BNC Bancorp (BNNC) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

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

of the Securities Exchange Act of 1934

For the transition period ended                                      

Commission File Number   000-50128     

BNC Bancorp

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Large accelerated filer¨	Accelerated filerx
Non-accelerated filer¨ (Do not check if a smaller reporting company)	Smaller reporting company¨

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

As of November 7, 2012, the registrant had outstanding 21,359,240 shares of Common Stock, no par value.

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2012 (unaudited) and December 31, 2011	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	5
	Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2012 and 2011 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities	57
Item 3.	Default Upon Senior Securities	57
Item 4	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
SIGNATURES		58
EXHIBIT INDEX		59

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PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

BNC BANCORP

CONSOLIDATED BALANCE SHEETS

	September 30, 2012			December 31,
	(Unaudited)			2011
	(In thousands, except share data)
Assets
Cash and due from banks	$	29,596		$	14,523
Interest-earning deposits in other banks		127,011			41,306
Investment securities available for sale, at fair value		250,033			282,174
Investment securities held to maturity, at amortized cost (fair value of $113,664 and $96,342 at September 30, 2012 and December 31, 2011, respectively)		110,645			97,036
Federal Home Loan Bank stock, at cost		6,985			9,159
Loans held for sale		29,883			9,596
Loans:
Covered under loss-share agreements		269,388			320,033
Not covered under loss-share agreements		1,631,004			1,389,450
Less allowance for loan losses		(34,823	)		(31,008	)
Net loans		1,865,569			1,678,475
Accrued interest receivable		8,949			10,174
Premises and equipment, net		55,414			43,220
Other real estate owned:
Covered under loss-share agreements		30,077			47,577
Not covered under loss-share agreements		25,589			20,927
FDIC indemnification asset		56,031			91,851
Investment in bank-owned life insurance		49,524			48,294
Goodwill and other intangible assets, net		30,639			29,115
Other assets		35,228			31,503
Total assets	$	2,711,173		$	2,454,930
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand	$	207,928		$	145,688
Interest-bearing demand		1,067,855			909,402
Time deposits		1,033,304			1,063,097
Total deposits		2,309,087			2,118,187
Short-term borrowings		37,135			70,211
Long-term debt		99,760			93,713
Accrued expenses and other liabilities		13,011			8,964
Total liabilities		2,458,993			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		30,597			30,237
Series B, Mandatorily Convertible Non-Voting Preferred Stock, $10 stated value, 1,804,566 shares issued and outstanding		17,161			17,161
Common stock, no par value; authorized 80,000,000 shares; 21,359,240 and 9,100,890 issued and outstanding at September 30, 2012 and December 31, 2011, respectively		171,871			87,421
Common stock warrants		-			2,412
Retained earnings		27,329			25,614
Stock in directors rabbi trust		(3,090	)		(2,505	)
Directors deferred fees obligation		3,090			2,505
Accumulated other comprehensive income		5,222			1,010
Total shareholders' equity		252,180			163,855
Total liabilities and shareholders' equity	$	2,711,173		$	2,454,930

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF INCOME  (Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012			2011
	(In thousands, except per share data)
Interest Income:
Loans, including fees	$	24,250		$	21,176	$	70,372		$	63,008
Investment securities:
Taxable		1,097			1,389		3,622			4,353
Tax-exempt		2,400			2,475		7,139			7,447
Interest-earning balances and other		67			25		158			86
Total interest income		27,814			25,065		81,291			74,894
Interest Expense:
Demand deposits		3,562			2,967		10,705			8,351
Time deposits		3,711			4,361		11,573			13,718
Short-term borrowings		35			172		296			356
Long-term debt		755			697		2,198			2,157
Total interest expense		8,063			8,197		24,772			24,582
Net Interest Income		19,751			16,868		56,519			50,312
Provision for loan losses, net		3,708			3,524		17,217			10,056
Net interest income after provision for loan losses		16,043			13,344		39,302			40,256
Non-Interest Income:
Mortgage fees		1,773			581		4,267			1,186
Service charges		746			744		2,233			2,439
Investment brokerage fees		206			357		675			741
Earnings on bank-owned life insurance		425			414		1,230			1,259
Gain on sale of investment securities, net		756			1,032		2,375			1,168
Gain on acquisition		-			-		7,734			-
Other		1,347			711		4,230			1,842
Total non-interest income		5,253			3,839		22,744			8,635
Non-Interest Expense:
Salaries and employee benefits		10,291			8,152		29,884			23,014
Occupancy		1,240			961		3,438			2,752
Furniture and equipment		993			632		3,019			1,924
Data processing and supplies		619			514		2,012			1,678
Advertising and business development		509			326		1,272			1,252
Insurance, professional and other services		2,136			668		4,702			2,538
FDIC insurance assessments		609			485		1,709			1,945
Loan, foreclosure and other real estate owned expenses		2,658			1,975		7,279			5,967
Other		1,344			1,002		4,086			3,270
Total non-interest expense		20,399			14,715		57,401			44,340
Income before income tax expense (benefit)		897			2,468		4,645			4,551
Income tax expense (benefit)		(492	)		46		(760	)		(982	)
Net Income		1,389			2,422		5,405			5,533
Less preferred stock dividends and discount accretion		601			601		1,803			1,803
Net Income Available to Common Shareholders	$	788		$	1,821	$	3,602		$	3,730
Basic earnings per common share	$	0.04		$	0.18	$	0.25		$	0.37
Diluted earnings per common share	$	0.04		$	0.18	$	0.25		$	0.37
Dividends declared and paid per common share	$	0.05		$	0.05	$	0.15		$	0.15

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE  INCOME (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	(In thousands)
Net income	$	1,389		$	2,422		$	5,405		$	5,533
Other comprehensive income:
Investment securities:
Unrealized holding gains on investments securities available for sale		1,409			7,635			4,394			14,681
Tax effect		(544	)		(2,943	)		(1,694	)		(5,659	)
Reclassification of gains recognized in net income		(756	)		(1,032	)		(2,375	)		(1,168	)
Tax effect		292			398			916			450
Amortization of unrealized gains on investment securities transferred from available for sale to held to maturity		(134	)		-			(403	)		-
Tax effect		51			-			155			-
Net of tax amount		318			4,058			993			8,304
Cash flow hedging activities:
Unrealized holding losses		(134	)		(2,507	)		(566	)		(5,262	)
Tax effect		52			966			218			2,028
Reclassification of losses recognized in net income		2,014			1,375			5,807			3,419
Tax effect		(778	)		(530	)		(2,240	)		(1,318	)
Net of tax amount		1,154			(696	)		3,219			(1,133	)
Total other comprehensive income		1,472			3,362			4,212			7,171
Total comprehensive income	$	2,861		$	5,784		$	9,617		$	12,704

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS 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
	(Amounts 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		-			-			-			-		-		-			-			5,533			-			-		-			5,533
Directors deferred fees		-			-			-			-		-		-			-			-			(304	)		304		-			-
Other comprehensive income, net of tax		-			-			-			-		-		-			-			-			-			-		7,171			7,171
Common stock issued pursuant to:
Exercise of stock options		5,000			41			-			-		-		-			-			-			-			-		-			41
Stock-based compensation		6,665			254			-			-		-		-			-			-			-			-		-			254
Dividend reinvestment plan		20,555			154			-			-		-		-			-			-			-			-		-			154
Cash dividends:
Common stock, $0.15 per share		-			-			-			-		-		-			-			(1,359	)		-			-		-			(1,359	)
Preferred stock, net of accretion		-			-			-			360		-		-			-			(1,803	)		-			-		-			(1,443	)
Balance, September 30, 2011		9,085,580		$	87,240		$	2,412		$	30,117	$	17,161	$	-		$	-		$	25,272		$	(2,033	)	$	2,033	$	373		$	162,575
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		-			-			-			-		-		-			-			5,405			-			-		-			5,405
Directors deferred fees		-			-			-			-		-		-			-			-			(585	)		585		-			-
Other comprehensive income, net of tax		-			-			-			-		-		-			-			-			-			-		4,212			4,212
Preferred stock issued, net		-			-			-			-		-		40,688			27,620			-			-			-		-			68,308
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		41,501			411			-			-		-		-			-			-			-			-		-			411
Dividend reinvestment plan		21,066			162			-			-		-		-			-			-			-			-		-			162
Acquisition of KeySource		1,810,267			13,942			-			-		-		-			-			-			-			-		-			13,942
Conversion of preferred stock		10,356,613			68,308			-			-		-		(40,688	)		(27,620	)		-			-			-		-			-
Redemption of common stock warrant		-			1,472			(2,412	)		-		-		-			-			-			-			-		-			(940	)
Cash dividends:
Common stock, $0.15 per share		-			-			-			-		-		-			-			(1,887	)		-			-		-			(1,887	)
Preferred stock, net of accretion		-			-			-			360		-		-			-			(1,803	)		-			-		-			(1,443	)
Balance, September 30, 2012		21,359,240		$	171,871		$	-		$	30,597	$	17,161	$	-		$	-		$	27,329		$	(3,090	)	$	3,090	$	5,222		$	252,180

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2012			2011
	(In thousands)
Operating activities
Net income	$	5,405		$	5,533
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		17,217			10,056
Depreciation and amortization		2,098			1,684
Amortization of premiums, net		744			61
Amortization of core deposit intangible		396			291
Accretion of fair value purchase accounting adjustments		(4,792	)		(3,795	)
Cash flow hedge caplet expense		5,807			3,419
Gain on acquisition		(7,734	)		-
Stock-based compensation		411			254
Deferred compensation		630			447
Earnings on bank-owned life insurance		(1,230	)		(1,259	)
Net gain on sale of investment securities available for sale		(2,375	)		(1,168	)
Loss on sale of premises and equipment		183			-
Losses on other real estate owned		4,107			2,915
Gain on sale of loans (mortgage fees)		(4,267	)		(1,186	)
Origination of loans held for sale		(184,460	)		(48,800	)
Proceeds from sales of loans held for sale		168,440			49,984
Decrease in accrued interest receivable		1,897			2,746
Decrease in FDIC indemnification asset		49,959			21,047
(Increase) decrease in other assets		1,997			(3,358	)
Increase (decrease) in accrued expenses and other liabilities		1,706			(2,666	)
Other operating activities, net		-			21
Net cash provided by operating activities		56,139			36,226
Investing activities
Purchases of investment securities available for sale		(47,635	)		(48,907	)
Purchases of investment securities held to maturity		(14,272	)		-
Proceeds from sales of investment securities available for sale		57,134			49,789
Proceeds from maturities of investment securities available for sale		30,044			23,620
Redemption (purchase) of Federal Home Loan Bank stock		2,716			(1,102	)
Net increase in loans		(69,354	)		(99,357	)
Purchases of premises and equipment		(7,935	)		(9,339	)
Proceeds from disposal of premises and equipment		283			-
Investment in other real estate owned		(1,052	)		(524	)
Proceeds from sales of other real estate owned		35,827			17,629
Net cash received from acquisitions		67,387			-
Net cash provided by (used in) by investing activities		53,143			(68,191	)
Financing activities
Net increase (decrease) in deposits		(38,986	)		7,534
Net increase (decrease) in short-term borrowings		(33,856	)		32,252
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		162			154
Redemption of common stock warrant		(940	)		-
Cash dividends paid, net of accretion		(3,330	)		(2,802	)
Net cash provided by (used in) financing activities		(8,504	)		37,179
Net increase in cash and cash equivalents		100,778			5,214
Cash and cash equivalents, beginning of period		55,829			30,087
Cash and cash equivalents, end of period	$	156,607		$	35,301

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)

	Nine Months Ended
	September 30,
	2012			2011
	(In thousands)
Supplemental Statement of Cash Flows Disclosure
Interest paid	$	24,594		$	21,476
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	$	1,240		$	8,304
Decrease in fair value of cash flow hedge, net of tax		(348	)		(3,077	)
Transfer of loans to foreclosed real estate		32,131			27,755
FDIC indemnification asset increase for losses, net		12,984			1,989
Acquisition:
Fair value of assets acquired		242,600			-
Fair value of liabilities assumed		241,654			-

See accompanying notes to unaudited consolidated financial statements.

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BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and nine months ended September 30, 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 reported in prior periods have been reclassified to conform to the current 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 date of the Annual Report on Form 10-K.

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

NOTE 2 – ACQUISITIONS

Acquisition of KeySource Financial, Inc.

On September 14, 2012, BNC acquired all the outstanding shares of KeySource Financial, Inc. (“KeySource”), pursuant to an agreement and plan of merger dated December 21, 2011 (the “Merger Agreement”). KeySource operated one branch in Durham, North Carolina. The acquisition of KeySourceexpands and enhances the BNC franchise in the Raleigh-Durham market.

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BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

A summary of assets received and liabilities assumed for KeySource and the estimated fair value adjustments are as follows (dollars in thousands):

	September 14, 2012
	As recorded by		Fair value			As recorded
	KeySource		adjustments			by BNC
Assets
Cash and due from banks	$	19,847	$	-		$	19,847
Investment securities available for sale		3,445		-			3,445
Federal Home Loan Bank stock, at cost		430		-			430
Loans		148,295		(8,690	)(1)		139,605
Premises and equipment		650		-			650
Accrued interest receivable		547		-			547
Other real estate owned		1,289		(150	)(2)		1,139
Core deposit intangible		-		621	(3)		621
Other assets		4,445		3,516	(4)		7,961
Total assets acquired	$	178,948	$	(4,703	)		174,245
Liabilities
Deposits	$	151,553	$	854	(5)		152,407
Short-term borrowings		780		-			780
Long-term debt		5,999		48	(6)		6,047
Other liabilities		1,754		-			1,754
Total liabilities assumed	$	160,086	$	902			160,988
Net assets acquired							13,257
Total consideration paid							13,942
Goodwill						$	685

Explanation of fair value adjustments: 

(1) -	Adjustment for the fair value of the acquired loan portfolio.
(2) -	Adjustment for the fair value of the acquired other real estate owned.
(3) -	Adjustment for the estimated value of the core deposit intangible.
(4) -	Adjustment for deferred tax asset recognized from acquisition.
(5) -	Adjustment for the estimated fair value of time deposits.
(6) -	Adjustment for the fair value of the subordinated debt assumed.

A summary of the consideration paid for KeySource is as follows (dollars in thousands):

Common stock issued (1,810,267 shares)	$	13,686
Fair value of KeySource stock options assumed		256
Total consideration paid	$	13,942

Direct costs related to the KeySource acquisition were expensed as incurred and amounted to $1.3 million for the nine months ended September 30, 2012. Direct costs include primarily severance costs, professional services, data processing fees, marketing and advertising and other non-interest expenses.

The following table presents financial information regarding the former KeySource operations included in our Consolidated Statements of Income from the date of acquisition through September 30, 2012 under the column “Actual from acquisition date through September 30, 2012”. These amounts do not include direct costs as explained above. In addition, the following table presents unaudited pro forma information as if the acquisition of KeySource had occurred on January 1, 2011 under the “Pro forma” columns. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. Direct costs of $1.3 million related to the KeySource merger that we incurred during the nine months ended September 30, 2012 are not reflected in the unaudited pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with KeySource at the beginning of 2011. Cost savings are also not reflected in the unaudited pro forma amounts for the nine months ended September 30, 2012 and 2011 (dollars in thousands).

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 BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

	Actual from acqusition		Pro forma
	date through		Nine months ended September 30,
	September 30, 2012		2012		2011
Net interest income	$	266	$	62,427	$	56,220
Non-interest income		4		23,875		9,766
Net income		199		7,753		7,056
Net income available to common shareholders		199		5,950		5,253
Pro forma earnings per share:
Basic			$	0.36	$	0.44
Diluted				0.36		0.43

FDIC-Assisted Acquisition of Carolina Federal Savings Bank

On June 8, 2012, BNC acquired certain assets and liabilities of Carolina Federal Savings Bank, 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.

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 in the 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.

- 11 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

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 liabilities 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 the estimated fair value of time deposits.
(5) -	Adjustment for the deferred tax liability from the acquisition gain.

In connection with the transaction, BNC recorded $7.7 million in net 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.

Acquisition of Branches from The Bank of Hampton Roads

On September 21, 2012, BNC acquired two branchesof Gateway Bank & Trust Company located in Cary and Chapel Hill, North Carolina, respectively, which were owned and operated by The Bank of Hampton Roads (“BHR”). The assets acquired, which included cash, premises and equipment, and other assets totaling $24.1 million, and liabilities assumed, which included deposits and other liabilities totaling $24.5 million, were recorded at their estimated fair values as of the acquisition date based on management’s best estimate using the information available at that time. BNC recorded approximately $400,000 of goodwill related to this acquisition. Fair value adjustments to assets acquired and liabilities assumed will be amortized on a straight-line basis over periods consistent with the average life, contractual term and/or useful life of the related assets and liabilities.

BNC has determined the acquisitions of KeySource, Carolina Federal and the BHR branches constitute 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.

- 12 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

The estimated fair values are 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.

NOTE 3 – SHAREHOLDERS’ EQUITY

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.

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.

TARP Auction and Warrant Redemption

On December 5, 2008, as part of the U.S. Department of the Treasury’s (“Treasury”) Capital Purchase Program, the Company issued and sold 31,260 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and a warrant to purchase up to 543,337 shares of the Company’s common stock to the Treasury.  On August 29, 2012, the Treasury completed the auction and sale of its investment in the Company’s preferred stock to private investors.  The Company received no proceeds from the auction. On September 19, 2012, the Company completed the repurchase of the warrant from the Treasury for $940,000. This warrant has been cancelled.

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 warrants under the Treasury’s Capital Purchase Program (collectively referred to herein as “Stock Rights”). As discussed in Note 3, the warrant issued in connection with the Treasury’s Capital Purchase Program was repurchased by the Company and cancelled in September 2012. 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.

- 13 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Net income available to common shareholders	$	788	$	1,821	$	3,602	$	3,730
Add:  Convertible preferred stock dividends		90		90		270		270
Net income available to participating common shareholders	$	878	$	1,911	$	3,872	$	4,000
Weighted average common shares - basic		19,840,076		9,080,235		13,548,555		9,067,224
Add:  Effect of convertible preferred stock		1,804,566		1,804,566		1,804,566		1,804,566
Weighted average participating common shares - basic		21,644,642		10,884,801		15,353,121		10,871,790
Effects of dilutive Stock Rights		1,395		14,852		5,334		16,381
Weighted average participating common shares - diluted		21,646,037		10,899,653		15,358,455		10,888,171
Basic earnings per common share	$	0.04	$	0.18	$	0.25	$	0.37
Diluted earnings per common share	$	0.04	$	0.18	$	0.25	$	0.37

For both the three and nine months ended September 30, 2012, there were 455,411 shares of Stock Rights that were excluded in computing diluted common shares outstanding because the exercise price exceeded the market price of the common shares outstanding. For the three and nine months ended September 30, 2011, there were 678,990 and 677,590 shares of Stock Rights, respectively, excluded in computing diluted common shares outstanding because the exercise price exceeded the average share value for the periods.

- 14 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

NOTE 5 – INVESTMENT SECURITIES

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

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
September 30, 2012:
Available for sale:
U.S. government agencies	$	17,967	$	206	$	-	$	18,173
State and municipals		153,952		11,469		81		165,340
Mortgage-backed securities:
Residential government sponsored		52,393		3,967		-		56,360
Other government sponsored		9,646		514		-		10,160
	$	233,958	$	16,156	$	81	$	250,033
Held to maturity:
State and municipals	$	104,645	$	4,092	$	33	$	108,704
Other debt securities		6,000		-		1,040		4,960
	$	110,645	$	4,092	$	1,073	$	113,664

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
December 31, 2011:
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
	$	268,118	$	14,193	$	137	$	282,174
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 September 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):

- 15 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

	Amortized cost		Fair value
Available for sale:
Due in one year or less	$	1,341	$	1,372
Due after one year through five years		4,522		4,587
Due after five through ten years		3,096		3,330
Due after ten years		224,999		240,744
	$	233,958	$	250,033
Held to maturity:
Due after one year through five years	$	882	$	896
Due after five through ten years		11,657		10,713
Due after ten years		98,106		102,055
	$	110,645	$	113,664

At September 30, 2012, and December 31, 2011, investment securities with an estimated fair value of approximately $169.5 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 September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Proceeds from sales	$	17,563	$	22,930		$	57,134		$	49,789
Gross realized gains on sales	$	756	$	1,467		$	2,476		$	2,122
Gross realized losses on sales		-		(435	)		(101	)		(954	)
Total realized gains, net	$	756	$	1,032		$	2,375		$	1,168

The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011 (dollars in thousands):

- 16 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
September 30, 2012:
Available for sale:
State and municipals	$	10,835	$	81	$	-	$	-	$	10,835	$	81
Mortgage-backed		-		-		-		-		-		-
	$	10,835	$	81	$	-	$	-	$	10,835	$	81
Held to maturity:
State and municipals	$	4,476	$	33	$	-	$	-	$	4,476	$	33
Other debt securities		-		-		4,960		1,040		4,960		1,040
	$	4,476	$	33	$	4,960	$	1,040	$	9,436	$	1,073

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
December 31, 2011:
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 September 30, 2012, the unrealized losses relate to 10 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 September 30, 2012. In addition, the Company noted the issuers of the corporate debt securities are financially sound and well capitalized. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, these debt securities before the anticipated recovery of the amortized costs basis.

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 September 30, 2012 and December 31, 2011 are summarized below (dollars in thousands):

- 17 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

	September 30, 2012						December 31, 2011
	Covered		Non-covered				Covered		Non-covered
	loans		loans		Total		loans		loans		Total
Commercial real estate	$	121,426	$	915,374	$	1,036,800	$	135,242	$	722,826	$	858,068
Commercial construction		36,771		173,197		209,968		51,426		175,710		227,136
Commercial and industrial		11,962		144,626		156,588		16,402		124,479		140,881
Leases		-		13,541		13,541		-		12,806		12,806
Total commercial		170,159		1,246,738		1,416,897		203,070		1,035,821		1,238,891
Residential construction		5,473		25,581		31,054		3,992		25,740		29,732
Residential mortgage		91,096		349,118		440,214		109,058		317,949		427,007
Consumer and other		2,660		9,567		12,227		3,913		9,940		13,853
	$	269,388	$	1,631,004	$	1,900,392	$	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 of covered acquired loans and accretable yield for loans receivable for the nine months ended September 30, 2012 and the year ended December 31, 2011 is as follows (dollars in thousands):

	September 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		-			(37,443	)		-			(62,573	)
Reclasses from non-accretable to accretable yield		-			-			(3,055	)		-
Accretion		1,989			1,989			7,677			7,677
Balance at end of period	$	(6,398	)	$	284,579		$	(8,387	)	$	320,033

The unpaid principal balance for covered loans was $307.3 million and $385.3 million at September 30, 2012 and December 31, 2011, respectively.

The Company evaluates loans acquired with evidence of credit deterioration in accordance with the provisions of ASC Topic 310-30:Loans and Debt Securities Acquired with Deteriorated Credit Quality. Credit-impaired loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, the Company will not collect all contractually required principal and interest payments. Generally, the acquired loans that meet the Company’s definition for nonaccrual status fall within the definition of credit-impaired covered loans. The following table presents loans at acquisition date accounted for under ASC Topic 310-30 for the nine months ended September 30, 2012 (dollars in thousands):

- 18 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

Contractually required payments receivable	$	19,811
Contractual cash flows not expected to be collected (nonaccretable)		(5,522	)
Expected cash flows		14,289
Interest component of expected cash flows		(806	)
Fair value of loans acquired	$	13,483

For the nine months ended September 30, 2012, the acquisition date unpaid balance of loans acquired that did not have credit deterioration was $161.5 million with an estimated fair value of $155.6 million. The discount of $5.8 million will be amortized on a level-yield basis over the economic life of the loans.

The Company has the ability to borrow funds from the FHLB and from the Federal Reserve Bank. At September 30, 2012 and December 31, 2011, real estate loans with carrying values of $415.2 million and $496.3 million, respectively, were pledged to secure borrowing facilities from these institutions.

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis.   Each loan portfolio is subject to risks that could have an adverse impact on the credit quality of the loan portfolio.

Commercial real estate loans

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

Commercial construction loans

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

Commercial and industrial and leases

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

Residential construction loans

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

- 19 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

Residential mortgage loans

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

Consumer and other loans

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

An analysis of the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 is as follows (dollars in thousands):

- 20 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

							Commercial
	Commercial			Commercial			and					Residential			Residential			Consumer
2012	real estate			construction			industrial			Leases		construction			mortgage			and other			Total
Allowance for loan losses:
Three months ended:
Balance July 1, 2012	$	14,335		$	11,130		$	5,591		$	18	$	650		$	9,038		$	94		$	40,856
Charge-offs		(2,843	)		(2,033	)		(2,262	)		-		(40	)		(3,838	)		(41	)		(11,057	)
Recoveries		687			61			44			-		24			140			2			958
Provision (a)		(134	)		1,759			(359	)		-		(56	)		2,486			12			3,708
Increase in FDIC indemnification asset (a)		-			-			-			-		-			358			-			358
Balance September 30, 2012	$	12,045		$	10,917		$	3,014		$	18	$	578		$	8,184		$	67		$	34,823
Nine months ended:
Balance January 1, 2012	$	11,789		$	10,957		$	4,338		$	18	$	699		$	3,058		$	149		$	31,008
Charge-offs		(6,632	)		(9,722	)		(4,392	)		-		(220	)		(6,425	)		(152	)		(27,543	)
Recoveries		704			926			261			-		24			718			11			2,644
Provision (a)		2,778			6,476			2,439			-		75			5,390			59			17,217
Increase in FDIC indemnification asset (a)		3,406			2,280			368			-		-			5,443			-			11,497
Balance September 30, 2012	$	12,045		$	10,917		$	3,014		$	18	$	578		$	8,184		$	67		$	34,823
Ending balances:
Specific reserves:
Impaired loans	$	638		$	2,089		$	6		$	-	$	2		$	1,356		$	-		$	4,091
Purchase credit impaired loans		4,187			2,917			458			-		-			1,766			-			9,328
Total specific reserves		4,825			5,006			464			-		2			3,122			-			13,419
General reserves		7,220			5,911			2,550			18		576			5,062			67			21,404
Total	$	12,045		$	10,917		$	3,014		$	18	$	578		$	8,184		$	67		$	34,823
Loans:
Ending balance:
Individually evaluated for impairment	$	27,946		$	20,162		$	1,454		$	-	$	362		$	16,975		$	122		$	67,021
Purchase credit impaired loans		27,148			17,993			1,279			-		1,722			20,354			77			68,573
Loans collectively evaluated for impairment		981,706			171,813			153,855			13,541		28,970			402,885			12,028			1,764,798
Total	$	1,036,800		$	209,968		$	156,588		$	13,541	$	31,054		$	440,214		$	12,227		$	1,900,392

(a) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $89,000 and $2.9 million for the three and nine months ended September 30, 2012, respectively. This resulted in an increase in the FDIC indemnification asset of $358,000 and $11.5 million for the three and nine months ended September 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 $447,000 and $14.4 million for the three and nine months ended September 30, 2012.

- 21 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

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

- 22 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

The following presents information related to impaired loans as of September 30, 2012 and December 31, 2011 (dollars in thousands):

	Impaired loans - with allowance						Impaired loans - with  no allowance
			Unpaid		Allowance for				Unpaid
	Recorded		principal		loan losses		Recorded		principal
September 30, 2012:	investment		balance		allocated		investment		balance
Non-covered:
Commercial real estate	$	11,376	$	11,348	$	638	$	19,891	$	19,841
Commercial construction		12,178		12,132		2,089		12,436		13,404
Commercial and industrial		100		100		6		1,354		1,354
Residential construction		363		362		2		-		-
Residential mortgage		12,857		12,816		1,356		5,182		5,207
Consumer and other		-		-		-		123		122
Total non-covered		36,874		36,758		4,091		38,986		39,928
Covered:
Commercial real estate		10,171		11,432		4,187		9,562		14,136
Commercial construction		5,702		7,890		2,917		12,299		15,133
Commercial and industrial		458		458		458		820		858
Residential construction		-		-		-		1,722		2,748
Residential mortgage		5,441		7,793		1,766		14,807		16,876
Consumer and other		-		-		-		77		80
Total covered		21,772		27,573		9,328		39,287		49,831
Total loans	$	58,646	$	64,331	$	13,419	$	78,273	$	89,759

- 23 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

							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 information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 and 2011 (dollars in thousands):

	Three Months Ended September 30,								Nine Months Ended September 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	$	25,527	$	173	$	4,140	$	43	$	21,337	$	313	$	5,778	$	66
Commercial construction		15,683		106		13,985		30		17,775		263		10,688		76
Commercial and industrial		820		7		216		-		2,363		52		473		-
Residential construction		363		3		-		-		161		4		364		4
Residential mortgage		17,887		134		7,158		58		12,392		232		5,477		110
Total impaired loans with allowance	$	60,280	$	423	$	25,499	$	131	$	54,028	$	864	$	22,780	$	256
Impaired loans with no allowance:
Commercial real estate	$	22,471	$	166	$	32,848	$	28	$	24,382	$	460	$	35,129	$	66
Commercial construction		22,729		104		33,556		80		22,925		292		37,753		167
Commercial and industrial		2,272		28		5,136		25		2,171		43		5,234		49
Leases		-		-		-		-		-		-		1		-
Residential construction		1,409		-		1,289		9		2,271		23		2,178		18
Residential mortgage		22,140		76		29,853		16		26,343		186		27,249		23
Consumer and other		204		3		28		-		178		4		110		-
Total impaired loans with no allowance	$	71,225	$	377	$	102,710	$	158	$	78,270	$	1,008	$	107,654	$	323

- 24 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

For the three and nine months ended September 30, 2012, 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 nine months ended September 30, 2012, 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 an aging analysis of past due loans as of September 30, 2012 and December 31, 2011 (dollars in thousands):

					Greater
					than
	30-59 days		60-89 days		90 days				Total				Total
September 30, 2012:	past due		past due		past due		Nonaccrual		past due		Current		loans
Non-covered:
Commercial real estate	$	1,625	$	1,610	$	-	$	6,921	$	10,156	$	905,218	$	915,374
Commercial construction		324		-		4,044		9,369		13,737		159,460		173,197
Commercial and industrial		254		-		-		1,131		1,385		143,241		144,626
Leases		-		-		-		-		-		13,541		13,541
Residential construction		-		-		-		-		-		25,581		25,581
Residential mortgage		4,277		1,720		93		7,788		13,878		335,240		349,118
Consumer and other		24		38		-		11		73		9,494		9,567
Total non-covered		6,504		3,368		4,137		25,220		39,229		1,591,775		1,631,004
Covered:
Commercial real estate		3,107		1,242		-		14,501		18,850		102,576		121,426
Commercial construction		-		246		-		16,633		16,879		19,892		36,771
Commercial and industrial		1,037		137		-		1,279		2,453		9,509		11,962
Residential construction		-		-		-		1,722		1,722		4,516		5,473
Residential mortgage		723		448		-		20,217		21,388		74,606		91,096
Consumer and other		49		-		1		75		125		3,077		2,660
Total covered		4,916		2,073		1		54,427		61,417		214,176		269,388
Total loans	$	11,420	$	5,441	$	4,138	$	79,647	$	100,646	$	1,805,951	$	1,900,392

- 25 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

					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.

At least annually the Company will review all loans exceeding a certain threshold and assign a risk rating. Loans excluded from the scope of the annual review process 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 or new loan. 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.

- 26 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

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

			Pass		Special
September 30, 2012	Total		credits		mention		Substandard		Doubtful		Loss
Non-covered:
Commercial real estate	$	915,374	$	826,320	$	47,535	$	41,519	$	-	$	-
Commercial construction		173,198		131,085		20,334		21,778		1		-
Commercial and industrial		144,625		136,904		5,454		2,267		-		-
Leases		13,541		13,541		-		-		-		-
Residential construction		25,581		23,251		223		2,107		-		-
Residential mortgage		349,118		303,340		23,069		22,709		-		-
Consumer and other		9,567		9,181		316		63		7		-
Total non-covered		1,631,004		1,443,622		96,931		90,443		8		-
Covered:
Commercial real estate		121,426		78,382		12,296		19,955		10,783		10
Commercial construction		36,771		15,790		1,536		10,731		8,714		-
Commercial and industrial		11,962		7,229		2,657		1,296		780		-
Residential construction		5,473		1,717		624		1,688		1,444		-
Residential mortgage		91,096		49,433		16,998		10,944		13,634		87
Consumer and other		2,660		2,368		207		62		23		-
Total covered		269,388		154,919		34,318		44,676		35,378		97
Total loans	$	1,900,392	$	1,598,541	$	131,249	$	135,119	$	35,386	$	97

			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

- 27 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

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.

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

							Allowance for
					Total		loan losses
	Accrual		Nonaccrual		TDRs		allocated
September 30, 1012:
Commercial real estate	$	17,434	$	4,787	$	22,221	$	120
Commercial construction		6,552		7,079		13,631		1,178
Commercial and industrial		325		1,029		1,354		-
Residential mortgage		9,762		4,907		14,669		771
Consumer and other		122		11		133		-
Total modifications	$	34,195	$	17,813	$	52,008	$	2,069

							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 September 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:

- 28 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

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.

The following table presents new TDRs, by modification category, for the three and nine months ended September 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
	Term		only		Combination		Total
Three Months Ended September 30, 2012:	modifications		modifications		modifications		modifications
Commercial real estate	$	-	$	1,893	$	458	$	2,351
Commercial construction		-		380		-		380
Residential mortgage		59		-		2,097		2,156
Consumer and other		-		11		-		11
Total modifications	$	59	$	2,284	$	2,555	$	4,898
Total number of contracts		1		3		5		9

			Interest
	Term		only		Combination		Total
Nine Months Ended September 30, 2012:	modifications		modifications		modifications		modifications
Commercial real estate	$	2,517	$	3,034	$	11,083	$	16,634
Commercial construction		641		1,693		-		2,334
Commercial and industrial		34		-		294		328
Residential mortgage		515		3,233		4,993		8,741
Consumer and other		-		11		-		11
Total modifications	$	3,707	$	7,971	$	16,370	$	28,048
Total number of contracts		7		13		17		37

- 29 -

BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

					Interest
	Rate		Term		only		Combination		Total
Three Months Ended September 30, 2011:	modifications		modifications		modifications		modifications		modifications
Commercial real estate	$	4,588	$	-	$	-	$	-	$	4,588
Commercial construction		-		-		94		48		142
Commercial and industrial		34		-		200		58		292
Residential construction		142		-		238		4,161		4,541
Consumer and other		-		3		-		-		3
Total modifications	$	4,764	$	3	$	532	$	4,267	$	9,566
Total number of contracts		4		1		3		7		15

					Interest
	Rate		Term		only		Combination		Total
Nine Months Ended September 30, 2011:	modifications		modifications		modifications		modifications		modifications
Commercial real estate	$	4,588	$	659	$	1,606	$	4,136	$	10,989
Commercial construction		783		52		14,092		4,173		19,100
Commercial and industrial		59		-		200		2,342		2,601
Residential construction		142		392		238		4,161		4,933
Residential mortgage		878		1,190		1,315		6,987		10,370
Consumer and other		-		3		-		-		3
Total modifications	$	6,450	$	2,296	$	17,451	$	21,799	$	47,996
Total number of contracts		9		8		15		19		51

The following table summarizes the period end balance for loans modified and classified as TDRs in the previous 12 months for which a payment default has occurred during the period (dollars in thousands). The Company defines payment default as movement of the TDR to non-accrual status.

	Number of		Three Months Ended		Number of		Nine Months Ended
	contracts		September 30, 2012		contracts		September 30, 2012
Commercial real estate		1	$	838		3	$	2,522
Commercial construction		3		1,975		7		5,961
Commercial and industrial		-				2		2,339

	Number of		Three Months Ended		Number of		Nine Months Ended
	contracts		September 30, 2011		contracts		September 30, 2011
Commercial real estate		1	$	381		2	$	1,507
Commercial construction		-		-		3		6,297
Consumer and other		1		52		1		52

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

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BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Loans held for sale at September 30,	$	29,883	$	6,753	$	29,883	$	6,753
Proceeds from sales of loans held for sale		60,839		19,258		168,440		49,984
Mortgage fees		1,773		581		4,267		1,186

NOTE 7 – FDIC INDEMNIFICATION ASSET

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Balance at beginning of period	$	72,483		$	61,003		$	91,851		$	69,493
Accretion of present value discount, net		524			250			1,155			250
Post-acquisition adjustments		(348	)		663			12,984			2,483
Receipt of payments from FDIC		(16,628	)		(11,231	)		(49,959	)		(21,541	)
Balance at end of period	$	56,031		$	50,685		$	56,031		$	50,685

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

NOTE 8 – DERIVATIVES

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

Risk Management Policies - Hedging Instruments

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

During the first quarter of 2009, the Company entered into a five-year interest rate derivative contract, with a notional amount of $250 million, to offset the effects of interest rate changes on an unsecured $250 million variable rate money market funding arrangement. Under this cash flow hedge relationship, the Company has structured a synthetic cap, where the objective is to offset the effect of interest rate changes, whenever funding rates are higher than the strike rate of the synthetic cap. During the third quarter of 2009, the Company paid $24.0 million to self-finance the transaction, thus securing a traditional interest rate cap. From this modification, the Company will achieve significantly reduced funding costs. Going forward, the amounts reclassified from other comprehensive income into earnings are expected to be more than compensated for by the reduced variable rate funding costs, as the hedge only covers a portion of the Company’s variable interest rate exposure.  The fair value of this derivative, which is designated as a hedging instrument under ASC Topic 815:Derivatives and Hedging, is a follows (dollars in thousands):

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BNC BANCORP
Notes to Consolidated Financial Statements (Unaudited)

			September 30, 2012			December 31, 2011
	Notional		Balance Sheet			Balance Sheet
	Amount		location	Fair value		location	Fair value
Derivative designated as hedging instrument	$	250,000	Other assets	$	67	Other assets	$	634

The Company has recorded a $7.6 million loss, net of tax, as accumulated other comprehensive income atSeptember 30, 2012, and expects $5.4 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 Consolidated Statements of Comprehensive Income, respectively, relating to derivative instruments designated as cash flow hedges (dollars in thousands, net of tax):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Amount of net loss recorded in OCI (effective portion)	$	83	$	1,540	$	349	$	3,077
Amount of net loss reclassified from OCI to earnings (1)		1,237		845		3,568		2,101
Amount of hedge ineffectiveness		-		-		-		-

(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 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.

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BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

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 assets activity for the nine months ended September 30, 2012 is as follows (dollars in thousands):

			Other
	Goodwill		Intangibles			Total
Balance at December 31, 2011	$	26,129	$	2,986		$	29,115
Acquisitions		1,083		837			1,920
Amortization		-		(396	)		(396	)
Balance at September 30, 2012	$	27,212	$	3,427		$	30,639

- 33 -

BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

No impairment charges were recognized for the nine months ended September 30, 2012.

NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	September 30,			December 31,
	2012			2011
Unrealized holding gains – investment securities available for sale, net of tax	$	9,877		$	8,637
Unrealized holding gains – investment securities transferred from available for sale to held to maturity, net of tax		2,963			3,211
Unrealized holding losses – cash flow hedge instruments, net of tax		(7,618	)		(10,838	)
Total accumulated other comprehensive income	$	5,222		$	1,010

NOTE 11 - FAIR VALUE MEASUREMENT

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

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

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

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

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

Investment Securities Available for Sale. The fair values of investment securities available for sale are recorded at quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 valuation 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 derivative instruments held or issued for risk management purposes as Level 2 valuation.

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BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

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

	Assets
	measured at		Fair value measured using
Description	fair value		Level 1		Level 2		Level 3
At September 30, 2012:
Investment securities available for sale:
U.S. government agencies	$	18,173	$	-	$	18,173	$	-
State and municipals		165,340		-		165,340		-
Mortgage-backed securities:
Residential government sponsored		56,360		-		56,360		-
Other government sponsored		10,160		-		10,160		-
Total investment securities available for sale		250,033		-		250,033		-
Interest rate cap		67		-		67		-
Total assets measured at fair value on a recurring basis	$	250,100	$	-	$	250,100	$	-
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		-
Total investment securities available for sale		282,174		-		282,174		-
Interest rate cap		634		-		634		-
Total assets measured at fair value on a recurring basis	$	282,808	$	-	$	282,808	$	-

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

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

Impaired Loans. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 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.

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

- 35 -

BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

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

	Assets
	measured at		Fair value measured using
Description	fair value		Level 1		Level 2		Level 3
At September 30, 2012:
Loans held for sale	$	29,883	$	-	$	29,883	$	-
Impaired loans		122,175		-		-		122,175
Other real estate owned		55,666		-		-		55,666
Total assets measured at fair value on a nonrecurring basis	$	207,724	$	-	$	29,883	$	177,841
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 September 30, 2012 and December 31, 2011, there were no fair value adjustments related to $27.2 million and $26.1 million of goodwill, respectively, and other intangible assets of $3.4 million and $3.0 million, respectively.

Below is a table that presents the valuation and unobservable inputs for Level 3 assets and liabilities measured at fair value on a nonrecurring basis during the three months ended September 30, 2012 (dollars in thousands):

	Fair value at		Valuation		Range of
Description	September 30, 2012		methodology	Unobservable inputs	inputs
Impaired loans	$	122,175	Appraised value	Discounts to reflect current market conditions and ultimate collectability		0% - 20%
Other real estate owned	$	55,666	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.

- 36 -

BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

The carrying value and estimated fair values of the Company’s 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 (dollars in thousands):

	September 30, 2012
	Carrying		Estimated
	value		fair value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	156,607	$	156,607	$	156,607	$	-	$	-
Investment securities available for sale		250,033		250,033		-		250,033		-
Investment securities held to maturity		110,645		113,664		-		113,664		-
Federal Home Loan Bank stock		6,985		6,985		-		6,985		-
Loans held for sale		29,883		29,883		-		29,883		-
Loans receivable, net		1,865,569		1,853,040		-		1,730,865		122,175
Accrued interest receivable		8,949		8,949		-		8,949		-
FDIC indemnification asset		56,031		56,031		-		-		56,031
Investment in bank-owned life insurance		49,524		49,524		-		49,524		-
Interest rate cap derivative		67		67		-		67		-
Financial liabilities:
Demand deposits and savings	$	1,275,783	$	1,275,783	$	-	$	1,275,783	$	-
Time deposits		1,033,304		1,045,616		-		1,045,616		-
Short-term borrowings		37,135		37,135		-		37,135		-
Long-term debt		99,760		87,165		-		87,165		-
Accrued interest payable		1,248		1,248		-		1,248		-

	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		282,174		282,174		-		282,174		-
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:

- 37 -

BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

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

Investment securities held to maturity - Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as 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.

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

- 38 -

BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

At September 30, 2012 and December 31, 2011, the outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk are as follows (dollars in thousands):

	September 30,		December 31,
	2012		2011
Commitments under unfunded loans and lines of credit	$	248,849	$	199,430
Letters of credit		12,549		13,122
Unused credit card lines		4,603		5,827
Commitments to sell loans held for sale		29,883		9,596

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

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. Detailed descriptions of these plans were included in Note M of the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 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.

On September 14, 2012, the Company merged with KeySource and assumed all of the outstanding and unexercised stock options from KeySource’s non-statutory and incentive stock option plans. As a result, 328,821 fully vested shares were assumed at a weighted average exercise price of $11.04 per share, with a remaining contractual term of 4.86 years.

A summary of option activity under the stock option plans as of September 30, 2012 and changes during the nine months ended September 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
Assumed in merger		328,821			11.04
Exercised		(48,092	)		5.95
Forfeited or expired		(12,041	)		6.95
Outstanding at September 30, 2012		463,813		$	11.32		4.4 years	$	19
Exercisable at September 30, 2012		455,408		$	11.37		4.3 years	$	15
Share options expected to vest		8,405		$	8.59		7.2 years	$	4

- 39 -

BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

The related compensation expense recognized for stock option awards for the nine months ended September 30, 2012 and 2011 was $66,000 and $11,000, respectively. Included in the 2012 amount was $55,000 of additional compensation expense related to the excess fair value of the stock options assumed from KeySource. As of September 30, 2012, there was $20,000 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 1.19 years. For the nine months ended September 30, 2012, the intrinsic value of options exercised amounted to $7,400. There were no options exercised for the nine months ended September 30, 2011.

Restricted Stock Awards.A summary of the status of the Company’s non-vested stock awards as of September 30, 2012 and changes during the nine months ended September 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		69,750			7.55
Vested		(14,563	)		8.18
Non-vested at September 30, 2012		125,311		$	7.41

The related compensation expense recognized for restricted stock awards for the nine months ended September 30, 2012 and 2011 was $310,000 and $243,000, respectively. As of September 30, 2012, there was $533,000 of total unrecognized compensation cost related to non-vested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 1.21 years.

NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS

In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-06,Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (ASU 2012-06), which addresses diversity in practice regarding the subsequent measurement of an indemnification asset in a government-assisted acquisition of a financial institution that includes a loss-sharing agreement. The amendments are effective for interim and annual reporting periods beginning on or after December 15, 2012 with early adoption permitted. The Company does not believe the adoption of this ASU will have a material impact on the consolidated financial statements.

In July 2012 the FASB issued 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.

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 subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013. As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the adoption will have no impact on the Company’s consolidated financial statements.

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BNC BANCORP

 Notes to Consolidated Financial Statements (Unaudited)

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 MATERIAL DEFINITIVE AGREEMENT

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.

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 operations, 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 September 21, 2012, we acquired the deposits and certain other assets of two branches that were owned by The Bank of Hampton Roads, a subsidiary of Hampton Roads Bankshares, Inc, located at Preston Corners in Cary, North Carolina and Meadowmont Village Circle in Chapel Hill, North Carolina.

On September 14, 2012, we acquired 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. The acquisition of KeySource, as well as the acquisition of the Bank of Hampton Roads branches, further increases our presence in the combined Raleigh-Durham Metropolitan Statistical Area, the market with the highest forecasted five-year growth rate in North Carolina.

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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-share 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.

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 Transaction 

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. The Agreement and Plan of Merger provides 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 approximately $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.

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 35 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 nine 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. During the third quarter of 2012, we also ended our participation in the Treasury’s Capital Purchase Program with the auction of our Series A preferred stock to private investors. We also repurchased and cancelled the warrant issued to the Treasury to purchase additional stock. As we are building our franchise throughout the Carolinas, we continue our ongoing 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 other real estate owned (“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 BNC to achieve an acceptable resolution of the credit.

Analysis of Results of Operations

Consolidated net income for the third quarter of 2012 was $1.4 million, a decrease of $1.0 million from the $2.4 million of net income from the comparable period of 2011. Our net income available to common shareholders for the third quarter of 2012 was $788,000, or $0.04 per diluted share, compared to $1.8 million, or $0.18 per diluted share, for the third quarter of 2011. During the three months ended September 30, 2012 and 2011, the Company incurred $1.9 million and $109,000, respectively, of expenses associated with merger and acquisition activities. Excluding these expenses, adjusted net income totaled $2.6 million, a slight increase compared to the $2.5 million exclusive of one-time costs for the quarter ended September 30, 2011.

For the nine months ended September 30, 2012, consolidated net income was $5.4 million, a slight decrease from the $5.5 million from the comparable period of 2011. Net income available to common shareholders for the nine months ended September 30, 2012 was $3.6 million, or $0.25 per diluted share, compared to $3.7 million, or $0.37 per diluted share, for the nine months ended September 30, 2011.During the nine months ended September 30, 2012 and 2011, the Company incurred $3.8 million and $368,000, respectively, of expenses associated with merger and acquisition activities. Excluding these expenses, adjusted net income totaled $7.8 million, an increase of 36% compared to the $5.8 million exclusive of one-time costs for the nine months ended September 30, 2011.

Comparability of earnings per share for both the above periods was impacted due to our second quarter capital raise. For the three and nine months ended September 30, 2012, outstanding average diluted shares increased by 10,356,613 shares and 4,308,956 shares, respectively.

The annualized return on average assets was 0.22% for the third quarter of 2012, compared to 0.44% for the third quarter of 2011. The annualized return on average assets was 0.29% for the nine months ended September 30, 2012, compared to 0.34% 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 third quarter of 2012 was $19.8 million, an increase of $2.9 million, or 17.1%, from the comparable period last year. For the nine months ended September 30, 2012 our net interest income totaled $56.5 million, an increase of $6.2 million, or 12.3%, from the comparable period in 2011. During the third quarter of 2012, our net interest margin (FTE) decreased by 4 basis points from the third quarter of 2011 to 3.75%. Excluding the costs associated with our interest rate cap, our net interest margin for the third quarter was 4.11%, a decrease of 1 basis point from the comparable period in 2011.

During the third quarter of 2012, the accretion of yield and fair value discounts totaled $1.1 million, an increase of $100,000 from $1.0 million in the third quarter of 2011. Accretion for the nine months ended September 30, 2012 and 2011 was $3.6 million and $3.5 million, respectively.

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During the third quarter of 2012, our average yield on interest-earning assets (FTE) decreased 29 basis points while the cost of average interest-bearing liabilities decreased 18 basis points when compared to the third quarter of 2011. For the nine months ended September 30, 2012, our average yield on interest-earning assets (FTE) decreased 27 basis points while the cost of average interest-bearing liabilities decreased 15 basis points from the comparable period in 2011.

Total interest income (FTE) increased $2.7 million for the third 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 portfolio loan balances, which have increased $234.4 million for the three months ended September 30, 2012 as compared to the same period in 2011. The increases in average loans are due to the acquisitions of KeySource, Carolina Federal, Regent and Blue Ridge, as well as organic growth in our footprint. Increases in average portfolio loans were offset by a 5 basis point decrease in average interest rates for the quarter ended September 30, 2012, as compared to the third quarter of 2011. Average portfolio loans, as a percentage of average interest-earning assets, decreased to 79.5% for the quarter ended September 30, 2012, compared to 80.7% for the prior year quarter. Average investment securities increased $1.6 million while the average yield on investment securities decreased 50 basis points during the third quarter of 2012, as compared to the third quarter of 2011.

Total interest income (FTE) increased $6.4 million for the nine months ended September 30, 2012 when compared to the comparable period of 2011. This increase in interest income (FTE) is primarily driven by increases in our average portfolio loan balances, which have increased $208.9 million for the nine months ended September 30, 2012 as compared to the same period in 2011. The increases in average loans are due to the acquisitions of KeySource, Carolina Federal, Regent, and Blue Ridge, as well as organic growth in our footprint. Increases in average loans are offset by a 13 basis point decrease in average interest rates during the nine months ended September 30, 2012, as compared to the same period of 2011. Average portfolio loans, as a percentage of total interest-earning assets, increased slightly to 80.5% for the nine months ended September 30, 2012, as compared to the same period in 2011. Average investment securities increased $311,000 while the average yield on investment securities decreased 42 basis points for the nine months ended September 30, 2012 compared to the same period of 2011.

Total interest expense decreased $134,000 for the third quarter of 2012 when compared to the same quarter of 2011. While average time deposits have increased by $66.3 million for the quarter ended September 30, 2012 compared to the same quarter of prior year, the average rates paid on time deposits have decreased by 41 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 $136.9 million, with rates paid on demand deposits increasing 3 basis points. Interest expense on borrowings decreased $79,000, with lower average outstanding balances being offset by an increase of 38 basis points in the average rate during the comparable periods.

Total interest expense for the nine months ended September 30, 2012 increased $190,000 when compared to the same period of 2011. Rates paid on time deposits decreased by 50 basis points, while average time deposits increased by $99.2 million. The decreases in rates were associated with the repricing of our time deposits at lower interest rates. Our average demand deposits increased by $109.7 million, with rates paid on demand deposits increasing 17 basis points. Interest expense on borrowings decreased modestly, with lower average outstanding balances being offset by an increase of 41 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
	September 30, 2012							September 30, 2011
	Average				Average			Average				Average
	balance		Interest		rate			balance		Interest		rate
Interest-earning assets:
Loans and leases	$	1,778,937	$	24,076		5.38	%	$	1,544,516	$	21,142		5.43	%
Loans held for sale		26,187		174		2.64	%		3,194		34		4.22	%
Investment securities, taxable		102,924		1,097		4.24	%		115,392		1,389		4.78	%
Investment securities, tax-exempt*		233,429		3,749		6.39	%		219,317		3,867		7.00	%
Interest-earning balances and other		95,331		67		0.28	%		31,375		25		0.32	%
Total interest-earning assets		2,236,808		29,163		5.19	%		1,913,794		26,457		5.48	%
Other assets		286,479							265,426
Total assets	$	2,523,287						$	2,179,220
Interest-bearing liabilities:
Demand deposits	$	933,437		3,486		1.49	%	$	796,581		2,926		1.46	%
Savings deposits		57,856		76		0.52	%		35,955		41		0.45	%
Time deposits		955,657		3,711		1.54	%		889,363		4,361		1.95	%
Borrowings		123,325		790		2.55	%		159,213		869		2.17	%
Total interest-bearing liabilities		2,070,275		8,063		1.55	%		1,881,112		8,197		1.73	%
Non-interest-bearing deposits		194,006							129,390
Other liabilities		17,965							9,792
Shareholders' equity		241,041							158,926
Total liabilities and shareholder's equity	$	2,523,287						$	2,179,220
Net interest income and
interest rate spread*			$	21,100		3.64	%			$	18,260		3.76	%
Net interest margin*						3.75	%						3.79	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $1.3 million and $1.4 million for the three months ended September 30, 2012 and 2011, respectively.

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	Nine Months Ended							Nine Months Ended
	September 30, 2012							September 30, 2011
	Average				Average			Average				Average
	balance		Interest		rate			balance		Interest		rate
Interest-earning assets:
Loans and leases	$	1,738,084	$	69,924		5.37	%	$	1,529,233	$	62,932		5.50	%
Loans held for sale		20,286		448		2.95	%		2,507		76		4.05	%
Investment securities, taxable		111,571		3,622		4.34	%		119,685		4,353		4.86	%
Investment securities, tax-exempt*		225,625		11,332		6.71	%		217,200		11,636		7.16	%
Interest-earning balances and other		64,715		158		0.33	%		32,545		86		0.35	%
Total interest-earning assets		2,160,281		85,484		5.29	%		1,901,170		79,083		5.56	%
Other assets		296,697							257,072
Total assets	$	2,456,978						$	2,158,242
Interest-bearing liabilities:
Demand deposits	$	912,738		10,533		1.54	%	$	803,052		8,234		1.37	%
Savings deposits		47,708		172		0.48	%		36,012		117		0.43	%
Time deposits		986,168		11,573		1.57	%		886,941		13,718		2.07	%
Borrowings		123,624		2,494		2.69	%		147,058		2,513		2.28	%
Total interest-bearing liabilities		2,070,238		24,772		1.60	%		1,873,063		24,582		1.75	%
Non-interest-bearing deposits		176,196							121,316
Other liabilities		14,944							8,252
Shareholders' equity		195,600							155,611
Total liabilities and shareholder's equity	$	2,456,978						$	2,158,242
Net interest income and
interest rate spread*			$	60,712		3.69	%			$	54,501		3.81	%
Net interest margin*						3.75	%						3.83	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $4.2 million for the nine months ended September 30, 2012 and 2011, respectively.

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

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	Three Months Ended									Nine Months Ended
	September 30, 2012 vs. 2011									September 30, 2012 vs. 2011
	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans and leases	$	3,129		$	(195	)	$	2,934		$	8,031		$	(1,039	)	$	6,992
Loans held for sale		199			(59	)		140			435			(63	)		372
Investment securities, taxable		(145	)		(147	)		(292	)		(427	)		(304	)		(731	)
Investment securities, tax-exempt*		228			(346	)		(118	)		197			(501	)		(304	)
Interest-earning balances and other		48			(6	)		42			78			(6	)		72
Total interest income		3,459			(753	)		2,706			8,314			(1,913	)		6,401
Interest expense:
Deposits:
Demand deposits		498			62			560			1,204			1,095			2,299
Savings deposits		27			8			35			40			15			55
Time deposits		282			(932	)		(650	)		1,360			(3,505	)		(2,145	)
Borrowings		(215	)		136			(79	)		(434	)		415			(19	)
Total interest expense		592			(726	)		(134	)		2,170			(1,980	)		190
Net interest income increase (decrease)	$	2,867		$	(27	)	$	2,840		$	6,144		$	67		$	6,211

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

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors.

We recorded a provision for loan losses of $3.7 million in the third quarter of 2012 compared to a provision for loan losses of $3.5 million in the third quarter of 2011. Of the $3.7 million in provision expense, $3.6 million related to legacy non-covered. The total covered loan provision totaled $447,000 for the third quarter of 2012, with $358,000 recorded through an FDIC indemnification asset.

For the nine months ended September 30, 2012, we recorded a provision for loan losses of $17.2 million compared to a provision for loan losses of $10.1 million for the comparable period in 2011. Of the $17.2 million in provision expense, $14.4 million related to legacy non-covered loans and $2.8 million in related covered loans. The total covered loan provision totaled $14.4 million for the nine months ended September 30, 2012, with $11.5 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 nine months ended September 30, 2012 and 2011 is as follows (dollars in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Balance at beginning of period	$	40,856	$	23,373	$	31,008	$	24,813
Provision charged to operations		3,708		3,524		17,217		10,056
Provision provided from indemnification asset		358		-		11,497		-
Loans charged-off:
Commercial real estate		2,843		789		6,632		3,896
Commercial construction		2,033		1,506		9,722		4,838
Commercial and industrial		2,262		275		4,392		1,052
Residential construction		40		267		220		876
Residential mortgage		3,838		376		6,425		1,009
Consumer and other		41		31		152		51
Total loans charged-off		11,057		3,244		27,543		11,722
Recoveries of loans:
Commercial real estate		687		85		704		142
Commercial construction		61		250		926		270
Commercial and industrial		44		154		261		511
Residential construction		24		3		24		14
Residential mortgage		140		31		718		61
Consumer and other		2		1		11		17
Total loan recoveries		958		524		2,644		1,015
Net charge-offs		10,099		2,720		24,899		10,707
Balance at end of period	$	34,823	$	24,177	$	34,823	$	24,162

Non-Interest Income

Non-interest income was $5.3 million for the third quarter of 2012, compared to non-interest income of $3.8 million for the third quarter of 2011. Excluding the acquisition gain from a FDIC-assisted transaction recorded in the second quarter of 2012, FDIC-related income, and gains on sale of securities, non-interest income was $3.8 million for the three months ended September 30, 2012, an increase of 49.6% from the comparable period of 2011.

Non-interest income was $22.7 million for the nine months ended September 30, 2012, compared to $8.6 million for the comparable period of 2011. Included in non-interest income for the nine months ended September 30, 2012 was $7.7 million of acquisition gain from a FDIC-assisted transaction, $2.4 million of gains on sale of securities, and $2.1 million of income associated with FDIC receivable and related loss-share receipts. Excluding FDIC-related income, acquisition gains, and gains on sale of securities, non-interest income was $10.6 million for the nine months ended September 30, 2012, an increase of 46.5% from the comparable period of 2011.

Mortgage fees generated in the third quarter of 2012 increased $1.2 million, or 205.2%, compared to the third quarter of 2011. Proceeds from sales of loans held for sale totaled $60.8 million for the third quarter of 2012, compared to $19.3 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 nine months ended September 30, 2012, mortgage fees were $4.3 million compared to $1.2 million for the same period in 2011.

Other non-interest income for the third quarter of 2012 increased $636,000, or 89.5%, compared to the third quarter of 2011. Included in other non-interest income for the third quarter of 2012 was $673,000 of FDIC related income, an increase of $423,000 from the income recorded in the comparable period of 2011. For the nine months ended September 30, 2012, other non-interest income totaled $4.2 million, an increase of $2.4 million when compared to the same period in 2011, with an increase in FDIC related income generating $1.8 million of the total increase. SBA income was $335,000 for the third quarter of 2012, an increase from the $207,000 recorded in the comparable period of 2011. For the nine months ended September 30, 2012, SBA income was $1.2 million, an increase of $1.0 million from the $207,000 recorded in the nine months ended September 30, 2011.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Mortgage fees	$	1,773	$	581	$	4,267	$	1,186
Service charges		746		744		2,233		2,439
Investment brokerage fees		206		357		675		741
Earnings on bank-owned life insurance		425		414		1,230		1,259
Gain on sale of investment securities, net		756		1,032		2,375		1,168
Gain on acquisition		-		-		7,734		-
Other		1,347		711		4,230		1,842
Total non-interest income	$	5,253	$	3,839	$	22,744	$	8,635

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 expense was $20.4 million for the third quarter of 2012, compared to $14.7 million for the third quarter of 2011. In comparison to the third quarter of 2011, salaries and employee benefits increased $2.1 million, primarily as a result of acquisitions made since the fourth quarter of 2011, as well as continued franchise growth. Professional services expenses also increased by $1.5 million in comparison to the same period in the prior year due to acquisitions and other strategic initiatives. In addition, we recorded a $1.6 million valuation adjustment related to our OREO properties, as compared to a $936,000 valuation adjustment in the same period of 2011.

Non-interest expense was $57.4 million for the nine months ended September 30, 2012, compared to $44.3 million for the comparable period of 2011. These increases were due to the addition of full-time equivalent employees and facilities as a result of the acquisitions that have been made since the fourth quarter of 2011, as well as continued investments in mortgage originations and overall franchise growth. These personnel additions are expected to contribute to our long-term focus on driving both top line and fee income growth. We also recorded $4.3 million of valuation adjustments for OREO during the nine months ended September 30, 2012, an increase from the $3.0 million recorded in the comparable period of 2011.

Included in non-interest expense for the three and nine months ended September 30, 2012 was merger and transactional costs totaling $1.9 million and $3.8 million, respectively. These costs included professional fees, contract cancellations, personnel costs, and data processing and system conversion expenses.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Salaries and employee benefits	$	10,291	$	8,152	$	29,884	$	23,014
Occupancy		1,240		961		3,438		2,752
Furniture and equipment		993		632		3,019		1,924
Data processing and supplies		619		514		2,012		1,678
Advertising and business development		509		326		1,272		1,252
Insurance, professional and other services		2,136		668		4,702		2,538
FDIC insurance assessments		609		485		1,709		1,945
Loan, foreclosure and other real estate owned		2,658		1,975		7,279		5,967
Other		1,344		1,002		4,086		3,270
Total non-interest expense	$	20,399	$	14,715	$	57,401	$	44,340

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 September 30, 2012, we recorded an income tax benefit of $492,000 compared to income tax expense of $46,000 for the same period in 2011. For the nine months ended September 30, 2012, we recorded an income tax benefit of $760,000 compared to an income tax benefit of $982,000 for the same period in 2011.

Analysis of Financial Condition

Total assets at September 30, 2012 were $2.71 billion, an increase of $256.2 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 $2.39 billion at September 30, 2012 and $2.12 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 September 30, 2012 were $406.6 million, or 15.0% of total assets, which is a $68.6 million increase from the $338.0 million, or 13.8% of total assets, at December 31, 2011.

Period-end portfolio loans, which exclude loans held for sale, totaled $1.90 billion as of September 30, 2012, an increase of $190.9 million, or 11.2%, from December 31, 2011. The increase was due to strong organic growth in our North Carolina franchise, along with the acquisition and integration of KeySource, Carolina Federal, Blue Ridge and Regent. Period-end deposits totaled $2.31 billion, an increase of $190.9 million, or 9.0%, from December 31, 2011. The increase was due to the $230.0 million of deposits assumed from the acquisitions of KeySource, Carolina Federal and, to a lesser extent, the branches acquired from BHR. This increase was partially offset by a $172.0 million decrease in wholesale deposits from December 31, 2011.

We remain well-capitalized with total equity of $252.2 million at September 30, 2012, an increase of $88.3 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.

During the third quarter of 2012, the Treasury completed the auction to private investors of the Company’s preferred stock that was issued to the Treasury in 2008 under the Capital Purchase Program. No proceeds were received in connection with this auction. Subsequent to the auction, the Company repurchased from the Treasury the Company’s outstanding warrants to purchase shares of the Company’s common stock in the amount of $940,000. This warrant has been cancelled.

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Investment Securities

Investment securities were $360.7 million at September 30, 2012 and $379.2 million at December 31, 2011. The decrease of $18.5 million was used to fund our loan growth. The majority of securities in the portfolio are bank-qualified municipal government securities and mortgage-backed securities issued or guaranteed by U.S. government agencies. 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 $16.2 million as of September 30, 2012 and $14.2 million as of December 31, 2011. Gross unrealized losses on our temporarily impaired available for sale investment securities were $81,000 as of September 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 purchased.

Loans

Portfolio loans increased by $190.9 million to $1.90 billion at September 30, 2012, from $1.71 billion at December 31, 2011. See Note 6 of Notes to Consolidated Financial Statements for more information on the composition of covered and non-covered loans. Our non-covered loan portfolio increased $241.6 million to $1.63 billion during the first nine months of 2012, primarily from increases in loan originations and portfolio growth, including $139.6 million of loans acquired from the acquisition of KeySource and $29.5 million of loans acquired from our FDIC-assisted acquisition of Carolina Federal.

Our covered loan portfolio decreased $50.6 million from December 31, 2011 to $269.4 million at September 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 nine months ended September 30, 2012, average portfolio loans were $1.74 billion, compared to $1.53 billion for the same period in 2011. The majority of this increase resulted from the acquisitions of KeySource, Carolina Federal, Blue Ridge and Regent. 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. During the nine months ended September 30, 2012, there were increases in our commercial real estate, commercial and industrial, and residential mortgage portfolios of $192.5 million, $20.1 million, and $31.2 million, respectively. 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.

Allowance for Loan Losses and Asset Quality

The allowance for loan losses was $34.8 million at September 30, 2012, an increase of $3.8 million, or 12.3%, from December 31, 2011. Loan loss reserves to total period-end portfolio loans were 1.83% and 1.81% at September 30, 2012 and December 31, 2011, respectively. Included in the $34.8 million amount is the allowance for loan losses for non-covered loans, which was $24.8 million, a decrease of $768,000 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 decreased from 1.89% at December 31, 2011 to 1.71% at September 30, 2012.

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

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Nonperforming assets include nonaccrual loans, accruing loans 90 days or more past due, and OREO. At September 30, 2012, nonperforming assets not covered by loss-share agreements were $54.8 million, or 2.27% of total assets not covered by loss-share agreements, compared to $40.4 million, or 1.93% of total assets not covered by loss-share agreements at December 31, 2011. Nonperforming assets, including assets covered under loss-share agreements, were $139.3 million, or 5.14% of total assets at September 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 $25.2 million at September 30, 2012, an increase of $5.8 million from $19.4 million at December 31, 2011. Nonaccrual loans, including covered loans, were $79.6 million at September 30, 2012, a decrease of $7.7 million 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):

	September 30,		December 31,
	2012		2011
Commercial real estate	$	21,422	$	25,889
Commercial construction		26,002		28,196
Commercial and industrial		2,410		3,132
Total commercial		49,834		57,217
Residential construction		1,722		1,727
Residential mortgage		28,005		28,262
Consumer and other		86		91
Total nonaccrual loans	$	79,647	$	87,297
Nonaccrual loans covered by loss-share	$	54,427	$	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.

At September 30, 2012, non-covered loans that were restructured or modified and were performing to the restructured terms and not 90 days past due totaled $34.5 million, a decrease of $7.0 million from December 31, 2011. The decrease during the third 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 third quarter of 2012 were $10.1 million, as compared with net charge-offs of $2.7 million for the third quarter of 2011. Expressed as an annualized percentage of average loans outstanding to non-covered portion of charge-offs, net charge-offs were 1.54% and 0.70% for the three months ended September 30, 2012 and 2011, respectively. Net charge-offs for the nine months ended September 30, 2012 were $24.9 million, as compared with net charge-offs of $10.7 million for the same period in 2011. Expressed as an annual percentage of average loans outstanding, net charge-offs were 1.21% and 0.93% for the nine months ended September 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.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net charge-offs to average loans (annualized)		1.54	%		0.70	%		1.21	%		0.93	%
Allowance for loan losses to total loans		1.83	%		1.54	%		1.83	%		1.54	%
Not covered by loss-share		1.52	%		1.85	%		1.52	%		1.85	%
Nonperforming loans to total loans		4.40	%		5.82	%		4.40	%		5.82	%
Not covered by loss-share		1.79	%		2.28	%		1.79	%		2.28	%

At September 30, 2012, OREO decreased to $55.7 million, a decrease of $12.8 million, from December 31, 2011. The decrease from December 31, 2011 was primarily due to $33.3 million of transfers to OREO during the nine months ended September 30, 2012, offset by $35.6 million of sales and $12.0 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):

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

	September 30,		December 31,
	2012		2011
Residential 1-4 family properties	$	15,118	$	29,617
Multifamily properties		1,248		385
Commercial properties		12,230		11,706
Construction, land development and other land		27,070		26,796
Total OREO	$	55,666	$	68,504
OREO covered by loss-share	$	30,077	$	47,577

Deposits

Deposits continue to be our primary funding source. At September 30, 2012 deposits totaled $2.31 billion, an increase of $190.9 million, or 9.0%, 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 nine-month period ended September 30, 2012, transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $220.7 million, while time deposits decreased $29.8 million. For the three months ended September 30, 2012, average deposits were $2.14 billion, compared to $1.85 billion for the same period in 2011. For the nine months ended September 30, 2012, average deposits were $2.12 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, Carolina Federal, KeySource and, to a lesser extent, the BHR branches. At September 30, 2012, time deposits were 44.7% 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, we decreased short-term borrowings from $70.2 million at December 31, 2011 to $37.1 million at September 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 September 30, 2012, long-term debt outstanding totaled $99.8 million compared to $93.7 million at December 31, 2011. Long-term debt at September 30, 2012 consisted of $62.0 million of FHLB advances, and $37.8 million of subordinated debt, of which $23.7 million has been issued through the Company’s trust subsidiaries.

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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 September 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 September 30, 2012 that management believes have changed either the Company’s or BNC’s capital classifications.

At September 30, 2012, shareholders’ equity totaled $252.2 million, an increase of $88.3 million from the December 31, 2011 balance. During the second quarter of 2012, the Company closed 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. On July 17, 2012, the Company’s shareholders approved, pursuant to NASDAQ Marketplace Rule 5635 and the terms of the Common Stock, the conversion of the Common Stock into voting and non-voting Common Stock, effective on July 20, 2012. Additionally, during the third quarter, the Treasury completed the auction and sale of its investment in the Company’s Series A preferred stock and subsequently repurchased the outstanding warrant from the Treasury for $940,000. See Note 3 of Notes to Consolidated Financial Statements for more information.

On September 14, 2012, the Company completed its acquisition of KeySource, which is reflected in Note 2 of the Consolidated Financial Statements. KeySource common shareholders received a share-for-share exchange of the Company’s common stock in exchange for each share of KeySource common stock, resulting in the Company issuing 1,810,267 shares of Common Stock at a fair value of $13.7 million. In addition, the Company assumed KeySource’s stock option plans with a fair value of $256,000.

At September 30, 2012, the Tier I risk-based capital ratio for BNC was 12.75%, the total risk-based capital ratio was 14.00% and all other capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures. At September 30, 2012, the Company’s total risk-based capital ratio was 13.90%, thus classifying the Company as “well-capitalized” for regulatory purposes.

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Liquidity

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

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

Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities, investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; investments available for sale; loan repayments; loan sales; deposits, both from our local markets and the wholesale markets; borrowings from the FHLB and Federal Reserve discount window; and borrowings from correspondent banks under unsecured overnight federal funds credit lines and secured lines of credit. 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 $406.6 million at September 30, 2012, compared to $338.0 million at December 31, 2011. Supplementing customer deposits as a source of funding, we have the ability to borrow up to $292.1 million from the FHLB of Atlanta, with $62.0 million outstanding at September 30, 2012. We also have the ability to borrow from the Federal Reserve Discount Window in the amount of $59.0 million, with no outstanding balances. These amounts are based on assets currently pledged. In addition to the above, we have $187.4 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 September 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 $55.0 million, and the Promontory Interfinancial Network weekly funds auctions where we have another $677.8 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 our recent 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 September 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.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Refer to the Note 12 “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 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

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

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SIGNATURES

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

	BNC BANCORP
Date: November 9, 2012	By:	/s/ W. Swope Montgomery, Jr.
		W. Swope Montgomery, Jr.
		President and Chief Executive Officer
Date: November 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) and15d-14 (a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and15d-14 (a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Exhibit (101) * The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, filed on November 9, 2012, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

*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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