BNC Bancorp 10Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013

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

of the Securities Exchange Act of 1934

For the transition period ended __________________

Commission File Number000-50128

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)

3980 Premier 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 May 7, 2013, the registrant had outstanding 26,471,737 shares of Common Stock, no par value.

BNC BANCORP AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, 2013 (unaudited) and December 31, 2012	3

	Consolidated Statements of Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)	5

	Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (unaudited)	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities	43

Item 3.	Default Upon Senior Securities	43

Item 4	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

SIGNATURES		44

EXHIBIT INDEX		45

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	March 31,
	2013			December 31,
	(Unaudited)			2012
Assets
Cash and due from banks	$	43,346		$	42,989
Interest-earning deposits in other banks		44,597			191,082
Investment securities available-for-sale, at fair value		342,606			341,539
Investment securities held-to-maturity, at amortized cost (fair value of $136,577 and $118,235 at March 31, 2013 and December 31, 2012, respectively)		134,376			114,805
Federal Home Loan Bank stock, at cost		6,567			7,604
Loans held for sale		46,134			57,414
Loans:
Covered under loss-share agreements		237,791			248,930
Not covered under loss-share agreements		1,793,358			1,786,328
Less allowance for loan losses		(38,148	)		(40,292	)
Net loans		1,993,001			1,994,966
Accrued interest receivable		10,616			11,363
Premises and equipment, net		68,244			66,615
Other real estate owned:
Covered under loss-share agreements		20,709			23,102
Not covered under loss-share agreements		31,177			28,811
FDIC indemnification asset		42,476			53,519
Investment in bank-owned life insurance		71,381			70,756
Goodwill and other intangible assets, net		31,932			32,193
Other assets		42,029			47,030
Total assets	$	2,929,191		$	3,083,788

Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand	$	267,458		$	275,605
Interest-bearing demand		1,171,484			1,221,089
Time deposits		1,069,207			1,159,615
Total deposits		2,508,149			2,656,309
Short-term borrowings		32,268			32,382
Long-term debt		85,506			88,173
Accrued expenses and other liabilities		19,213			24,680
Total liabilities		2,645,136			2,801,544

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		30,855			30,717
Series B, Mandatorily Convertible Non-Voting Preferred Stock, $10 stated value, 1,804,566 shares issued and outstanding at December 31, 2012		-			17,161
Common stock, no par value; authorized 80,000,000 shares; 20,479,524 and 20,462,667 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		157,763			157,541
Common stock, non-voting, no par value; authorized 5,992,213 shares; 5,992,213 and 4,187,647 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		57,849			40,688
Retained earnings		33,135			30,708
Stock in directors rabbi trust		(3,021	)		(3,090	)
Directors deferred fees obligation		3,021			3,090
Accumulated other comprehensive income		4,453			5,429
Total shareholders' equity		284,055			282,244
Total liabilities and shareholders' equity	$	2,929,191		$	3,083,788

See accompanying notes to consolidated financial statements.

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended
	March 31,
	2013			2012

Interest Income:
Loans, including fees	$	29,141		$	23,377
Investment securities:
Taxable		1,039			1,332
Tax-exempt		2,848			2,427
Interest-earning balances and other		123			43
Total interest income		33,151			27,179
Interest Expense:
Demand deposits		3,600			3,659
Time deposits		3,152			4,052
Short-term borrowings		37			132
Long-term debt		574			724
Total interest expense		7,363			8,567
Net Interest Income		25,788			18,612
Provision for loan losses, net		4,115			5,179
Net interest income after provision for loan losses		21,673			13,433
Non-Interest Income:
Mortgage fees		2,381			1,116
Service charges		926			738
Investment brokerage fees		175			240
Earnings on bank-owned life insurance		559			410
Gain (loss) on sale of investment securities, net		(228	)		1,619
Gain on acquisition		719			-
Other		1,670			1,686
Total non-interest income		6,202			5,809
Non-Interest Expense:
Salaries and employee benefits		12,805			9,901
Occupancy		1,683			1,120
Furniture and equipment		1,379			1,074
Data processing and supplies		723			697
Advertising and business development		587			388
Insurance, professional and other services		1,458			1,345
FDIC insurance assessments		666			600
Loan, foreclosure and other real estate owned expenses		2,018			1,476
Other		1,797			1,224
Total non-interest expense		23,116			17,825
Income before income tax expense (benefit)		4,759			1,417
Income tax expense (benefit)		480			(308	)
Net Income		4,279			1,725
Less preferred stock dividends and discount accretion		529			601
Net Income Available to Common Shareholders	$	3,750		$	1,124

Basic earnings per common share	$	0.14		$	0.11
Diluted earnings per common share	$	0.14		$	0.11
Dividends declared and paid per common share	$	0.05		$	0.05

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2013			2012

Net income	$	4,279		$	1,725

Other comprehensive income (loss):
Investment securities:
Unrealized holding gain (loss) on investments securities available-for-sale		(3,105	)		944
Tax effect		1,197			(364	)
Reclassification of (gains) losses recognized in net income		228			(1,619	)
Tax effect		(88	)		624
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity		(143	)		(134	)
Tax effect		55			52
Net of tax amount		(1,856	)		(497	)
Cash flow hedging activities:
Unrealized holding losses		(773	)		(214	)
Tax effect		298			83
Reclassification of losses recognized in net income		2,205			1,919
Tax effect		(850	)		(740	)
Net of tax amount		880			1,048
Total other comprehensive income (loss)		(976	)		551
Total comprehensive income	$	3,303		$	2,276

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

Three Months Ended March 31, 2013 and 2012

(Dollars in thousands, except per share data)

																								Directors			Accumulated
							Non-voting				Common		Preferred		Preferred						Stock in			deferred			other com-
	Common stock						common stock				stock		stock		stock			Retained			directors			fees			prehensive
	Shares			Amount			Shares		Amount		warrants		Series A		Series B			earnings			rabbi trust			obligation			income			Total

Balance, December 31, 2011		9,100,890		$	87,421			-	$	-	$	2,412	$	30,237	$	17,161		$	25,614		$	(2,505	)	$	2,505		$	1,010		$	163,855
Net income		-			-			-		-		-		-		-			1,725			-			-			-			1,725
Directors deferred fees		-			-			-		-		-		-		-			-			58			(58	)		-			-
Other comprehensive income, net of tax		-			-			-		-		-		-		-			-			-			-			551			551
Common stock issued pursuant to:
Exercise of stock options		2,268			13			-		-		-		-		-			-			-			-			-			13
Shares traded to exercise options		(1,799	)		(13	)		-		-		-		-		-			-			-			-			-			(13	)
Stock-based compensation		5,488			119			-		-		-		-		-			-			-			-			-			119
Dividend reinvestment plan		6,654			50			-		-		-		-		-			-			-			-			-			50
Cash dividends:
Common stock, $0.05 per share		-			-			-		-		-		-		-			(456	)		-			-			-			(456	)
Preferred stock, net of accretion		-			-			-		-		-		120		-			(601	)		-			-			-			(481	)
Balance, March 31, 2012		9,113,501		$	87,590			-	$	-	$	2,412	$	30,357	$	17,161		$	26,282		$	(2,447	)	$	2,447		$	1,561		$	165,363

Balance, December 31, 2012		20,462,667		$	157,541			4,187,647	$	40,688	$	-	$	30,717	$	17,161		$	30,708		$	(3,090	)	$	3,090		$	5,429		$	282,244
Net income		-			-			-		-		-		-		-			4,279			-			-			-			4,279
Directors deferred fees		-			-			-		-		-		-		-			-			69			(69	)		-			-
Other comprehensive loss, net of tax		-			-			-		-		-		-		-			-			-			-			(976	)		(976	)
Stock-based compensation		9,270			159			-		-		-		-		-			-			-			-			-			159
Dividend reinvestment plan		7,587			63			-		-		-		-		-			-			-			-			-			63
Conversion of preferred stock		-			-			1,804,566		17,161		-		-		(17,161	)		-			-			-			-			-
Cash dividends:
Common stock, $0.05 per share		-			-			-		-		-		-		-			(1,323	)		-			-			-			(1,323	)
Preferred stock, net of accretion		-			-			-		-		-		138		-			(529	)		-			-			-			(391	)
Balance, March 31, 2013		20,479,524		$	157,763			5,992,213	$	57,849	$	-	$	30,855	$	-		$	33,135		$	(3,021	)	$	3,021		$	4,453		$	284,055

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2013			2012

Operating activities
Net income	$	4,279		$	1,725
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,115			5,179
Depreciation and amortization		964			688
Amortization of premiums, net		1,159			250
Amortization of intangible assets		261			135
Accretion of fair value purchase accounting adjustments		(3,844	)		(2,180	)
Gain on acquisition		(719	)		-
Cash flow hedge expense		2,205			1,472
Stock-based compensation		159			119
Deferred compensation		180			210
Earnings on bank-owned life insurance		(559	)		(410	)
Net loss (gain) on sale of investment securities available-for-sale		228			(1,619	)
Loss on sale of premises and equipment		33			183
Losses on other real estate owned		552			526
Gain on sale of loans (mortgage fees)		(2,381	)		(1,116	)
Origination of loans held for sale		(86,331	)		(55,148	)
Proceeds from sales of loans held for sale		99,992			45,893
Decrease in accrued interest receivable		747			1,529
Decrease in FDIC indemnification asset		10,972			24,102
Decrease in other assets		4,577			4,200
Increase (decrease) in accrued expenses and other liabilities		(5,153	)		252
Net cash provided by operating activities		31,436			25,990
Investing activities
Purchases of investment securities available-for-sale		(34,882	)		(6,419	)
Purchases of investment securities held-to-maturity		(19,919	)		(4,584	)
Proceeds from sales of investment securities available-for-sale		15,797			39,571
Proceeds from maturities of investment securities available-for-sale		13,923			8,509
Proceeds from maturities of investment securities held-to-maturity		36			-
Redemption of Federal Home Loan Bank stock		1,037			-
Net increase in loans		(5,674	)		(31,658	)
Purchases of premises and equipment		(2,474	)		(3,402	)
Proceeds from disposal of premises and equipment		-			283
Investment in bank-owned life insurance		(66	)		-
Investment in other real estate owned		(844	)		(461	)
Proceeds from sales of other real estate owned		7,559			13,013
Net cash provided by (used in) by investing activities		(25,507	)		14,852
Financing activities
Net decrease in deposits		(147,612	)		(1,646	)
Net decrease in short-term borrowings		(114	)		(46,080	)
Net decrease in long-term-debt		(2,680	)		-
Common stock issued pursuant to dividend reinvestment plan		63			50
Cash dividends paid, net of accretion		(1,714	)		(937	)
Net cash used in financing activities		(152,057	)		(48,613	)
Net decrease in cash and cash equivalents		(146,128	)		(7,771	)
Cash and cash equivalents, beginning of period		234,071			55,829
Cash and cash equivalents, end of period	$	87,943		$	48,058

Supplemental Statement of Cash Flows Disclosure
Interest paid	$	6,550		$	8,615
Income taxes paid		-			57
Summary of Noncash Investing and Financing Activities
Decrease in fair value of investment securities available-for-sale, net of tax	$	(1,768	)	$	(497	)
Increase in fair value of cash flow hedges, net of tax		880			1,048
Transfer of loans to foreclosed real estate		7,410			15,253
FDIC indemnification asset increase for losses, net		2,233			5,141

NOTE 1 – BASIS OF PRESENTATION

BNC Bancorp (the “Company”) is a bank holding company for Bank of North Carolina (“BNC”), a wholly owned subsidiary, headquartered in High Point, North Carolina. BNC is a full service commercial bank providing commercial banking services tailored to the particular banking needs of the communities it serves in North and South Carolina. BNC’s primary source of revenue is derived from loans to customers, who are predominantly individuals and small to medium size businesses in BNC’s market areas.

These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The information contained in the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 should be referred to in connection with these unaudited interim consolidated financial statements.

The preparation of consolidated financial statements in conformity GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those relating to the allowance for loan losses, determination of fair value of acquired assets and assumed liabilities, and valuation of goodwill and intangible assets.

Reclassifications

Certain amounts in the 2012 consolidated financial statements have been reclassified to conform to the 2013 presentation. The reclassifications had no effect on net income, net income available to common shareholders or shareholders' equity as previously reported.

Recently Adopted and Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02,Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASUrequires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or interest expense). If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. This ASU is effective for fiscal and interim reporting periods beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In October 2012, the FASB issued 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, 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 adoption of this ASU did not have a material impact on the Company’s 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 adoption of this ASU did not have a material impact on the Company’s consolidated financial statements

In December 2011, the FASB released ASU 2011-11,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Under this update, the Company will be required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and transactions subject to an agreement similar to a master netting arrangement. The scope would include derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements. This disclosure is intended to enable financial statement users to understand the effect of such arrangements on the Company’s financial position. The objective of this update is to support further convergence between U.S. GAAP and International Financial Reporting Standards. In January 2013, the FASB released ASU 2013-01 Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.Under this update, the FASB limited the scope of ASU 2011-11 to items identified in the implementation guidance which include derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting agreement. Both of these updates are effective for annual reporting periods beginning on or after January 1, 2013. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

NOTE 2 – ACQUISITIONS

Acquisition of First Trust Bank

On November 30, 2012, the Company completed the acquisition of First Trust Bank (“First Trust”), pursuant to an agreement and plan of merger dated June 4, 2012. First Trust operated three branches in Charlotte, North Carolina. The acquisition of First Trustexpanded and enhanced the BNC franchise in the metropolitan Charlotte market.

Subsequent to the initial reporting of the assets acquired and the liabilities assumed in the First Trust acquisition, the Company has made additional measurement period adjustments to the fair value of assets acquired and liabilities assumed. As a result of these measurement period adjustments, the Company recognized $719,000 of additional bargain purchase gain during the first quarter of 2013, which was recorded as a component of non-interest income.

A summary of assets acquired and liabilities assumed for First Trust, including both preliminary and subsequent measurement period adjustments, are as follows (dollars in thousands):

											Measurement Period
											Adjustments
	As Recorded by First Trust				Preliminary Fair Value Adjustments			As Initially Recorded by BNC			Three Months Ended March 31, 2013			As Recorded by BNC
Assets				��
Cash and due from banks	$	46,079			$	-		$	46,079		$	-		$	46,079
Investment securities available-for-sale		124,616				-			124,616			-			124,616
Federal Home Loan Bank stock, at cost		753				-			753			-			753
Loans		179,702				(9,820	)(1)		169,882			-			169,882
Premises and equipment		6,938				866	(2)		7,804			-			7,804
Accrued interest receivable		1,565				-			1,565			-			1,565
Other real estate owned		8,686				(535	)(3)		8,151			-			8,151
Core deposit intangible		-				1,826	(4)		1,826			-			1,826
Other assets		12,337				3,295	(5)		15,632			-			15,632
Total assets acquired	$	380,676			$	(4,368	)		376,308		$	-			376,308
Liabilities
Deposits	$	(323,139	)		$	(884	)(6)		(324,023	)	$	-			(324,023	)
Short-term borrowings		(7,899	)			-			(7,899	)		-			(7,899	)
Other liabilities		(2,849	)			-			(2,849	)		719	(7)		(2,130	)
Total liabilities assumed	$	(333,887	)		$	(884	)		(334,771	)	$	719			(334,052	)

Net assets acquired									41,537						42,256
Total consideration paid									36,565						36,565
Bargain purchase gain								$	4,972					$	5,691

Explanation of fair value adjustments:

(1)	-	Adjustment for the fair value of the acquired loan portfolio.
(2)	-	Adjustment for fair value of acquired premises and equipment.
(3)	-	Adjustment for the fair value of the acquired other real estate owned.
(4)	-	Adjustment for the estimated value of the core deposit intangible.
(5)	-	Adjustment for deferred tax asset recognized from acquisition.
(6)	-	Adjustment for the estimated fair value of time deposits.
(7)	-	Adjustment for the cancellation of split dollar life insurance plan.

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

Common stock issued (3,276,101 shares)	$	26,177
Cash payments to First Trust stockholders		10,388
Total consideration paid	$	36,565

Acquisition of KeySource Financial, Inc.

On September 14, 2012, the Company completed the acquisition of KeySource Financial, Inc. (“KeySource”), pursuant to an agreement and plan of merger dated December 21, 2011. KeySource operated one branch in Durham, North Carolina. The acquisition of KeySourceexpanded and enhanced the BNC franchise in the Raleigh-Durham market.

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

	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	)		102			(1,652	)
Total liabilities assumed	$	(160,086	)	$	(800	)		(160,886	)

Net assets acquired								13,359
Total consideration paid								13,942
Goodwill							$	583

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

Acquisition of Branches from The Bank of Hampton Roads

On September 21, 2012, the Company 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 estimated fair value of the assets acquired, which included cash, premises and equipment, and other assets, totaled $24.1 million, while the estimated fair value of liabilities assumed, which included deposits and other liabilities, totaled $24.5 million. BNC recorded approximately $400,000 of goodwill related to this acquisition. None of the goodwill is deductible for tax purposes.

FDIC-Assisted Acquisition of Carolina Federal Savings Bank

On June 8, 2012, the Company acquired certain assets and liabilities of Carolina Federal Savings Bank (“Carolina Federal”), a federal thrift organized under the laws of the United States and headquartered in Charleston, South Carolina, from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver of Carolina Federal, pursuant to a purchase and assumption agreement dated as of June 8, 2012. Carolina Federal operated two branches in the Charleston market. There is no loss-sharing arrangement with the FDIC with respect to this transaction. The FDIC paid the Company an asset discount in the amount of $10.7 million at closing and the deposits were acquired without a premium.

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

	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
Bargain purchase gain							$	7,734

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.

The Company has determined the above noted acquisitions 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. The Company has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with ASC Topic 805.

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”). On May 31, 2012, the Company and Aquiline entered into the Securities Purchase Agreement and Amendment Number 1 to Investment Agreement (the “Aquiline Agreement”). Pursuant to the Aquiline Agreement, Aquiline agreed to purchase, as part of the Private Placement, 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.

Conversion of Preferred Stock

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 6,168,965 shares of no par value Common Stock, and the conversion of the Series B-1 Preferred Stock into 4,187,647 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.

On February 7, 2013, all 1,804,566 shares of the Company’s Mandatorily Convertible Non-Voting Preferred Stock, Series B were converted into 1,804,566 shares of the Company’s non-voting common stock.

Series A Preferred Stock Issued under TARP

On December 5, 2008, as part of the U.S. Department of the Treasury’s (“Treasury”) Troubled Asset Relief Program Capital Purchase Program, the Company issued and sold 31,260 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), and a warrant to purchase up to 543,337 shares of the Company’s common stock at an exercise price of $8.63 per share to the Treasury. On August 29, 2012, the Treasury completed the auction and sale of its investment in the Company’s Series A Preferred Stock to private investors. The Company received no proceeds from the auction. On September 19, 2012, the Company repurchased the warrant from the Treasury for approximately $940,000. The warrant has been cancelled.

As discussed further in Note 13, on April 29, 2013, the Company redeemed all 31,260 shares of the Company’s Series A Preferred Stock that were issued under the Treasury’s Troubled Asset Relief Program Capital Purchase Program.

NOTE 4 - EARNINGS PER SHARE

Basic earnings per common share is computed using the weighted average number of common shares and participating securities outstanding during the reporting period. Diluted earnings per common share is the amount of earnings available to each share of common stock during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock awards and the warrant under the Treasury’s Troubled Asset Relief Program Capital Purchase Program (collectively referred to herein as “Stock Rights”). Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in the periods in which the effect would be anti-dilutive. As discussed in Note 3, the warrant issued in connection with the Treasury’s Troubled Asset Relief Program Capital Purchase Program was repurchased by the Company and cancelled in September 2012.

The Company's basic and diluted earnings per share calculations are presented in the following table (dollars in thousands, except per share data):

	Three Months Ended March 31,
	2013		2012

Net income available to common shareholders	$	3,750	$	1,124
Add: Convertible preferred stock dividends		-		90
Net income available to participating common shareholders	$	3,750	$	1,214

Weighted average common shares - basic		25,702,276		9,105,949
Add: Effect of convertible preferred stock		761,928		1,804,566
Weighted average participating common shares - basic		26,464,204		10,910,515
Effects of dilutive Stock Rights		11,681		9,885
Weighted average participating common shares - diluted		26,475,885		10,920,400

Basic earnings per common share	$	0.14	$	0.11
Diluted earnings per common share	$	0.14	$	0.11

For the three months ended March 31, 2013 and 2012, there were 415,936 and 675,527 shares, respectively, of Stock Rights excluded in computing diluted common shares outstanding because the exercise price exceeded the average share value for the periods.

NOTE 5 – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of March 31, 2013 and December 31, 2012 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
March 31, 2013:
Available-for-sale:
U.S. government agencies	$	15,484	$	584	$	-	$	16,068
State and municipals		238,875		9,977		1,947		246,905
Corporate debt securities		8,000		-		9		7,991
Mortgage-backed securities:
Residential government sponsored		57,701		2,659		87		60,273
Other government sponsored		10,985		395		11		11,369
	$	331,045	$	13,615	$	2,054	$	342,606
Held-to-maturity:
State and municipals	$	118,376	$	3,736	$	535	$	121,577
Other debt securities		16,000		-		1,000		15,000
	$	134,376	$	3,736	$	1,535	$	136,577

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2012:
Available-for-sale:
U. S government agencies	$	15,735	$	660	$	-	$	16,395
State and municipals		213,679		11,359		1,152		223,886
Mortgage-backed securities:
Residential government sponsored		83,764		3,155		29		86,890
Other government sponsored		13,923		450		5		14,368
	$	327,101	$	15,624	$	1,186	$	341,539
Held-to-maturity:
State and municipals	$	108,805	$	4,576	$	146	$	113,235
Other debt securities		6,000		-		1,000		5,000
	$	114,805	$	4,576	$	1,146	$	118,235

The amortized cost and estimated fair value of investment securities at March 31, 2013, by contractual maturity, are shown below (dollars in thousands). The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities have been included in maturity groupings based on the contractual maturity.

	Amortized Cost		Fair Value

Available-for-sale:
Due in one year or less	$	4,812	$	4,944
Due after one through five years		134		148
Due after five through ten years		19,289		19,615
Due after ten years		306,810		317,899
	$	331,045	$	342,606

Held-to-maturity:
Due after one year through five years	$	1,417	$	1,450
Due after five through ten years		23,544		22,804
Due after ten years		109,415		112,323
	$	134,376	$	136,577

At March 31, 2013 and December 31, 2012, investment securities with an estimated fair value of approximately $189.1 million and $175.1 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):

	For the Three Months Ended March 31,
	2013			2012

Proceeds from sales	$	15,797		$	39,571

Gross realized gains on sales	$	-		$	1,720
Gross realized losses on sales		(228	)		(101	)
Total realized gains (losses), net	$	(228	)	$	1,619

The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2013 and December 31, 2012 (dollars in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
March 31, 2013:	Value		Losses		Value		Losses		Value		Losses
Available-for-sale:
State and municipals	$	95,247	$	1,947	$	-	$	-	$	95,247	$	1,947
Corporate debt securities		4,991		9		-		-		4,991		9
Mortgage-backed securities		15,339		98		-		-		15,339		98
	$	115,577	$	2,054	$	-	$	-	$	115,577	$	2,054
Held-to-maturity:
State and municipals	$	23,419	$	535	$	-	$	-	$	23,419	$	535
Other debt securities		-		-		5,000		1,000		5,000		1,000
	$	23,419	$	535	$	5,000	$	1,000	$	28,419	$	1,535

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2012:	Value		Losses		Value		Losses		Value		Losses
Available-for-sale:
State and municipals	$	75,551	$	1,152	$	-	$	-	$	75,551	$	1,152
Mortgage-backed securities		22,465		34		-		-		22,465		34
	$	98,016	$	1,186	$	-	$	-	$	98,016	$	1,186

Held-to-maturity:
State and municipals	$	10,301	$	146	$	-	$	-	$	10,301	$	146
Other debt securities		-		-		5,000		1,000		5,000		1,000
	$	10,301	$	146	$	5,000	$	1,000	$	15,301	$	1,146

At March 31, 2013, the unrealized losses relate to 87 state and municipal securities, 11 mortgage-backed securities and three other debt securities. Of those, only two of the other debt securities were in a continuous unrealized loss position for more than twelve months. In determining if any credit losses were evident, the Company noted all of the state and municipal securities were investment grade as of March 31, 2013. The gross unrealized losses reported for mortgage-backed securities relate to investment securities issued by the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation. The unrealized losses were primarily attributable to changes in interest rates and not due to the credit quality of the investment securities. The Company noted the issuers of the other 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 cost basis and; therefore, does not consider them to be other-than-temporarily impaired at March 31, 2013.

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major categories of loans, including loans covered under loss-share agreements with the FDIC (“covered”) and loans not covered under loss-share agreements (“non-covered”) at March 31, 2013 and December 31, 2012 are summarized below (dollars in thousands):

	March 31, 2013						December 31, 2012
	Covered		Non-covered				Covered		Non-covered
	Loans (1)		Loans (2)		Total		Loans (1)		Loans (2)		Total

Commercial real estate	$	113,655	$	1,042,519	$	1,156,174	$	114,757	$	1,034,686	$	1,149,443
Commercial construction		28,588		195,992		224,580		33,447		183,747		217,194
Commercial and industrial		10,380		154,164		164,544		10,898		150,870		161,768
Leases		-		14,370		14,370		-		13,209		13,209
Total commercial		152,623		1,407,045		1,559,668		159,102		1,382,512		1,541,614
Residential construction		214		30,594		30,808		215		34,514		34,729
Residential mortgage		82,435		347,070		429,505		87,015		359,260		446,275
Consumer and other		2,519		8,649		11,168		2,598		10,042		12,640
	$	237,791	$	1,793,358	$	2,031,149	$	248,930	$	1,786,328	$	2,035,258

(1) The unpaid principal balance for covered loans was $255.5 million and $272.7 million at March 31, 2013 and December 31, 2012, respectively.

(2) Amount includes $325.7 million and $347.2 million of acquired, non-covered loans as of March 31, 2013 and December 31, 2012, respectively.

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

A portion of the fair value discount on acquired covered loans has an accretable yield associated with those loans that is accreted into interest income over the estimated remaining life of the loans. The remaining nonaccretable difference represents cash flows not expected to be collected. The changes in the carrying amount of covered acquired loans and accretable yield for loans receivable for the three months ended March 31, 2013 and the year ended December 31, 2012 is as follows (dollars in thousands):

	March 31, 2013						December 31, 2012
	Accretable			Carrying			Accretable			Carrying
	Yield			Amount			Yield			Amount

Balance at beginning of period	$	(12,895	)	$	248,930		$	(8,387	)	$	320,033
Reductions from payments and foreclosures, net		-			(14,921	)		-			(74,998	)
Reclass from non-accretable to accretable yield		(610	)		-			(8,403	)		-
Accretion		3,782			3,782			3,895			3,895
Balance at end of period	$	(9,723	)	$	237,791		$	(12,895	)	$	248,930

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(“ASC Topic 310-30”). 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 Company has the ability to borrow funds from the Federal Home Loan Bank (“FHLB”) and from the Federal Reserve Bank. At March 31, 2013 and December 31, 2012, real estate loans with carrying values of $468.1 million and $462.4 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 class of financing receivable detailed below 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.

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 months ended March 31, 2013 and 2012, respectively, is as follows (dollars in thousands):

	Commercial			Commercial			Commercial						Residential			Residential			Consumer
2013	Real Estate			Construction			and Industrial			Leases			Construction			Mortgage			and Other			Total
Allowance for loan losses:
Balance January 1, 2013	$	15,718		$	9,807		$	3,578		$	18		$	593		$	10,441		$	137		$	40,292
Charge-offs		(1,407	)		(3,119	)		(1,339	)		-			-			(2,579	)		(12	)		(8,456	)
Recoveries		4			34			93			-			5			143			5			284
Provision (a)		(1,245	)		2,858			1,217			(18	)		(252	)		1,549			6			4,115
Increase in FDIC indemnification asset (a)		(539	)		474			(2	)		-			(1	)		1,982			(1	)		1,913
Balance March 31, 2013	$	12,531		$	10,054		$	3,547		$	-		$	345		$	11,536		$	135		$	38,148

Ending balances:
Specific reserves:
Impaired loans	$	469		$	3,668		$	74		$	-		$	2		$	1,460		$	-		$	5,673
Purchase credit impaired loans		5,438			1,205			744			-			-			5,777			18			13,182
Total specific reserves		5,907			4,873			818			-			2			7,237			18			18,855
General reserves		6,624			5,181			2,729			-			343			4,299			117			19,293
Total	$	12,531		$	10,054		$	3,547		$	-		$	345		$	11,536		$	135		$	38,148

Loans:
Ending balance:
Individually evaluated for impairment	$	26,992		$	17,700		$	505		$	-		$	360		$	16,044		$	122		$	61,723
Purchase credit impaired loans		118,043			34,439			11,763			-			977			64,451			2,513			232,186
Loans collectively evaluated for impairment		1,011,139			172,441			152,276			14,370			29,471			349,010			8,533			1,737,240
Total	$	1,156,174		$	224,580		$	164,544		$	14,370		$	30,808		$	429,505		$	11,168		$	2,031,149

(a)

The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $500,000 for the three months ended March 31, 2013. This resulted in an increase in the FDIC indemnification asset of $1.9 million for the three months ended March 31, 2013, 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 $2.4 million for the three months ended March 31, 2013.

	Commercial			Commercial			Commercial					Residential			Residential			Consumer
2012	Real Estate			Construction			and Industrial			Leases		Construction			Mortgage			and Other			Total
Allowance for loan losses:
Balance January 1, 2012	$	11,789		$	10,957		$	4,338		$	18	$	699		$	3,058		$	149		$	31,008
Charge-offs		(1,714	)		(2,164	)		(725	)		-		(17	)		(1,339	)		(24	)		(5,983	)
Recoveries		13			189			32			-		-			23			3			260
Provision		282			1,853			953			-		(62	)		2,223			(70	)		5,179
Increase in FDIC indemnification asset (a)		325			2,280			368			-		-			3,285			-			6,258
Balance March 31, 2012	$	10,695		$	13,115		$	4,966		$	18	$	620		$	7,250		$	58		$	36,722

Ending balances:
Specific reserves:
Impaired loans	$	924		$	2,737		$	1,366		$	-	$	-		$	1,434		$	-		$	6,461
Purchase credit impaired loans		3,167			6,236			460			-		-			2,569			-			12,432
Total specific reserves		4,091			8,973			1,826			-		-			4,003			-			18,893
General reserves		6,604			4,142			3,140			18		620			3,247			58			17,829
Total	$	10,695		$	13,115		$	4,966		$	18	$	620		$	7,250		$	58		$	36,722

Loans:
Ending balance:
Individually evaluated for impairment	$	16,062		$	21,685		$	3,281		$	-	$	1,171		$	11,648		$	122		$	53,969
Purchase credit impaired loans		115,227			40,594			14,924			-		2,064			82,745			83			255,637
Loans collectively evaluated for impairment		759,643			151,875			121,731			12,503		28,970			328,250			12,048			1,415,020
Total	$	890,932		$	214,154		$	139,936		$	12,503	$	32,205		$	422,643		$	12,253		$	1,724,626

(a)

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

The following presents information related to impaired loans, excluding purchased impaired loans, as of March 31, 2013 and December 31, 2012 (dollars in thousands):

							Impaired Loans - With
	Impaired Loans - With Allowance						No Allowance
			Unpaid		Allowance for				Unpaid
	Recorded		Principal		Loan Losses		Recorded		Principal
March 31, 2013:	Investment		Balance		Allocated		Investment		Balance
Originated:
Commercial real estate	$	9,739	$	9,717	$	473	$	17,316	$	17,275
Commercial construction		9,678		9,741		3,705		8,039		8,343
Commercial and industrial		187		187		77		320		319
Residential construction		361		360		2		-		-
Residential mortgage		10,674		10,660		1,523		4,770		4,758
Consumer and other		-		-		-		122		122
Total legacy		30,639		30,665		5,780		30,567		30,817
Acquired (non-covered):
Commercial real estate		-		-		-		195		203
Commercial construction		-		-		-		231		244
Commercial and industrial		-		-		-		39		41
Residential mortgage		92		92		1		1,453		1,696
Consumer and other		-		-		-		3		3
Total acquired (non-covered)		92		92		1		1,921		2,187
Acquired (covered):
Commercial real estate		-		-		-		629		709
Commercial construction		-		-		-		317		349
Commercial and industrial		-		-		-		141		174
Residential mortgage		-		-		-		5,165		5,430
Total acquired (covered)		-		-		-		6,252		6,662
Total loans	$	30,731	$	30,757	$	5,781	$	38,740	$	39,666

							Impaired Loans - With
	Impaired Loans - With Allowance						No Allowance
			Unpaid		Allowance for				Unpaid
	Recorded		Principal		Loan Losses		Recorded		Principal
December 31, 2012:	Investment		Balance		Allocated		Investment		Balance
Originated:
Commercial real estate	$	7,918	$	7,891	$	562	$	17,915	$	17,867
Commercial construction		11,838		11,815		3,022		7,581		7,552
Commercial and industrial		99		99		1		1,352		1,351
Residential construction		362		361		2		-		-
Residential mortgage		10,772		10,755		1,526		4,801		4,788
Consumer and other		-		-		-		124		122
Total legacy		30,989		30,921		5,113		31,773		31,680
Acquired (non-covered):
Commercial real estate		500		800		16		248		256
Commercial and industrial		240		240		3		-		-
Residential mortgage		601		607		87		765		895
Consumer and other		-		-		-		5		5
Total acquired (non-covered)		1,341		1,647		106		1,018		1,156
Acquired (covered):
Commercial real estate		-		-		-		548		625
Commercial construction		-		-		-		530		561
Commercial and industrial		-		-		-		143		176
Residential mortgage		-		-		-		5,504		5,749
Total acquired (covered)		-		-		-		6,725		7,111
Total loans	$	32,330	$	32,568	$	5,219	$	39,516	$	39,947

The following presents information related to the average recorded investment and interest income recognized on impaired loans, excluding purchased impaired loans, for the three months ended March 31, 2013 and 2012 (dollars in thousands):

	2013				2012
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with allowance:
Commercial real estate	$	6,620	$	57	$	5,603	$	50
Commercial construction		7,284		41		10,160		52
Commercial and industrial		79		-		2,570		28
Residential construction		241		2		-		-
Residential mortgage		9,120		48		6,424		41
Total impaired loans with allowance	$	23,344	$	148	$	24,757	$	171
Impaired loans with no allowance:
Commercial real estate	$	18,859	$	174	$	10,770	$	112
Commercial construction		9,243		24		13,086		82
Commercial and industrial		667		3		746		3
Residential construction		-		-		1,270		9
Residential mortgage		9,613		29		5,932		13
Consumer and other		84		-		122		-
Total impaired loans with no allowance	$	38,466	$	230	$	31,926	$	219

For the three months ended March 31, 2013 and 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 months ended March 31, 2013 and 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 March 31, 2013 and December 31, 2012 (dollars in thousands):

					Greater
					than
	30-59 Days		60-89 Days		90 Days				Total				Total
March 31, 2013:	Past Due		Past Due		Past Due		Nonaccrual		Past Due		Current		Loans
Originated:
Commercial real estate	$	2,743	$	82	$	-	$	4,472	$	7,297	$	834,597	$	841,894
Commercial construction		2,503		222		-		12,548		15,273		147,185		162,458
Commercial and industrial		158		-		-		187		345		131,344		131,689
Leases		-		-		-		-		-		14,370		14,370
Residential construction		223		-		-		-		223		24,633		24,856
Residential mortgage		1,466		54		-		7,373		8,893		275,573		284,466
Consumer and other		24		1		-		122		147		7,785		7,932
Total legacy		7,117		359		-		24,702		32,178		1,435,487		1,467,665
Acquired (non-covered):
Commercial real estate		1,630		-		-		625		2,255		198,370		200,625
Commercial construction		-		-		-		231		231		33,303		33,534
Commercial and industrial		81		283		-		46		410		22,065		22,475
Residential construction		-		-		-		-		-		5,738		5,738
Residential mortgage		348		-		-		1,605		1,953		60,651		62,604
Consumer and other		-		-		-		3		3		714		717
Total acquired (non-covered)		2,059		283		-		2,510		4,852		320,841		325,693
Acquired (covered):
Commercial real estate		1,756		-		-		18,641		20,397		93,258		113,655
Commercial construction		326		-		-		10,614		10,940		17,648		28,588
Commercial and industrial		173		-		-		2,171		2,344		8,036		10,380
Residential construction		-		-		-		-		-		214		214
Residential mortgage		1,799		352		-		20,702		22,853		59,582		82,435
Consumer and other		23		51		-		146		220		2,299		2,519
Total acquired (covered)		4,077		403		-		52,274		56,754		181,037		237,791
Total loans	$	13,253	$	1,045	$	-	$	79,486	$	93,784	$	1,937,365	$	2,031,149

					Greater
					than
	30-59 Days		60-89 Days		90 Days				Total				Total
December 31, 2012:	Past Due		Past Due		Past Due		Nonaccrual		Past Due		Current		Loans
Originated:
Commercial real estate	$	731	$	1,080	$	-	$	3,522	$	5,333	$	818,764	$	824,097
Commercial construction		369		-		-		7,586		7,955		145,924		153,879
Commercial and industrial		243		8		-		1,121		1,372		123,040		124,412
Leases		-		-		-		-		-		13,209		13,209
Residential construction		-		-		-		-		-		21,704		21,704
Residential mortgage		1,205		2,133		-		7,356		10,694		282,037		292,731
Consumer and other		9		127		-		-		136		8,988		9,124
Total originated		2,557		3,348		-		19,585		25,490		1,413,666		1,439,156
Acquired (non-covered):
Commercial real estate		1,255		-		-		1,179		2,434		208,155		210,589
Commercial construction		315		-		-		-		315		29,553		29,868
Commercial and industrial		113		-		-		248		361		26,097		26,458
Residential construction		136		-		-		-		136		12,674		12,810
Residential mortgage		960		-		-		1,425		2,385		64,144		66,529
Consumer and other		1		1		-		5		7		911		918
Total acquired (non-covered)		2,780		1		-		2,857		5,638		341,534		347,172
Acquired (covered):
Commercial real estate		5,257		84		-		12,730		18,071		96,686		114,757
Commercial construction		-		113		-		14,961		15,074		18,373		33,447
Commercial and industrial		55		-		-		1,170		1,225		9,673		10,898
Residential construction		-		-		-		-		-		215		215
Residential mortgage		3,593		352		-		18,057		22,002		65,013		87,015
Consumer and other		70		1		-		63		134		2,464		2,598
Total acquired (covered)		8,975		550		-		46,981		56,506		192,424		248,930
Total loans	$	14,312	$	3,899	$	-	$	69,423	$	87,634	$	1,947,624	$	2,035,258

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.

The following presents the recorded investment in the Company’s loans, by credit quality indicator, as of March 31, 2013 and December 31, 2012 (dollars in thousands):

			Pass		Special
March 31, 2013:	Total		Credits		Mention		Substandard		Doubtful		Loss
Originated:
Commercial real estate	$	841,894	$	752,577	$	43,324	$	45,993	$	-	$	-
Commercial construction		162,458		124,755		14,734		22,969		-		-
Commercial and industrial		131,689		124,440		4,914		2,324		11		-
Leases		14,370		14,370		-		-		-		-
Residential construction		24,856		22,527		354		1,975		-		-
Residential mortgage		284,466		244,489		20,864		19,113		-		-
Consumer and other		7,932		7,586		181		165		-		-
Total legacy		1,467,665		1,290,744		84,371		92,539		11		-
Total acquired (non-covered):
Commercial real estate		200,625		177,749		13,214		9,662		-		-
Commercial construction		33,534		22,851		2,365		8,318		-		-
Commercial and industrial		22,475		20,246		1,744		485		-		-
Residential construction		5,738		3,050		1,727		961		-		-
Residential mortgage		62,604		52,948		5,187		4,469		-		-
Consumer and other		717		632		82		3		-		-
Total acquired (non-covered):		325,693		277,476		24,319		23,898		-		-
Acquired (covered):
Commercial real estate		113,655		66,193		17,248		17,272		12,942		-
Commercial construction		28,588		13,588		1,981		8,420		4,599		-
Commercial and industrial		10,380		5,796		1,839		917		1,770		58
Residential construction		214		198		16		-		-		-
Residential mortgage		82,435		42,166		14,006		11,555		14,258		450
Consumer and other		2,519		2,176		191		74		77		1
Total acquired (covered)		237,791		130,117		35,281		38,238		33,646		509
Total loans	$	2,031,149	$	1,698,337	$	143,971	$	154,675	$	33,657	$	509

			Pass		Special
December 31, 2012:	Total		Credits		Mention		Substandard		Doubtful		Loss
Originated:
Commercial real estate	$	824,097	$	739,050	$	39,562	$	45,485	$	-	$	-
Commercial construction		153,879		115,996		18,088		19,795		-		-
Commercial and industrial		124,412		117,546		4,385		2,481		-		-
Leases		13,209		13,209		-		-		-		-
Residential construction		21,704		19,546		440		1,718		-		-
Residential mortgage		292,731		250,083		21,831		20,817		-		-
Consumer and other		9,124		8,760		320		44		-		-
Total legacy		1,439,156		1,264,190		84,626		90,340		-		-
Acquired (non-covered):
Commercial real estate		210,589		192,016		6,993		11,080		500		-
Commercial construction		29,868		24,060		2,228		3,580		-		-
Commercial and industrial		26,458		24,491		1,401		326		-		240
Residential construction		12,810		7,086		176		5,548		-		-
Residential mortgage		66,529		57,965		4,445		4,119		-		-
Consumer and other		918		903		10		5		-		-
Total acquired (non-covered)		347,172		306,521		15,253		24,658		500		240
Acquired (covered):
Commercial real estate		114,757		69,401		19,744		14,960		10,642		10
Commercial construction		33,447		14,605		1,493		9,715		7,634		-
Commercial and industrial		10,898		6,251		2,745		1,118		784		-
Residential construction		215		16		199		-		-		-
Residential mortgage		87,015		46,039		17,069		11,956		11,808		143
Consumer and other		2,598		2,237		291		58		11		1
Total acquired (covered)		248,930		138,549		41,541		37,807		30,879		154
Total loans	$	2,035,258	$	1,709,260	$	141,420	$	152,805	$	31,379	$	394

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 March 31, 2013 and December 31, 2012 (dollars in thousands):

							Allowance for
					Total		Loan Losses
	Accrual		Nonaccrual		TDRs		Allocated
March 31, 2013:
Commercial real estate	$	4,562	$	2,317	$	6,879	$	340
Commercial construction		2,183		6,936		9,119		1,481
Commercial and industrial		-		29		29		74
Residential mortgage		4,151		3,295		7,446		435
Consumer and other		-		130		130		-
Total modifications	$	10,896	$	12,707	$	23,603	$	2,330
Total contracts		21		19		40

							Allowance for
					Total		Loan Losses
	Accrual		Nonaccrual		TDRs		Allocated
December 31, 2012:
Commercial real estate	$	16,010	$	2,314	$	18,324	$	904
Commercial construction		11,420		1,030		12,450		1,960
Commercial and industrial		322		1,029		1,351		-
Residential mortgage		8,015		4,639		12,654		1,165
Consumer and other		122		11		133		-
Total modifications	$	35,889	$	9,023	$	44,912	$	4,029
Total contracts		44		20		64

As of March 31, 2013 and December 31, 2012, the Company had no available commitments outstanding on TDRs.

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

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

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

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

Payment modification – A modification in which the principal and interest payment are lowered from the original contractual terms.

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 months ended March 31, 2013 and 2012 (dollars in thousands). All balances represent the recorded investment as of the end of the period in which the modification was made.

	2013
					Interest
	Rate		Term		only		Payment		Combination		Total
	Modifications		Modifications		Modifications		Modifications		Modifications		Modifications
Commercial real estate	$	-	$	648	$	-	$	-	$	812	$	1,460
Commercial construction		-		-		-		-		486		486
Total modifications	$	-	$	648	$	-	$	-	$	1,298	$	1,946

	2012
					Interest
	Rate		Term		only		Payment		Combination		Total
	Modifications		Modifications		Modifications		Modifications		Modifications		Modifications
Commercial real estate	$	-	$	493	$	-	$	-	$	2,029	$	2,522
Commercial construction		-		629		-		-		-		629
Residential mortgage		-		-		-		-		118		118
Total modifications	$	-	$	1,122	$	-	$	-	$	2,147	$	3,269

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 restructuring to nonaccrual status, foreclosure or charge-off, whichever occurs first.

	Three Months Ended
	March 31, 2013
Commercial construction	$	5,906
Commercial and industrial		29

	Three Months Ended
	March 31, 2012
Commercial construction	$	3,986

Loans held for sale

The Company originates certain single family, residential first mortgage loans for sale on a presold basis. Loan sale activity for the three months ended March 31, 2013 and 2012 is summarized below (dollars in thousands):

	2013		2012

Loans held for sale at March 31,	$	46,134	$	19,967
Proceeds from sales of loans held for sale		99,992		45,893
Mortgage fees		2,381		1,116

NOTE 7 – FDIC INDEMNIFICATION ASSET

The FDIC indemnification asset activity for the three months ended March 31, 2013 and 2012 is summarized as follows (dollars in thousands):

	2013			2012
Balance at beginning of period	$	53,519		$	91,851
Accretion of present value discount, net		(24	)		631
Post-acquisition adjustments		(47	)		5,141
Receipt of payments from FDIC		(10,972	)		(24,102	)
Balance at end of period	$	42,476		$	73,521

The FDIC indemnification asset is measured separately from the related covered assets and is initially 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. Cash flow projections are reviewed and updated prospectively as loss estimates related to both covered loans and covered OREO change.

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.

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

The Company has variable rate funding which creates exposure to variability in interest payments due to changes in 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. The termination date of this interest rate cap is February 16, 2014.

In March 2013, the Company entered into a forward-starting interest rate swap transaction with a notional amount of$125 million to effectively convert$125 million of its variable-rate money market funding arrangement to fixed interest rate debt as of the forward-starting date of the swap transaction. The effective date of this interest rate swap is September 16, 2014 and the termination date is March 18, 2019. The swap transaction was designated as a cash flow hedge of the changes in cash flows attributable to changes in one-month LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on the first$125 million of the Company's variable rate money market funding arrangement, which are indexed to one-month LIBOR.

The fair value of these derivatives, which are designated as cash flow hedging instruments under ASC Topic 815:Derivatives and Hedging, is as follows (dollars in thousands):

March 31, 2013

December 31, 2012

Notional

Balance Sheet

Amount

Location

Fair Value

Location

Fair Value

Interest rate cap

250,000

Other assets

Interest rate swap

125,000

Accrued expenses and other liabilities

(768

)

N/A

The interest rate swap and interest rate cap instruments held by the Company are subject to master netting arrangements which contain a legally enforceable right to offset recognized amounts and settle such amounts on a net basis. The Company has elected to present the financial assets and financial liabilities associated with these arrangements on a gross basis in the Consolidated Balance Sheets. Cash collateral is posted by the counterparty with net liability positions in accordance with contract thresholds.

Information about financial instruments that are eligible for offset in the consolidated balance sheet as of March 31, 2013 and December 31, 2012 is presented in the following tables (dollar amounts in thousands):

							Gross Amounts Not
			Gross Amounts		Net Amounts		Offset in the
	Gross		Offset in the		Presented in the		Consolidated Balance Sheets
	Amount		Consolidated		Consolidated		Financial		Cash
	Recognized		Balance Sheets		Balance Sheets		Instruments		Collateral			Net
March 31, 2013
Financial assets:
Interest rate cap	$	35	$	-	$	35	$	-	$	-		$	35

Financial liabilities:
Interest rate swap	$	768	$	-	$	768	$	-	$	(768	)	$	-

December 31, 2012
Financial assets:
Interest rate cap	$	40	$	-	$	40	$	-	$	-		$	40

The Company has recorded a $5.4 million loss, net of tax, as accumulated other comprehensive income atMarch 31, 2013 associated with cash flow hedging instruments and expects $5.0 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 March 31,
	2013		2012

Amount of net loss recorded in OCI (effective portion)	$	475	$	131
Amount of net loss reclassified from OCI to earnings (1)		1,355		1,179

(1) Amount recorded in interest expense on demand deposits in the Consolidated Statements of Income

The amounts included in accumulated other comprehensive income will be reclassified to interest expense should the hedges no longer be considered effective.No amount of ineffectiveness was included in net income for the three months endedMarch 31, 2013 and 2012.The Company will continue to assess the effectiveness of the hedges on a quarterly basis.

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.

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in accumulated other comprehensive income, net of taxes, for the three months ended March 31, 2013 and 2012 are as follows (dollars in thousands):

	Unrealized			Unrealized Holding Gains
	Holding Gains on Available-			on Investment Securities Transferred			Unrealized Holding			Total Accumulated
	For-Sale Investment Securities			from Available- For-Sale to Held- to-Maturity			Losses on Cash Flow Hedging Activities			Other Comprehensive Income
Balance at December 31, 2012	$	8,872		$	2,881		$	(6,324	)	$	5,429
Other comprehensive loss before reclassifications		(1,908	)		-			(475	)		(2,383	)
Amounts reclassified from accumulated other comprehensive income		140			(88	)		1,355			1,407
Net current period other comprehensive income (loss)		(1,768	)		(88	)		880			(976	)
Balance at March 31, 2013	$	7,104		$	2,793		$	(5,444	)	$	4,453

	Unrealized			Unrealized Holding Gains
	Holding Gains on Available-			on Investment Securities Transferred			Unrealized Holding			Total Accumulated
	For-Sale Investment Securities			from Available- For-Sale to Held- to-Maturity			Losses on Cash Flow Hedging Activities			Other Comprehensive Income
Balance at December 31, 2011	$	8,637		$	3,211		$	(10,838	)	$	1,010
Other comprehensive income (loss) before reclassifications		580			-			(131	)		449
Amounts reclassified from accumulated other comprehensive income		(995	)		(82	)		1,179			102
Net current period other comprehensive income (loss)		(415	)		(82	)		1,048			551
Balance at March 31, 2012	$	8,222		$	3,129		$	(9,790	)	$	1,561

The following table details reclassification adjustments from accumulated other comprehensive income during the three months ended March 31, 2013 (dollars in thousands):

	Amount Reclassified
	from Accumulated
Details about Accumulated Other Comprehensive Income Components	Other Comprehensive Income			Affected Line Item in the Consolidated Statement of Income
Unrealized holding loss – investment securities available-for-sale	$	(228	)	Gain (loss) on sale of investment securities, net
		88		Income tax benefit (expense)
		(140	)	Total, net of tax

Unrealized holding gains – investment securities transferred from available-for-sale to held-to-maturity (1)		143		Interest income - investment securities
		(55	)	Income tax benefit (expense)
		88		Total, net of tax

Unrealized holding losses – cash flow hedge instruments		(2,205	)	Interest expense - demand deposits
		850		Income tax benefit (expense)
		(1,355	)	Total, net of tax
Total reclassifications for the period	$	(1,407	)	Total, net of tax

(1) The amortization of the unrealized holding gains in accumulated other comprehensive income at the date of transfer partially offsets the amortization of the difference between the par value and fair value of the investment securities at the date of transfer. Both components are amortized as an adjustment of yield.

NOTE 10 - 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 value of our investment securities available-for-sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers and reference data obtained from market research publications. The valuation of mortgage-backed securities also includes new issue data, monthly payment information and “To Be Announced” prices. The valuation of state and municipal securities also include the use of material event notices. We review the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness. At least annually, we will validate prices supplied by the independent pricing service by comparing to prices obtained from a second third-party source. The Company classifies these investment securities as Level 2 valuation.

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

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

	Assets
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
At March 31, 2013:
Assets:
Investment securities available-for-sale:
U.S. government agencies	$	16,068	$	-	$	16,068	$	-
State and municipals		246,905		-		246,905		-
Corporate debt securities		7,991		-		7,991		-
Mortgage-backed securities:
Residential government sponsored		60,273		-		60,273		-
Other government sponsored		11,369		-		11,369		-
Total investment securities available-for-sale		342,606		-		342,606		-
Interest rate cap		35		-		35		-
Total assets measured at fair value on a recurring basis	$	342,641	$	-	$	342,641	$	-

Liabilities:
Interest rate swap	$	768	$	-	$	768	$	-
Total liabilities measured at fair value on a recurring basis	$	768	$	-	$	768	$	-

At December 31, 2012:
Assets:
Investment securities available-for-sale:
U.S. government agencies	$	16,395	$	-	$	16,395	$	-
State and municipals		223,886		-		223,886		-
Mortgage-backed securities:
Residential government sponsored		86,890		-		86,890		-
Other government sponsored		14,368		-		14,368		-
Total investment securities available-for-sale		341,539		-		341,539		-
Interest rate cap		40		-		40		-
Total assets measured at fair value on a recurring basis	$	341,579	$	-	$	341,579	$	-

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 –The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

Other Real Estate Owned –Other real estate owned is initially recorded 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, which the Company classifies as a Level 3 valuation.

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

	Assets
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
March 31, 2013:
Loans held for sale	$	46,134	$	-	$	46,134	$	-
Impaired loans		275,054		-		-		275,054
Other real estate owned		51,886		-		-		51,886
Total assets measured at fair value on a nonrecurring basis	$	373,074	$	-	$	46,134	$	326,940

December 31, 2012:
Loans held for sale	$	57,414	$	-	$	57,414	$	-
Impaired loans		290,085		-		-		290,085
Other real estate owned		51,913		-		-		51,913
Total assets measured at fair value on a nonrecurring basis	$	399,412	$	-	$	57,414	$	341,998

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 at March 31, 2013 (dollars in thousands):

Fair Value at

Valuation

Range of

Description

March 31, 2013

Methodology

Unobservable Inputs

Inputs

Impaired loans

275,054

Appraised value

Discounts to reflect current market conditions and ultimate collectability

0% - 20%

Other real estate owned

51,886

Appraised value

Discount to reflect current market conditions

0% - 20%

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

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

The carrying value and estimated fair 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):

	March 31, 2013
	Carrying		Estimated
	Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	87,943	$	87,943	$	87,943	$	-	$	-
Investment securities available-for-sale		342,606		342,606		-		342,606		-
Investment securities held-to-maturity		134,376		136,577		-		136,577		-
Federal Home Loan Bank stock		6,567		6,567		-		6,567		-
Loans held for sale		46,134		46,134		-		46,134		-
Loans receivable, net		1,993,001		1,974,780		-		1,699,726		275,054
Accrued interest receivable		10,616		10,616		-		10,616		-
FDIC indemnification asset		42,476		42,476		-		-		42,476
Investment in bank-owned life insurance		71,381		71,381		-		71,381		-
Interest rate cap derivative		35		35		-		35		-
Financial liabilities:
Demand deposits and savings	$	1,438,942	$	1,438,942	$	-	$	1,438,942	$	-
Time deposits		1,069,207		1,081,119		-		1,081,119		-
Short-term borrowings		32,268		32,268		-		32,268		-
Long-term debt		85,506		78,882		-		78,882		-
Interest rate swap		768		768		-		768		-
Accrued interest payable		2,021		2,021		-		2,021		-

	December 31, 2012
	Carrying		Estimated
	Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	234,071	$	234,071	$	234,071	$	-	$	-
Investment securities available-for-sale		341,539		341,539		-		341,539		-
Investment securities held-to-maturity		114,805		118,235		-		118,235		-
Federal Home Loan Bank stock		7,604		7,604		-		7,604		-
Loans held for sale		57,414		57,414		-		57,414		-
Loans receivable, net		1,994,966		1,976,745		-		1,686,660		290,085
Accrued interest receivable		11,363		11,363		-		11,363		-
FDIC indemnification asset		53,519		53,519		-		-		53,519
Investment in bank-owned life insurance		70,756		70,756		-		70,756		-
Interest rate cap derivative		40		40		-		40		-
Financial liabilities:
Demand deposits and savings	$	1,496,694	$	1,496,694	$	-	$	1,496,694	$	-
Time deposits		1,159,615		1,170,560		-		1,170,560		-
Short-term borrowings		32,382		32,382		-		32,382		-
Long-term debt		88,173		83,292		-		83,292		-
Accrued interest payable		2,158		2,158		-		2,158		-

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

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

Investment securities held-to-maturity - The fair value of our investment securities held-to-maturity are determined by a third-party pricing service. The valuations provided by the third-party pricing service for state and municipal securities are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers and the use of material event notices.

We review the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness. At least annually, we will validate prices supplied by the independent pricing service by comparing to prices obtained from a second third-party source.

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 11 – 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.

At March 31, 2013 and December 31, 2012, the outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk are as follows (dollars in thousands):

	March 31,		December 31,
	2013		2012
Commitments under unfunded loans and lines of credit	$	263,555	$	272,308
Letters of credit		4,955		12,172
Unused credit card lines		4,362		4,536
Commitments to sell loans held for sale		46,134		57,414

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. As a result of the Company’s FDIC-assisted acquisition activity, the Company has pending litigation as a result of the Beach First acquisition and could have potential litigation from the Blue Ridge and Carolina Federal acquisitions. Any resulting losses from these proceedings are covered by the terms of the FDIC’s loss-share indemnification agreement.

NOTE 12 – EMPLOYEE BENEFITS

During 2004, the Company adopted, with shareholder approval, the BNC Bancorp Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”). The Compensation Committee may grant or award eligible participants options, rights to receive restricted shares of common stock, and or stock appreciation rights (collectively referred to herein as “Rights”). On June 15, 2010, the shareholders approved Amendment No. 1 to the Plan which provided an additional 400,000 shares of the Company’s common stock underlying rights which may be granted pursuant to the plan. At March 31, 2013, the Company had 271,753 grants of Rights issued and 199,561 Rights available for grants or awards under the Omnibus Plan.

Stock Option Awards. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on the yield at the time of the option grant. There were no grants of options during the three months ended March 31, 2013.

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. At March 31, 2013, the Company had 308,821 grants of Rights issued and 35,607 Rights available for issuance related to these plans.

A summary of stock option activity for the three months ended March 31, 2013 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, 2012		436,939	$	11.32
Exercised		-		-
Forfeited or expired		-		-
Outstanding at March 31, 2013		436,939	$	11.32	3.9 years	$	56
Exercisable at March 31, 2013		428,515	$	11.37	3.9 years	$	44
Share options expected to vest		8,424	$	8.58	6.7 years	$	12

The related compensation expense recognized for stock option awards was $4,000 for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there was $13,000 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 0.69 years.No stock options were exercised during the three months ended March 31, 2013.

Restricted Stock Awards.A summary of the activity of the Company’s non-vested stock awards during the three months ended March 31, 2013 is presented below:

				Weighted
				Average
	Number of			Grant-Date
	Shares			Fair Value

Non-vested at December 31, 2012		153,723		$	7.73
Granted		-			-
Vested		(9,088	)		7.61
Forfeited		(1,000	)		7.95
Non-vested at March 31, 2013		143,635		$	7.74

The Company measures the fair value of restricted shares based on the price of BNC’s common stock on the grant date and compensation expense is recorded over the vesting period. The related compensation expense recognized for restricted stock awards for the three months ended March 31, 2013 and 2012 was $155,000 and $115,000, respectively. As of March 31, 2013, there was $663,000 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 1.43 years. The grant-date fair value of restricted stock grants vested during the three months ended March 31, 2013 was $69,000.

NOTE 13 – SUBSEQUENT EVENT

On April 26, 2013, the Company entered into a $30 million senior unsecured term loan agreement (the “Term Loan”). On April 29, 2013, the net proceeds from the Term Loan were used to redeem all 31,260 shares of the Company’s Series A Preferred Stock that were issued under the Treasury’s Troubled Asset Relief Program Capital Purchase Program. The purchase price for the shares of the Series A Preferred Stock in the redemption will be the stated liquidation value of $1,000 per share, plus any accrued or unpaid dividends that have been earned thereon up to, but not including, the date of redemption.

The Term Loan bears interest as determined by the Company at either (i) 3.50%, plus a rate equal to the higher of (a) Prime lending rate (published in the Wall Street Journal) as in effect from time to time, (b) the Federal Funds rate, as in effect from time to time, plus one-half of one percent per annum, and (c) LIBOR determined on a daily basis for a period of one month, plus 1.00%, or (ii) 4.5%, plus the 30, 60, or 90 day LIBOR. The interest rate has a floor of 1.00%. The Term Loan matures on April 26, 2018 and is amortized over the five year term. The Term Loan has customary reporting, financial, affirmative and negative covenants and includes a prepayment penalty during the first two years of the term.

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

Throughout this Quarterly Report on Form 10-Q, “the Company,” “we,” “us,” or “our” refers to BNC Bancorp and our consolidated subsidiaries, including Bank of North Carolina (sometimes referred to as “BNC” as a separate legal entity), except where the context indicates otherwise.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of the Company that are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:

the economic recovery may face challenges causing its momentum to falter or a further recession;

the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended, and other reforms will subject us to a variety of new and more stringent legal and regulatory requirements, including increased scrutiny from our regulators;

changes in local, regional and international business, economic or political conditions in the regions where we operate or have significant assets;

changes in trade, monetary and fiscal policies of various governmental bodies and central banks could affect the economic environment in which we operate;

adverse changes in credit quality trends;

our ability to determine accurate values of certain assets and liabilities;

adverse behaviors in securities, public debt, and capital markets, including changes in market liquidity and volatility;

our ability to anticipate interest rate changes correctly and manage interest rate risk presented through unanticipated changes in our interest rate risk position and/or short- and long-term interest rates;

unanticipated changes in our liquidity position, including but not limited to our ability to enter the financial markets to manage and respond to any changes to our liquidity position;

adequacy of our risk management program;

increased competitive pressure due to consolidation;

unanticipated adverse effects and integration costs of acquisitions and dispositions of assets, business units or affiliates;

our failure to realize anticipated benefits of our acquisitions or to realize the benefits within the existing time frame; or

our ability to integrate acquisitions and retain existing customers and attract new ones.

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, 2012.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. The more critical accounting and reporting policies include accounting for the allowance for credit losses, valuation of goodwill and intangible assets, and valuation of assets acquired and liabilities assumed in business combinations. Accordingly, the Company’s critical accounting policies are discussed in detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The Company’s significant accounting policies are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no changes to the Company’s significant accounting policies during 2013. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 “Basis of Presentation” included herein.

Overview and Executive Summary

The Company was formed in 2002 to serve as a one-bank holding company for BNC, a full service commercial bank, incorporated under the laws of the State of North Carolina on November 15, 1991, that opened for business on December 3, 1991. 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.

We are registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended 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. BNC is also subject to certain regulations of the Federal Reserve System governing the reserves to be maintained against deposits and other matters. Our principal executive offices are located at 3980 Premier Drive, High Point, North Carolina 27265.

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. 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 target business professionals and small to mid-size business customers with credit relationships in the $250,000 to $15 million range that are generally too small for the regional banks but too large for smaller community banks with lower legal lending limits. We offer our customers superior customer service, convenient branch locations and experienced bankers.

We have experienced steady, primarily organic growth over our 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 is as follows:

On November 30, 2012 we acquired First Trust Bank (“First Trust”), which operated three branches in the greater Charlotte, North Carolina metropolitan area. This acquisition expanded and enhanced our footprint in the metropolitan Charlotte market.

On September 21, 2012, we acquired the deposits and certain other assets of two branches that were owned by The Bank of Hampton Roads (“BHR”), a subsidiary of Hampton Roads Bankshares, Inc., located in Cary, North Carolina and 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 BHR branches, further increased our presence in the combined Raleigh-Durham Metropolitan Statistical Area, the market with the highest forecasted five-year growth rate in North Carolina.

On June 8, 2012, we acquired certain assets and liabilities of Carolina Federal Savings Bank (“Carolina Federal”) in Charleston, South Carolina, 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.

During the first three months of 2013, management has continued to focus on managing credit quality, maintaining adequate liquidity sources, managing capital, and extracting earnings from the investments in people, markets, and noninterest income sources made over the past four years. As we build our franchise throughout the Carolinas, we continue our 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, a strong core deposit base, a sound and well-priced asset portfolio, strong risk management practices, and an emphasis on operational efficiency are the core fundamentals being emphasized.

Credit costs remain high due to elevated nonperforming asset levels prompted by a prolonged weakness in the real estate values in the Carolinas. Elevated, yet improving, unemployment levels across our banking markets have also resulted in higher loan charge-offs, workout costs, and other real estate owned (“OREO”) valuation adjustments which have adversely impacted earnings. We continue to focus on accelerating the sales cycle for OREO including taking necessary discounts when deemed the most prudent course of action.

Analysis of Results of Operations

Consolidated net income for the first quarter of 2013 was $4.3 million, an increase of $2.6 million from the $1.7 million of net income from the first quarter of 2012. Our net income available to common shareholders for the first quarter of 2013 was $3.8 million, or $0.14 per diluted share, compared to $1.1 million, or $0.11 per diluted share, for the first quarter of 2012. Included in the financial results for the quarters ended March 31, 2013 and 2012 are $491,000 and $1.6 million, respectively, of net gains from securities and gains on acquisitions included in non-interest income, and $1.0 million and $847,000, respectively, of transaction-related expenses included in non-interest expense.

Average common shares outstanding have increased significantly since the first quarter of 2012 as a result of a $72.5 million capital raise during the second quarter of 2012, as well as common stock issued as part of the acquisitions of both KeySource and First Trust during the second half of 2012. For the quarters ended March 31, 2013 and 2012, average fully-diluted common shares outstanding were 26.5 million and 10.9 million, respectively.

Two important and commonly used measures of bank profitability are return on average assets (net income as a percentage of average total assets) and return on average common shareholders’ equity (net income available to common shareholders as a percentage of average common shareholders’ equity). The annualized return on average assets was 0.58% for the first quarter of 2013, compared to 0.29% for the first quarter of 2012. The annualized return on average common equity was 6.12% for the first quarter of 2013, an increase from return on average common equity of 4.09% for the first quarter of 2012.

Net Interest Income

Net interest income is our primary source of revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, loan prepayment behavior, and the use of interest rate derivative financial instruments. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt loans and investment securities is computed on a fully-taxable equivalent basis (“FTE”). Net interest income and yield on interest-earning assets are discussed below on a FTE basis.

Net interest income was $27.5 million for the first quarter of 2013, an increase of $7.5 million, or 37.5%, from the $20.0 million earned in the first quarter of 2012. The increase in net interest income was primarily due to a $537.2 million, or 25.4%, increase in the average balance of interest-earning assets from first quarter 2012 to first quarter of 2013. Average loans and leases, excluding loans held for sale, have increased by $333.2 million, or 19.6%, to $2.04 billion for the first quarter of 2013, as compared to the first quarter of 2012. Average investment securities were $461.8 million for the first quarter of 2013, an increase of $115.6 million, or 33.4%, from the first quarter of 2012. These increases are primarily associated with our acquisitions of Carolina Federal, BHR, KeySource and First Trust during 2012. We also experienced a $58.0 million increase in average interest-earning bank balances between the first quarter of 2013 and the comparable period of 2012, which was primarily generated from cash acquired in business combinations and the sale of acquired investment securities. The significantly higher liquidity position was strategically maintained by the Company to repay wholesale and non-core deposits to improve net interest margin during the first quarter of 2013.

The average yield on interest earning assets was 5.33% for the first quarter of 2013, a decrease of 10 basis points from 5.43% during the comparable period of 2012. The average yield earned on loans and leases, excluding loans held for sale, was 5.72% for the first quarter of 2013, an increase from an average yield of 5.49% for the comparable period in 2012. This improvement in average yield is primarily due to an increased level of accretion of yield and fair value discounts on the acquired loan portfolios, which totaled $3.3 million for the first quarter of 2013, an increase of $1.9 million from loan accretion of $1.5 million for the first quarter of 2012. Factors affecting the amount of accretion include unscheduled loan payments, changes in estimated cash flows and impairment. This improvement was offset by a decrease of 107 basis points in the average yield on investment securities from the first quarter of 2012 to the first quarter of 2013. The decrease is due to the maturity and replacement of higher yielding investment securities with investment securities with lower yields.

Total interest expense was $7.4 million for the first quarter of 2013, a decrease of $1.2 million, or 14.1%, from interest expense of $8.6 million for the first quarter of 2012. Average total interest-bearing liabilities were $2.41 billion for the first quarter of 2013, an increase of $317.7 million, or 15.1%, as compared to the first quarter of 2012. The increase in interest-bearing liabilities was primarily associated with the acquisitions of Carolina Federal, BHR, KeySource and First Trust during 2012.

The Company’s average cost of interest-bearing liabilities was 1.24% for the first quarter of 2013, a decrease of 40 basis points from 1.64% for the first quarter of 2012. This decrease was due to the Company’s decision to reduce exposure to higher cost deposit products and aggressively reduce deposit rates over the past two quarters. Average rate paid on demand and time deposits were 1.31.% and 1.14%, respectively, for the first quarter of 2013, as compared to 1.62% and 1.58%, respectively, for the first quarter of 2012. Decreases in the average cost of deposits were slightly offset by an increase in cash flow hedging expense, which totaled $2.2 million for the first quarter of 2013, compared to $1.9 million for the first quarter of 2012.

The following tables set forth the major components of net interest income and the related annualized yields and rates for the first quarter of 2013 and 2012, respectively (dollars in thousands):

Table 1

Average Balance and Net Interest Income (FTE)

	Three Months Ended							Three Months Ended
	March 31, 2013							March 31, 2012
	Average				Average			Average				Average
	balance		Interest		rate			balance		Interest		rate
Interest-earning assets:
Loans and leases	$	2,037,683	$	28,762		5.72	%	$	1,704,459	$	23,260		5.49	%
Loans held for sale		45,911		379		3.35	%		15,491		117		3.04	%
Investment securities, taxable		139,637		1,039		3.02	%		119,347		1,332		4.49	%
Investment securities, tax-exempt*		322,144		4,521		5.69	%		226,845		3,792		6.72	%
Interest-earning balances and other		104,854		123		0.48	%		46,849		43		0.37	%
Total interest-earning assets		2,650,229		34,824		5.33	%		2,112,991		28,544		5.43	%
Other assets		330,425							302,648
Total assets	$	2,980,654						$	2,415,639
Interest-bearing liabilities:
Demand deposits	$	1,092,732		3,539		1.31	%	$	897,284		3,616		1.62	%
Savings deposits		84,008		61		0.29	%		39,587		43		0.44	%
Time deposits		1,117,159		3,152		1.14	%		1,034,249		4,052		1.58	%
Borrowings		120,496		611		2.06	%		125,624		856		2.74	%
Total interest-bearing liabilities		2,414,395		7,363		1.24	%		2,096,744		8,567		1.64	%
Non-interest-bearing deposits		262,821							152,239
Other liabilities		17,050							8,542
Shareholders' equity		286,388							158,114
Total liabilities and shareholder's equity	$	2,980,654						$	2,415,639
Net interest income and
interest rate spread*			$	27,461		4.09	%			$	19,977		3.79	%
Net interest margin*						4.20	%						3.80	%

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $1.7 million and $1.4 million for the three months ended March 31, 2013 and 2012, 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).

Table 2

Volume and Rate Variance Analysis

Three Months Ended March 31, 2013 and 2012

	2013 vs. 2012
	Increase (decrease) due to
	Volume			Rate			Total
Interest income:
Loans and leases	$	4,414		$	1,088		$	5,502
Loans held for sale		238			23			261
Investment securities, taxable		177			(470	)		(293	)
Investment securities, tax-exempt (1)		1,428			(698	)		730
Interest-earning balances and other		60			20			80
Total interest income		6,317			(37	)		6,280

Interest expense:
Deposits:
Demand deposits		677			(754	)		(77	)
Savings deposits		40			(22	)		18
Time deposits		245			(1,145	)		(900	)
Borrowings		(37	)		(208	)		(245	)
Total interest expense		925			(2,129	)		(1,204	)
Net interest income	$	5,392		$	2,092		$	7,484

(1) Interest income on tax-exempt investments has been adjusted to a fully taxable-equivalent basis.

Provision for Loan Losses

Provision 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.

During the first quarter of 2013, the Company recorded a provision for loan losses of $4.1 million, a decrease of $1.1 million, or 20.5%, from $5.2 million recorded during the first quarter of 2012. Of the $4.1 million in provision expense, $3.7 million related to legacy non-covered loans. During the first quarter of 2013, the Company recorded a gross provision of $2.4 million for loss-share loans, of which $1.9 million was recorded through a FDIC indemnification asset and the remaining $500,000 was included in provision for loan losses.

Non-Interest Income

Non-interest income was $6.2 million for the first quarter of 2013, an increase of $393,000 from non-interest income of $5.8 million for the first quarter of 2012. Included in non-interest income for the first quarter of 2013 is $719,000 of bargain purchase gain related to the purchase of First Trust, which was due to a post-acquisition fair value adjustment. Excluding non-recurring sources of income, which includes gains on acquisitions, FDIC-related income and gain (loss) on sale of securities, non-interest income was $5.0 million for the first quarter of 2013, an increase of $2.0 million from $3.0 million in the first quarter of 2012. This increase is primarily due to increased volume of mortgage originations, as the Company continues to expand commissioned originators across key target markets.

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

Table 3

Non-Interest Income

	Three Months Ended March 31,
	2013			2012
Mortgage fees	$	2,381		$	1,116
Service charges		926			738
SBA income		353			228
Earnings on bank-owned life insurance		559			410
Gain (loss) on sale of investment securities, net		(228	)		1,619
Gain on acquisitions		719			-
Other		1,492			1,698
Total non-interest income	$	6,202		$	5,809

Non-Interest Expense

Non-interest expense was $23.1 million for the first quarter of 2013, an increase of $5.3 million from $17.8 million for the first quarter of 2012. Excluding transaction-related costs, non-interest expense for the first quarter of 2013 was $22.1 million, an increase of $5.1 million from $17.0 million for the first quarter of 2012. The increase from the first quarter of 2012 was primarily due to an increased number of employees and facilities purchased through the acquisitions of Carolina Federal, BHR, KeySource and First Trust.

Included in non-interest expense for the three months ended March 31, 2013 and 2012 was merger and transactional costs totaling $1.0 million and $847,000, respectively. These costs included professional fees, contract cancellations, personnel costs, and data processing and system conversion expenses.

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

Table 4

Non-Interest Expense

	Three Months Ended March 31,
	2013		2012
Salaries and employee benefits	$	12,805	$	9,901
Occupancy		1,683		1,120
Furniture and equipment		1,379		1,074
Data processing and supplies		723		697
Advertising and business development		587		388
Insurance, professional and other services		1,458		1,345
FDIC insurance assessments		666		600
Loan, foreclosure and other real estate owned		2,018		1,476
Other		1,797		1,224
Total non-interest expense	$	23,116	$	17,825

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 income taxes significantly affects our effective tax rate.

Our income tax expense was $480,000 for the first quarter of 2013, as compared to an income tax benefit of $308,000 for the first quarter of 2012. Our effective tax rates for the first quarter of 2013 and 2012 were 10.1% and (21.7%), respectively.

Analysis of Financial Condition

As part of the KeySource and First Trust acquisitions, management’s intention was to utilize excess liquidity and the acquired securities portfolios to repay wholesale and non-core deposits as they matured. The Company has been successful at reducing this inefficient component of the acquired balance sheets, and thus has experienced a decline in total assets during the first quarter of 2013 as compared to year-end 2012. Total assets as of March 31, 2013 were $2.93 billion, a decrease of $154.6 million, or 5.0%, when compared to total assets of $3.08 billion at December 31, 2012. Interest-earning assets, which serve as our primary revenue source and are comprised of interest-earning balances at banks, investment securities, FHLB stock, loans held for sale and portfolio loans, were $2.61 billion at March 31, 2013, a decrease of $142.3 million, or 5.2%, from $2.75 billion at December 31, 2012.

We continually monitor liquidity levels in relation to the market conditions, and adjust levels to what we deem to be an appropriate level for the current operating environment. Historically, liquid assets, consisting of cash and cash equivalents and investment securities,have been managed towards a target of 10% of total assets. At March 31, 2013, liquid assets totaled $564.9 million, or 19.3% of total assets, with the majority being available to meet short-term liquidity needs. At December 31, 2012, liquid assets totaled $690.4 million, or 22.4% of total assets. As stated previously, management’s intention was to utilize excess liquidity, including the acquired securities portfolios, to repay wholesale and non-core deposits as they matured. We will continue to execute this strategy going forward.

While total shareholders’ equity as of March 31, 2013 experienced a slight increase to $284.1 million, as compared to total shareholders’ equity of $282.2 million as of December 31, 2012, we have experienced changes in the composition of shareholders’ equity during 2013. In February 2013, the Company converted all 1,804,566 shares of Series B Preferred Stock to non-voting common stock. Further, in April 2013 we redeemed all 31,260 shares of the Company’s Series A Preferred Stock that was issued under the Treasury’s Troubled Asset Relief Program Capital Purchase Program utilizing the proceeds from a $30 million term loan and, to a lesser extent, cash on hand.

Investment Securities

The investment securities portfolio is intended to provide us with adequate liquidity, flexibility in asset/liability management, a source of stable income, and is structured with minimum credit exposure. Investment securities were $477.0 million at March 31, 2013, an increase of $20.6 million, or 4.5%, from total investment securities of $456.3 million at December 31, 2012. 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.

Net unrealized gains in our available-for-sale investment securities portfolio were $11.6 million as of March 31, 2013 and $14.4 million as of December 31, 2012. The decrease in gross unrealized gains was 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 totaled $2.03 billion as of March 31, 2013, a slight decrease from total portfolio loans of $2.04 billion at December 31, 2012. Our non-covered loan portfolio was $1.79 billion as of March 31, 2013, which is consistent with the balance as of December 31, 2012. Our covered loan portfolio decreased $11.1 million, or 4.5%, from December 31, 2012 to $237.8 million at March 31, 2013, 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.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, accruing loans 90 days or more past due, and OREO. At March 31, 2013, nonperforming assets not covered by loss-share agreements were $58.4 million, or 2.19% of total assets not covered by loss-share agreements, compared to $51.3 million, or 1.82% of total assets not covered by loss-share agreements, at December 31, 2012. Nonperforming assets, including assets covered under loss-share agreements, were $131.4 million, or 4.48% of total assets at March 31, 2013, compared to $121.3 million, or 3.93% of total assets, at December 31, 2012. For those nonperforming assets covered by loss-share agreements, we are provided with 80% loss protection from the FDIC.

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.

Nonaccrual loans not covered by loss-share agreements were $27.2 million at March 31, 2013, an increase of $4.8 million from $22.4 million at December 31, 2012. Nonaccrual loans, including covered loans, were $79.5 million at March 31, 2013, an increase of $10.1 million from total nonaccrual loans of $69.4 million as of December 31, 2012. Included in nonaccrual loans not covered by loss-share agreements are certain credit relationships that were performing when acquired during 2012 from Carolina Federal, KeySource, or First Trust, and have since deteriorated into nonaccrual status. In addition, two credits in the originated portfolio amounting to $5.4 million migrated from a performing troubled debt restructuring (“TDR”) category into nonaccrual during the first quarter of 2013.

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

Table 5

Nonperforming Assets

	March 31,			December 31,			September 30,			June 30,			March 31,
	2013			2012			2012			2012			2012
Nonaccrual loans:
Not covered by loss-share agreements	$	27,212		$	22,442		$	25,220		$	25,351		$	17,481
Covered by loss-share agreements		52,274			46,981			54,427			61,695			69,797
90 days or more past due:
Not covered by loss-share agreements		-			-			4,137			-			-
Covered by loss-share agreements		-			-			1			5			652
Other real estate owned:
Not covered by loss-share agreements		31,177			28,811			25,589			23,655			25,212
Covered by loss-share agreements		20,709			23,102			30,077			35,105			43,603
Total nonperforming assets	$	131,372		$	121,336		$	139,451		$	145,811		$	156,745
Total nonperforming assets not covered by loss-share agreements	$	58,389		$	51,253		$	54,946		$	49,006		$	42,693

Total nonperforming assets to total assets		4.48	%		3.93	%		5.14	%		5.97	%		6.51	%
Total nonperforming assets to total assets (not covered by loss share)		2.19	%		1.82	%		2.28	%		2.31	%		2.07	%

Total nonperforming loans to total portfolio loans		3.91	%		3.41	%		4.41	%		4.95	%		5.10	%
Total nonperforming loans to total portfolio loans (not covered by loss share)		1.52	%		1.26	%		1.80	%		1.72	%		1.23	%

Troubled debt restructurings not included in above	$	10,896		$	35,889		$	38,239		$	24,061		$	29,617

At March 31, 2013, non-covered loans that were restructured or modified and were performing to the restructured terms totaled $10.9 million, a decrease of $25.0 million from $35.9 million of performing TDRs at December 31, 2012. The decrease was due to performing TDRs that were removed from reporting disclosure due to satisfactory performance and reporting requirements, as well as the aforementioned movement of $5.4 million from performing TDR status to nonaccrual loans in the first quarter of 2013.

At March 31, 2013, there were $51.9 million in assets classified as OREO, which is consistent with total OREO as of December 31, 2012. As of March 31, 2013 and December 31, 2012, we had $20.7 million and $23.1 million, respectively, of OREO covered under loss-share agreements. The carrying values of other real estate owned represent the lower of the carrying amount or fair value less costs to sell.

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

Table 6

Other Real Estate Owned

	March 31, 2013		December 31, 2012
Covered under loss-share agreements:
Residential 1-4 family properties	$	7,083	$	7,897
Multifamily properties		273		303
Commercial properties		4,620		5,226
Construction, land development and other land		8,733		9,676
		20,709		23,102
Not covered under loss-share agreements:
Residential 1-4 family properties		4,277		2,185
Commercial properties		8,151		7,882
Construction, land development and other land		18,749		18,744
		31,177		28,811
Total other real estate owned	$	51,886	$	51,913

Allowance for Loan Losses and Asset Quality

The allowance for loan losses was $38.1 million at March 31, 2013, a decrease of $2.1 million, or 5.3%, from allowance for loan losses of $40.3 million as of December 31, 2012. Loan loss reserves to total period-end portfolio loans were 1.88% and 1.98% at March 31, 2013 and December 31, 2012, respectively. Included in the $38.1 million amount is the allowance for loan losses for non-covered loans, which was $25.0 million as of March 31, 2013, which is consistent with the amount recorded as of December 31, 2012. Total portfolio loans, less loans recorded at fair value, was 1.68% and 1.72% of the allowance for loan losses for non-covered loans as of March 31, 2013 and December 31, 2012, respectively. The decrease in the allowance for loan losses was primarily due to the charge-off and/or movement to OREO of problem credits that were already fully reserved for as part of the allowance for loan loss calculation. These loans were replaced with non-accrual loans that required a lower level of specific reserve.

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.

Net loan charge-offs for the first quarter of 2013 were $8.2 million, which included $4.5 million on loans covered under loss-share agreements and $3.7 million on loans not covered under loss-share agreements. The Company’s cost for the covered net loan charge-offs was $892,000, with the remainder being reimbursed by the FDIC. Combined with the $3.7 million of non-covered charge-offs, the Company incurred $4.6 million in charge-off losses, or 0.92% of average loans, during the first quarter of 2013, compared to $3.8 million, or 0.89% of average loans, for the first quarter of 2012.

The following table presents information related to the allowance for loan losses for the three months ended March 31, 2013 and 2012 (dollars in thousands):

Table 7

Analysis of Allowance for Loan Losses

	For the Three Months Ended March 31,
	2013			2012

Beginning balance	$	40,292		$	31,008
Provision for credit losses:
Non-covered loans		3,650			3,615
Covered loans		465			1,564
Increase in FDIC indemnification asset		1,913			6,258
Net charge-offs on loans covered under loss-share		(4,459	)		(2,692	)
Charge-offs on loans not covered under loss-share:
Commercial real estate		(420	)		(1,556	)
Commercial construction		(1,356	)		(1,071	)
Commercial and industrial		(1,276	)		(240	)
Residential construction		-			(17	)
Residential mortgage		(792	)		(397	)
Consumer and other		(11	)		(10	)
Total charge-offs		(3,855	)		(3,291	)

Recoveries on loans not covered under loss-share:
Commercial real estate		4			13
Commercial construction		18			189
Commercial and industrial		75			32
Residential construction		4			-
Residential mortgage		38			23
Consumer and other		3			3
Total recoveries		142			260
Net charge-offs on loans not covered under loss-share		(3,713	)		(3,031	)
Ending balance	$	38,148		$	36,722

Ratios:
Ratio of allowance for loan losses to total portfolio loans		1.88	%		2.13	%
Total portfolio loans less fair value loans to allowance not covered by loss-share		1.68	%		1.75	%
Net charge-offs of portfolio loans to total average loans		1.63	%		1.35	%
Net charge-offs of portfolio loans to total average loans (non-covered)		0.84	%		0.94	%

Deposits

Total deposits at March 31, 2013 were $2.51 billion, a decrease of 5.6% from total deposits of $2.66 billion as of December 31, 2012. This decrease was primarily due to the Company’s decision to utilize excess liquidity and the acquired securities portfolios to repay wholesale and non-core deposits as they matured, as well as aggressively reducing deposit rates over the past two fiscal quarters. While wholesale deposits as a percentage of total deposits at March 31, 2013 remained consistent with December 31, 2012, wholesale certificates of deposit decreased by $47.1 million from December 31, 2012. Transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $319.3 million, or 28.5%, over the past twelve months. At March 31, 2013, time deposits were 42.6% of total deposits, compared to 43.7% at December 31, 2012.

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 March 31, 2013, 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 March 31, 2013 that management believes have changed either the Company’s or BNC’s capital classifications.

On March 31, 2013, shareholders’ equity was $284.1 million, an increase of $1.9 million from shareholders’ equity of $282.2 million as of December 31, 2012. As stated previously, during the first quarter of 2013 the Company converted all 1,804,566 shares of Series B Preferred Stock to non-voting common stock and, on April 29, 2013, redeemed all 31,260 shares of the Company’s Series A Preferred Stock that were issued under the Treasury’s Troubled Asset Relief Program Capital Purchase Program.

At March 31, 2013, the Tier I risk-based capital ratio for BNC was 12.86%, the total risk-based capital ratio was 14.12% and all other capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures. At March 31, 2013, the Company’s total risk-based capital ratio was 14.08%, thus classifying the Company as “well-capitalized” for regulatory purposes.

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 $430.5 million at March 31, 2013, compared to $575.6 million at December 31, 2012. Supplementing customer deposits as a source of funding, we have the ability to borrow up to $294.0 million from the FHLB of Atlanta, with $62.0 million outstanding at March 31, 2013. We also have the ability to borrow from the Federal Reserve Discount Window in the amount of $71.5 million, with no outstanding balances. These amounts are based on assets currently pledged. In addition, we may purchase federal funds through unsecured federal funds guidance lines of credit totaling $55.0 million, with no outstanding balance as of March 31, 2013.

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

As discussed in Note 13 to the “Notes to Consolidated Financial Statements,” we entered into a $30.0 million term funding agreement in April 2013. The Term Loan bears interest as determined by the Company at either (i) 3.5%, plus a rate equal to the higher of (a) prime lending rate (published in the Wall Street Journal) as in effect from time to time, (b) the Federal Funds rate, as in effect from time to time, plus one- half of one percent per annum, and (c) LIBOR determined on a daily basis for a period of one month, plus 1.00%, or (ii) 4.5%, plus the 30, 60, or 90 day LIBOR. The interest rate has a floor of 1.00%. The Term Loan matures on April 26, 2018 and is amortized over the five year term. The Term Loan has customary reporting, financial, affirmative and negative covenants and includes a prepayment penalty during the first two years of the term.

Except for the term loan agreement noted above, all contractual obligations remained generally unchanged atMarch 31, 2013 compared toDecember 31, 2012.

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, 2012, 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, 2012 to March 31, 2013.

Item 4. Controls and Procedures

(a)

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

(b)

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 11 “Off-Balance Sheet Risk” 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, 2012, 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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

*Signature*	*Title*	*Date*
/s/ W. Swope Montgomery, Jr.	President, Chief Executive	May 10, 2013
W. Swope Montgomery, Jr.	Officer and Director

/s/ David B. Spencer	Executive Vice President, and	May 10, 2013
David B. Spencer	Chief Financial Officer (Principal
	Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description

3.1		Articles of Amendment dated February 7, 2013 regarding the Mandatory Convertible Non-Voting Preferred Stock, Series B, incorporated by reference to Exhibit 3.1 to the Current Report on From 8-K, filed with the SEC on February 11, 2013.

10.1		Amendment Number 2 to the Investment Agreement dated as of February 7, 2013, by and between BNC Bancorp and Aquiline BNC Holdings LLC, incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 18, 2013.

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.

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.

32		Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit (101) *		The following financial information from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed on May 10, 2013, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets at March 31, 2013 and December 31, 2012, (ii) the Consolidated Statements of Income for the three months ended March 31, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012, (iv) the Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2013 and 2012, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, 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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BNC Bancorp (BNNC) Inactive 10-Q2013 Q1 Quarterly report

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