acquisitions of Regent, Blue Ridge and, to a lesser extent, Carolina Federal. Increase in average loans is offset by a 17 basis point decrease in average interest rates as compared to second quarter of 2011. Average total loans as a percentage of interest-earning assets increased to 81.8% for the six months ended June 30, 2012, compared to 80.4% for the comparable period in 2011. Average investment securities decreased $369,000 while the average yield on investment securities decreased 37 basis points for the six months ended June 30, 2012 compared to the same period of 2011.

Total interest expense remained relatively stable for the second quarter of 2012 when compared to the same quarter of 2011. While average time deposits have increased by $85.2 million for the quarter ended June 30, 2012 compared to the same quarter of prior year, the average rates paid on time deposits have decreased by 50 basis points over the same period. The decreases were associated with the repricing of our time deposits at lower interest rates. Our average demand deposits increased by $103.6 million, with rates paid on demand deposits increasing 24 basis points. Interest expense on borrowings also remained relatively stable, with lower average outstanding balances being off-set by an increase of 37 basis points in the average rate during the comparable periods.

Total interest expense for the six months ended June 30, 2012 increased $324,000 when compared to the same period of 2011. Rates paid on time deposits decreased by 55 basis points, while average time deposits increased by $115.9 million. The decreases were associated with the repricing of our time deposits at lower interest rates. Our average demand deposits increased by $95.9 million, with rates paid on demand deposits increasing 24 basis points. Interest expense on borrowings increased by $60,000, with lower average outstanding balances being off-set by an increase of 42 basis points in the average rate during the comparable periods.

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

	Three Months Ended							Three Months Ended
	June 30, 2012							June 30, 2011
	Average				Average			Average				Average
	balance		Interest		rate			balance		Interest		rate
Interest-earning assets:
Loans and leases	$	1,730,264	$	22,588		5.25	%	$	1,529,717	$	20,968		5.50	%
Loans held for sale		19,095		157		3.31	%		1,505		15		4.00	%
Investment securities, taxable		112,574		1,193		4.26	%		116,787		1,426		4.90	%
Investment securities, tax-exempt*		211,436		3,779		7.19	%		206,874		3,672		7.12	%
Interest-earning balances and other		51,603		48		0.37	%		33,124		28		0.34	%
Total interest-earning assets		2,124,972		27,765		5.26	%		1,888,007		26,109		5.55	%
Other assets		306,221							256,746
Total assets	$	2,431,193						$	2,144,753
Interest-bearing liabilities:
Demand deposits	$	907,211		3,431		1.52	%	$	803,617		2,574		1.28	%
Savings deposits		45,536		53		0.47	%		35,552		39		0.44	%
Time deposits		969,292		3,810		1.58	%		884,100		4,577		2.08	%
Borrowings		121,946		848		2.80	%		137,020		831		2.43	%
Total interest-bearing liabilities		2,043,985		8,142		1.60	%		1,860,289		8,021		1.73	%
Non-interest-bearing deposits		181,983							123,398
Other liabilities		18,238							5,482
Shareholders' equity		186,987							155,584
Total liabilities and shareholder's equity	$	2,431,193						$	2,144,753
Net interest income and
interest rate spread*			$	19,623		3.65	%			$	18,088		3.82	%
Net interest margin*						3.71	%						3.84	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $1.5 million and $1.3 million for the three months ended June 30, 2012 and 2011, respectively.

	Six Months Ended							Six Months Ended
	June 30, 2012							June 30, 2011
	Average				Average			Average				Average
	balance		Interest		rate			balance		Interest		rate
Interest-earning assets:
Loans and leases	$	1,717,433	$	45,848		5.37	%	$	1,521,465	$	41,790		5.54	%
Loans held for sale		17,303		274		3.18	%		2,158		42		3.92	%
Investment securities, taxable		115,942		2,525		4.38	%		121,867		2,964		4.90	%
Investment securities, tax-exempt*		221,680		7,583		6.88	%		216,124		7,769		7.25	%
Interest-earning balances and other		49,239		91		0.37	%		33,139		61		0.37	%
Total interest-earning assets		2,121,597		56,321		5.34	%		1,894,753		52,626		5.60	%
Other assets		301,862							252,826
Total assets	$	2,423,459						$	2,147,579
Interest-bearing liabilities:
Demand deposits	$	902,275		7,047		1.57	%	$	806,341		5,308		1.33	%
Savings deposits		42,578		96		0.45	%		36,041		76		0.43	%
Time deposits		1,001,591		7,862		1.58	%		885,710		9,357		2.13	%
Borrowings		123,775		1,704		2.77	%		140,880		1,644		2.35	%
Total interest-bearing liabilities		2,070,219		16,709		1.62	%		1,868,972		16,385		1.77	%
Non-interest-bearing deposits		167,193							117,212
Other liabilities		13,417							7,469
Shareholders' equity		172,630							153,926
Total liabilities and shareholder's equity	$	2,423,459						$	2,147,579
Net interest income and
interest rate spread*			$	39,612		3.72	%			$	36,241		3.83	%
Net interest margin*						3.75	%						3.86	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $2.8 million for the six months ended June 30, 2012 and 2011.

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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).

	Three Months Ended									Six Months Ended
	June 30, 2012 vs. 2011									June 30, 2012 vs. 2011
	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans and leases	$	2,636		$	(1,016	)	$	1,620		$	5,427		$	(1,369	)	$	4,058
Loans held for sale		160			(18	)		142			268			(36	)		232
Investment securities, taxable		(50	)		(183	)		(233	)		(128	)		(311	)		(439	)
Investment securities, tax-exempt*		71			36			107			217			(403	)		(186	)
Interest-earning balances and other		17			3			20			30			-			30
Total interest income		2,834			(1,178	)		1,656			5,814			(2,119	)		3,695

Interest expense:
Deposits:
Demand deposits		347			510			857			186			1,553			1,739
Savings deposits		11			3			14			12			8			20
Time deposits		390			(1,157	)		(767	)		2,400			(3,895	)		(1,495	)
Borrowings		(102	)		119			17			(351	)		411			60
Total interest expense		646			(525	)		121			2,247			(1,923	)		324
Net interest income increase	$	2,188		$	(653	)	$	1,535		$	3,567		$	(196	)	$	3,371

* 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 $8.3 million in the second quarter of 2012 compared to a provision for loan losses of $3.0 million in the second quarter of 2011. Of the $8.3 million in provision expense, $7.1 million related to legacy non-covered loans and $1.2 million in related covered loans, representing 20% of the total provision. The total covered loan provision totaled $6.1 million for the second quarter of 2012, with the remaining $4.9 million recorded through an FDIC indemnification asset.

For the six months ended June 30, 2012, we recorded a provision for loan losses of $13.5 million compared to a provision for loan losses of $6.5 million for the comparable period in 2011. Of the $13.5 million in provision expense, $10.8 million related to legacy non-covered loans and $2.7 million in related covered loans, representing 20% of the total provision. The total covered loan provision totaled $13.9 million for the six months ended June 30, 2012, with the remaining $11.1 million recorded through an FDIC indemnification asset.

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A summary of activity in the allowance for loan losses for the three and six months ended June 30, 2012 and 2011 is as follows (dollars in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011

Balance at beginning of period	$	36,722	$	24,325	$	31,008	$	24,813
Provision charged to operations		8,330		3,032		13,509		6,532
Provision provided from indemnification asset		4,881		-		11,139		-
Loans charged-off:
Commercial real estate		2,075		2,533		3,789		3,106
Commercial construction		5,525		634		7,689		3,332
Commercial and industrial		1,405		491		2,130		778
Residential construction		163		101		180		609
Residential mortgage		1,248		330		2,587		633
Consumer and other		87		21		111		21
Total loans charged-off		10,503		4,110		16,486		8,479
Recoveries of loans:
Commercial real estate		4		56		17		57
Commercial construction		676		-		865		19
Commercial and industrial		185		3		217		356
Leases		-		16		-		16
Residential construction		-		7		-		11
Residential mortgage		555		27		578		30
Consumer and other		6		17		9		18
Total loan recoveries		1,426		126		1,686		507
Net charge-offs		9,077		3,984		14,800		7,972
Balance at end of period	$	40,856	$	23,373	$	40,856	$	23,373

Non-Interest Income

Non-interest income was $11.7 million for the second quarter of 2012 compared to $2.4 million for the prior year second quarter. Included in non-interest income for the second quarter of 2012 was $7.7 million of acquisition gain from a FDIC-assisted transaction and $238,000 of income associated with FDIC receivable and related loss-share receipts. Excluding FDIC related income and acquisition gains, non-interest income was $3.7 million for the current quarter, an increase of 61.9% from the $2.3 million reported for the second quarter of 2011. For the six months ended June 30, 2012, non-interest income, excluding FDIC related income, acquisition gains and the sales of investment securities, was $6.7 million compared to $4.7 million for the same period in 2011.

Mortgage fees generated from our mortgage market operations in the second quarter of 2012 increased $1.1 million, or 467%, compared to the second quarter of 2011.Proceeds from sales of loans held for sale totaled $61.7 million for the second quarter of 2012, compared to $30.7 million for the same period in 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. For the six months ended June 30, 2012, mortgage fees were $2.5 million compared to $605,000 for the same period in 2011.

Service charges on deposit accounts decreased $119,000, or 13.7%, in the second quarter of 2012, compared to the second 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. For the six months ended June 30, 2012, service charges on deposit accounts were $1.5 million compared to $1.7 million for the same period in 2011.

Acquisition gains totaled $7.7 million for the second quarter of 2012 from the FDIC-assisted acquisition of Carolina Federal Saving Bank through an FDIC-assisted transaction.

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Other non-interest income for the second quarter of 2012 increased $663,000, or 124%, compared to the second quarter of 2011. Included in this increase was SBA fee income generated from our new SBA division, which became fully operational in the third quarter of 2011. We recorded $669,000 of SBA fee income during the second quarter of 2012, compared to $101,000 for the same period in 2011. Additionally, during the second quarter of 2012 we recorded $238,000 of FDIC related income. For the six months ended June 30, 2012, other non-interest income totaled $2.9 million, an increase of $1.8 million when compared to the same period in 2011, with SBA fee income generating $796,000 of this increase.

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

	Three Months Ended				Six Months Ended
	6/30/2012		6/30/2011		6/30/2012		6/30/2011

Mortgage fees	$	1,378	$	243	$	2,494	$	605
Service charges		749		868		1,487		1,695
Investment brokerage fees		229		227		469		384
Earnings on bank-owned life insurance		395		420		805		845
Gain on sale of available for sale
investment securities, net		-		79		1,619		136
Gain on acquisition		7,734		-		7,734		-
Other		1,197		534		2,883		1,131
Total non-interest income	$	11,682	$	2,371	$	17,491	$	4,796

Non-Interest Expense

We strive to maintain levels of non-interest expense that management believes are appropriate given the nature of our 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 our growth and strategy, we 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 $4.3 million, or 28.8%, during the second quarter of 2012 when compared to the second quarter of 2011. For the six months ended June 30, 2012, non-interest expenses increased $7.4 million, or 24.9%, when compared to the same period in 2011.Non-interest expenses remain elevated during 2012 due to our franchise growth. During the second quarter of 2012, there was $1.1 million of additional non-interest expense associated with acquisition and project related costs, including the Carolina Federal acquisition, compared to $1.2 million for the first quarter of 2012, which included the Regent and Blue Ridge acquisitions.

The Company’s personnel costs increased $2.1 million, or 27.1%, during the second quarter of 2012 when compared to the second quarter of 2011. These increases are primarily due to the additional full-time equivalent employees from the fourth quarter 2011 acquisitions, as well as increases in personnel costs attributable to continued investments in the mortgage originations, 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. For the six months ended June 30, 2012, personnel costs were $19.6 million compared to $14.9 million for the same period of 2011, an increase of $4.7 million.

Occupancy and furniture/equipment expenditures increased by $519,000, or 34.3%, for the second quarter of 2012 when compared to the second quarter of 2011. For the six months ended June 30, 2012, occupancy and furniture/equipment expenditures increased $1.1 million, or 37.0%, compared to the same period in 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.

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Professional and other services increased by $347,000, or 39.7%, for the second quarter of 2012 when compared to the same quarter a year ago. For the six months ended June 30, 2012, professional and other service fees increased $696,000, or 37.2%, compared to the same period in 2011. The majority of the increases are related to costs with our acquisitions, project costs and to a lesser extent, overall franchise growth.

FDIC insurance assessments decreased $310,000, or 38.3%, for the second quarter of 2012 when compared to the second quarter of 2011. For the six months ended June 30, 2012, FDIC insurance assessments decreased $520,000, or 32.1%, compared to the same period in 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 increased $1.2 million for the second quarter of 2012 when compared to the second quarter of 2011. Included in this increase was an additional $1.0 million of valuation adjustments on OREO properties. For the six months ended June 30, 2012, loan, foreclosure and collection expenses increased $629,000 when compared to the same period in 2011. During the six months ended June 30, 2012 and 2011, we recorded $2.7 million and $2.0 million, respectively, of OREO valuation adjustments.

Other non-interest expenses for the second quarter of 2012 increased $467,000, or 44.4%, compared to the second quarter of 2011. For the six months ended June 30, 2012, other non-interest expenses increased $634,000, or 30.1%, compared to the same period in 2011. These increases are primarily due to overall franchise growth, including acquisition and project related costs.

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

	Three Months Ended				Six Months Ended
	6/30/2012		6/30/2011		6/30/2012		6/30/2011

Salaries and employee benefits	$	9,692	$	7,623	$	19,593	$	14,862
Occupancy and equipment		2,030		1,511		4,224		3,083
Data processing and supply		696		601		1,393		1,164
Advertising and business development		375		507		763		926
Professional and other services		1,221		874		2,566		1,870
FDIC insurance assessments		500		810		1,100		1,620
Loan, foreclosure and collection		3,145		1,916		4,621		3,992
Other		1,518		1,051		2,742		2,108
Total non-interest expense	$	19,177	$	14,893	$	37,002	$	29,625

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. If income exceeds non-taxable income, income tax expense is recorded. The change in benefit and expense amounts is attributable to the increased income that was recorded during the reported periods. For the three months ended June 30, 2012, we recorded income tax expense of $40,000 compared to an income tax benefit of $381,000 for the same period in 2011. For the six months ended June 30, 2012, we recorded income tax benefit of $268,000 compared to an income tax benefit of $1.0 million for the same period in 2011.

Analysis of Financial Condition

Total assets at June 30, 2012 were $2.44 billion, a decrease of $12.1 million when compared to total assets at December 31, 2011. Total earning assets, which are comprised of interest-earning balances at banks, investment securities, FHLB stock, loans held for sale and loans, were $2.17 billion at June 30, 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 investment securities available for sale at June 30, 2012 were 12.4% of total assets, or $303.1 million, a $35.0 million decrease from the $338.1 million reported at December 31, 2011.

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Period-end portfolio loans, which exclude loans held for sale, totaled $1.76 billion, an increase of $50.8 million, or 3.0%, from December 31, 2011. The increase was due to strong organic growth in our North Carolina franchise, along with the acquisition and integration of Carolina Federal, Blue Ridge and Regent. Period-end deposits totaled $2.09 billion, a decrease of $28.7 million, or 1.4%, from December 31, 2011. The decrease in deposits was due to a significant reduction in wholesale deposits, offset by the additional $53.1 million in deposits purchased as part of the Carolina Federal acquisition.

We remain well-capitalized with total equity of $237.5 million at June 30, 2012, an increase of $73.7 million from December 31, 2011. This increase in total equity was primarily driven by a $72.5 million private placement of preferred stock that occurred in June 2012, with net proceeds totaling $68.3 million.

Investment Securities

Investment securities were $334.4 million at June 30, 2012 and $379.3 million at December 31, 2011. The decrease of $44.9 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.

Gross unrealized gains in our investment securities available for sale portfolio were $15.4 million as of June 30, 2012 and $14.2 million as of December 31, 2011. Gross unrealized losses on our temporarily impaired available for sale investment securities were $8,000 as of June 30, 2012 and $137,000 at December 31, 2011. The gross unrealized losses were primarily attributable to changes in interest rates related to our state and municipal securities portfolio, relative to when the investments were purchases.

Loans

Portfolio loans increased by $50.8 million to $1.76 billion at June 30, 2012 from $1.71 billion at December 31, 2011. See Note 6 of Notes to Consolidated Financial Statements for the composition of covered and non-covered loans. Our non-covered loan portfolio increased $86.3 million to $1.48 billion during the first six months of 2012, primarily from increases in loan originations and portfolio growth, including $29.5 million of loans acquired from our FDIC-assisted acquisition of Carolina Federal.

Our covered loan portfolio decreased $35.5 million from December 31, 2011 to $284.6 million at June 30, 2012, reflecting normal repayments, charge-offs and foreclosures. The covered loan portfolio will continue to decline over the terms of the loss-share agreements. Covered loans include all loans covered under loss-share agreements from FDIC-assisted acquisitions and, as such, have significant loss protection.

For the six months ended June 30, 2012, average portfolio loans were $1.72 billion, compared to $1.52 billion for the same period in 2011. The majority of this increase resulted from the acquisitions of Blue Ridge and Regent, and to a lesser extent, Carolina Federal. 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 commercial real estate portfolio of $80.4 million were offset by reductions in our commercial construction by $8.7 million during the six months ended June 30, 2012.Increases in our commercial real estate portfolio have been primarily in single credit tenant fully leased or owner occupied facilities which meet our heightened underwriting standards. We will continue our efforts to diversify and divest A&D exposures as needed and deemed appropriate by management.

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Allowance for Loan Losses and Asset Quality

The allowance for loan losses was $40.9 million at June 30, 2012, an increase of $9.8 million, or 31.8%, from December 31, 2011. Loan loss reserves to total period-end portfolio loans was 2.32% and 1.81% at June 30, 2012 and December 31, 2011, respectively. Included in the $40.9 million amount is the allowance for loan losses for non-covered loans, which was $27.3 million, an increase of $3.4 from December 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 for loans not covered by loss-share to period-end loans not covered by loss-share increased from 1.76% at December 31, 2011 to 1.91% at June 30, 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.

Nonperforming assets include nonaccrual loans, accruing loans 90 days or more past due, and OREO. At June 30, 2012, nonperforming assets not covered by loss-share agreements were $49.0 million, or 2.31% of total assets not covered by loss-share agreements, compared to $40.4 million, or 1.93% of total assets at December 31, 2011. Nonperforming assets, including assets covered under loss-share agreements, were $145.8 million, or 5.97% of total assets at June 30, 2012, compared to $161.2 million, or 6.57% of total assets, at December 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 $25.4 million at June 30, 2012, an increase of $5.9 million from $19.4 million at December 31, 2011. Nonaccrual loans, including covered loans, were $87.0 million at June 30, 2012, which represents a slight decrease from total nonaccrual loans of $87.3 million as of December 31, 2011. The following is a summary of nonaccrual loans at the periods presented (dollars in thousands):

	June 30,		December 31,
	2012		2011

Commercial real estate	$	21,611	$	25,889
Commercial construction		27,596		28,196
Commercial and industrial		4,461		3,132
Total commercial		53,668		57,217
Residential construction		1,518		1,727
Residential mortgage		31,774		28,262
Consumer and other		86		91
Total nonaccrual loans	$	87,046	$	87,297

Nonaccrual loans covered by loss-share	$	61,695	$	67,854

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.

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At June 30, 2012, OREO decreased to $58.8 million, a decrease of $9.7 million, from December 31, 2011. The decrease from December 31, 2011 when compared to June 30, 2012 was primarily due to $23.7 million of transfers to OREO during the six months ended June 30, 2012, offset by $25.6 million of sales and $9.0 million of valuation adjustments. 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 our OREO properties. The following is a summary of OREO at the periods presented (dollars in thousands):

	June 30,		December 31,
	2012		2011

Residential 1-4 family properties	$	19,230	$	29,618
Multifamily properties		444		385
Commercial properties		12,815		11,705
Construction, land development and other land		26,271		26,796
Total OREO	$	58,760	$	68,504

OREO covered by loss-share	$	35,105	$	47,577

At June 30, 2012, non-covered loans that were restructured or modified and were performing to the restructured terms and not 90 days past due totaled $34.1 million, a decrease of $7.5 million from December 31, 2011. The decrease during the second 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 second quarter of 2012 were $9.1 million, as compared with net charge-offs of $4.0 million for the second quarter of 2011. Expressed as an annualized percentage of average loans outstanding to non-covered portion of charge-offs, net charge-offs were 1.17% and 1.04% for the three months ended June 30, 2012 and 2011, respectively. Net charge-offs for the six months ended June 30, 2012 were $14.8 million, as compared with net charge-offs of $8.0 million for the same period in 2011. Expressed as an annual percentage of average loans outstanding, net charge-offs were 1.03% and 1.06% for the six months ended June 30, 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:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011

Net charge-offs to average loans, non-covered portion (annualized)		1.17	%		1.04	%		1.03	%		1.06	%
Allowance for loan losses to portfolio loans		2.32	%		1.53	%		2.32	%		1.53	%
Not covered by loss-share		1.91	%		1.88	%		1.91	%		1.88	%
Nonperforming loans to portfolio loans		4.95	%		6.15	%		4.95	%		6.15	%
Not covered by loss-share		1.72	%		2.56	%		1.72	%		2.56	%

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Deposits

Deposits continue to be our primary funding source. AtJune 30, 2012, deposits totaled $2.09 billion, a decrease of $28.7 million, or 1.4%, from the $2.12 billion in deposits as of 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 six-month period, transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $85.7 million, while time deposits decreased $114.4 million. For the three months ended June 30, 2012, average deposits were $2.10 billion, compared to $1.85 billion for the same period in 2011. For the six months ended June 30, 2012, average deposits were $2.11 billion, compared to $1.85 billion for the same period in 2011.The majority of the deposit increase resulted from the acquisitions of Blue Ridge, Regent and, to a lesser extent, Carolina Federal.At June 30, 2012, time deposits were 45.4% 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 six months ended June 30, 2012, we decreased short-term borrowings from $70.2 million at December 31, 2011 to $12.5 million at June 30, 2012, primarily from the repayment of short-term funding through FHLB advances. 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 June 30, 2012 and December 31, 2011, long-term debt outstanding totaled $93.7 million. Long-term debt at June 30, 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.

Capital Resources

The Company and BNC 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 BNC must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation to ensure capital adequacy. As of June 30, 2012, the Company and BNC were “well capitalized” and exceeded the minimum thresholds established under this regulatory framework. There have been no conditions or events since June 30, 2012 that management believes have changed either the Company’s or BNC’s capital classifications.

At June 30, 2012, shareholders’ equity totaled $237.5 million, an increase of $73.7 million from the December 31, 2011 balance. During the second quarter of 2012, the Company executed a $72.5 million private placement of preferred stock. Proceeds from the private placement, after deducting issuance costs of $4.2 million, were $68.3 million. AtJune 30, 2012, the Tier I risk-based capital ratio for BNC was 13.25%, the total risk-based capital ratio was 14.68% and all other capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures. AtJune 30, 2012, the Company’s total risk-based capital ratio was 14.61%, thus classifying the Company as “well-capitalized” for regulatory purposes.

On July 17, 2012, the Company’s shareholders approved, pursuant to NASDAQ Marketplace Rule 5635 and the terms of the Preferred Stock, the conversion of the Preferred Stock into Common Stock, with both Common and Non-Voting Common Stock effective on July 20, 2012. See Note 3 of Notes to Consolidated Financial Statements for more information.

Liquidity

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

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

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Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities, investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; investments available for sale; loan repayments; loan sales; deposits, both from our local markets and the wholesale markets; borrowings from the FHLB and Federal Reserve discount window; and borrowings from correspondent banks under unsecured overnight federal funds credit lines and secured lines of credit. We are also provided liquidity through various interest-bearing and non-interest bearing deposit accounts.

Our cash liquidity position, which includes cash and cash equivalents and investment securities available for sale, aggregated $303.1 million at June 30, 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 $253.0 million from the FHLB of Atlanta, with $62.0 million outstanding at June 30, 2012. We also have the ability to borrow from the Federal Reserve Discount Window in the amount of $79.0 million, with no outstanding balances. These amounts are based on assets currently pledged. In addition to the above, we have $187 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 no outstanding balance as of June 30, 2012.

In addition to these liquidity sources, we have access to unsecured lines of credit from correspondent banks for short-term liquidity needs totaling $45.0 million, and the Promontory Interfinancial Network weekly funds auctions where we have another $488.0 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.

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, BNC’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 June 30, 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.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Refer to the “Off-Balance Sheet Risk” footnote in the “Notes to Consolidated Financial Statements”.

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: August 9, 2012	By:	/s/ W. Swope Montgomery, Jr.
		W. Swope Montgomery, Jr.
		President and Chief Executive Officer

Date: August 9, 2012	By:	/s/ David B. Spencer
		David B. Spencer
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.

Description

2.1		Purchase and Assumption Agreement Whole Bank All Deposits among the Federal Deposit Insurance Corporation, receiver of Carolina Federal Savings Bank, Charleston, South Carolina, Federal Deposit Insurance Corporation and Bank of North Carolina, dated as of June 8, 2012, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on June 14, 2012
2.2		Agreement and Plan of Merger, dated as of June 4, 2012, by and among First Trust Bank, BNC Bancorp and Bank of North Carolina, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with SEC on June 6, 2012
3.1		Articles of Amendment dated May 22, 2012, incorporated by reference to Exhibit 3.4 to the Form S-4/A filed with the SEC on July 2, 2012
3.2		Articles of Amendment To Designate the Terms of the Mandatorily Convertible Non-Voting Preferred Stock, Series B-1, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on June 6, 2012
3.3		Articles of Amendment To Designate the Terms of the Mandatorily Convertible Non-Voting Preferred Stock, Series C, incorporated by reference to Exhibit 3.2 to the Form 8-K filed with the SEC on June 6, 2012
4.1		Form of Certificate for the Mandatorily Convertible Non-Voting Preferred Stock, Series B-1, incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on June 6, 2012
4.2		Form of Certificate for the Mandatorily Convertible Non-Voting Preferred Stock, Series C, incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on June 6, 2012
10.1		Purchase and Assumption Agreement dated April 27, 2012, by and between The Bank of Hampton Roads and the Bank of North Carolina, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 1, 2012
10.2		Form of Securities Purchase Agreement, dated as of May 31, 2012, by and between BNC Bancorp and the Purchasers thereto, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on June 6, 2012
10.3		Securities Purchase Agreement and Amendment Number 1 to Investment Agreement, dated as of May 31, 2012, by and between BNC Bancorp and Aquiline BNC Holdings LLC, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on June 6, 2012

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 June 30, 2012, filed on August 9, 2012, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iv) the Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for the six months ended June 30, 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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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

BNC Bancorp (BNNC) Inactive 10-Q2012 Q2 Quarterly report

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