BNC Bancorp (BNNC) 10-Q 2005 Q2 Quarterly report

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

x Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

¨ Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period ended                    

Commission File Number 000-50128

BNC Bancorp

(Exact name of registrant as specified in its charter)

North Carolina	47-0898685
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

831 Julian Avenue Thomasville, North Carolina	27360
(Address of principal executive offices)	(Zip Code)

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

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

Common Stock, No Par Value

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

Indicate by check mark whether or not the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 11, 2005, the registrant had outstanding 3,487,588 shares of Common Stock, no par value.

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition June 30, 2005 and December 31, 2004	3
	Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2005 and 2004	4
	Consolidated Statements of Cash Flows Six Months Ended June 30, 2005 and 2004	5
	Notes to Consolidated Financial Statements	6
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	13
Item 4 -	Controls and Procedures	13
Part II.	Other Information
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 4 -	Submission of Matters to a Vote of Security Holders	14
Item 6 -	Exhibits	14

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Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

BNC BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30, 2005 (Unaudited)			December 31, 2004*
	(Amounts in thousands)
Assets
Cash and due from banks	$	9,541		$	6,747
Interest-earning balances		15,582			780
Securities available for sale		41,618			35,428
Federal Home Loan Bank stock, at cost		3,019			3,037
Loans held for sale		1,037			1,894
Loans		461,808			420,838
Less allowance for loan losses		(5,948	)		(5,361	)
Net loans		455,860			415,477
Accrued interest receivable		2,292			1,868
Premises and equipment, net		13,762			11,827
Investment in life insurance		11,935			11,713
Goodwill		3,423			3,423
Other assets		5,230			5,355
Total assets	$	563,299		$	497,549
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing demand	$	43,606		$	34,485
Interest-bearing demand		120,492			140,485
Savings		12,331			10,787
Time deposits of $100,000 and greater		192,865			134,696
Other time		85,894			71,027
Total deposits		455,188			391,480
Short-term borrowings		4,266			28,275
Long-term debt		69,496			45,496
Accrued expenses and other liabilities		2,923			3,261
Total liabilities		531,873			468,512
Shareholders’ Equity:
Common stock, no par value; authorized 80,000,000 shares; 3,492,588 and 3,480,548 issued and outstanding at June 30, 2005 and December 31, 2004, respectively		20,105			20,033
Retained earnings		10,723			8,679
Accumulated other comprehensive income		598			325
Total shareholders’ equity		31,426			29,037
Total liabilities and shareholders’ equity	$	563,299		$	497,549

* Derived from audited consolidated financial statements.

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005			2004
	(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans	$	7,361	$	5,073	$	13,907		$	9,697
Interest on U.S. Treasury and agency securities		5		28		23			66
Interest on state and municipal securities		424		319		807			611
Other interest income		64		32		118			65
							��
TOTAL INTEREST INCOME		7,854		5,452		14,855			10,439
INTEREST EXPENSE
Interest on demand deposits		562		538		1,114			1,079
Interest on savings deposits		14		5		26			10
Interest on time deposits of $100,000 and greater		1,567		517		2,725			908
Interest on other time deposits		554		291		975			578
Interest on short-term borrowings		366		77		489			89
Interest on long-term debt		389		433		888			793
TOTAL INTEREST EXPENSE		3,452		1,861		6,217			3,457
NET INTEREST INCOME		4,402		3,591		8,638			6,982
PROVISION FOR LOAN LOSSES		525		230		1,005			350
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,877		3,361		7,633			6,632
NON-INTEREST INCOME
Mortgage fee income		142		167		227			294
Service charges on deposit accounts		422		402		800			762
Investment brokerage fees		20		111		50			167
Increase in cash surrender value of life insurance		107		107		222			193
Other income		11		7		20			13
TOTAL NON-INTEREST INCOME		702		794		1,319			1,429
NON-INTEREST EXPENSE
Salaries and employee benefits		1,785		1,645		3,573			3,261
Occupancy expenses		188		161		373			320
Furniture and equipment expense		182		173		336			325
Data processing and supply expense		183		171		364			396
Advertising and business development expenses		109		82		231			172
Insurance, professional and other services		265		256		573			486
Other operating expenses		349		392		651			752
TOTAL NON-INTEREST EXPENSE		3,061		2,880		6,101			5,712
INCOME BEFORE INCOME TAX EXPENSE		1,518		1,275		2,851			2,349
INCOME TAX EXPENSE		411		375		786			670
NET INCOME	$	1,107	$	900	$	2,065		$	1,679
BASIC NET INCOME PER SHARE	$	.32	$	.26	$	.59		$	.48
DILUTED NET INCOME PER SHARE	$	.30	$	.24	$	.56		$	.45

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended June 30,
	2005			2004
	(Amounts in thousands)
Operating Activities
Net income	$	2,065		$	1,679
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		379			321
Amortization of premiums and discounts, net		(374	)		73
Amortization of core deposit intangible		25			14
Provision for loan losses		1,005			350
Gain on sale of securities available for sale		(5	)		—
Net increase in cash surrender value of life insurance		(222	)		(193	)
(Gain) loss on sales of foreclosed assets		(18	)		32
Changes in assets and liabilities:
(Increase) decrease in loans held for sale		857			(493	)
Increase in accrued interest receivable		(424	)		(180	)
Increase in other assets		(89	)		(541	)
Increase in accrued expenses and other liabilities		99			105
Net cash provided by operating activities		3,298			1,167
Investing Activities
Purchases of securities available for sale and Federal Home Loan Bank stock		(8,840	)		(5,998	)
Proceeds from calls and maturities of securities available for sale		2,196			3,090
Proceeds from sales of securities available for sale		1,280			—
Investment in life insurance		—			(2,573	)
Net increase in loans		(41,746	)		(65,684	)
Purchase of premises and equipment		(2,307	)		(821	)
Proceeds from sales of foreclosed assets		558			671
Net cash used by investing activities		(48,859	)		(71,315	)
Financing Activities
Net increase in deposits		63,708			74,768
Net increase (decrease) in short-term borrowings		(24,009	)		4,273
Net increase in long-term debt		24,000			6,186
Proceeds from exercise of stock options		96			9
Purchase and retirement of common stock		(60	)		(339	)
Cash dividends paid		(578	)		(501	)
Net cash provided by financing activities		63,157			84,396
Net increase in cash and cash equivalents		17,596			14,248
Cash and cash equivalents, beginning of period		7,527			11,364
Cash and cash equivalents, end of period	$	25,123		$	25,612

See accompanying notes.

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BNC BANCORP

Notes to Consolidated Financial Statements

NOTE A - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three-month and six-month periods ended June 30, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of BNC Bancorp (the “Company”) and its wholly-owned subsidiaries, Bank of North Carolina (the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three-month and six-month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005.

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2004 Annual Report on Form 10-KSB for the year ended December 31, 2004. This quarterly report should be read in conjunction with the Annual Report.

NOTE B - COMMITMENTS

At June 30, 2005, loan commitments were as follows (in thousands):

Commitments to extend credit	$	50,904
Undisbursed lines of credit		24,532
Letters of credit		1,372
Commitments to sell loans held for sale		1,037

NOTE C - COMPREHENSIVE INCOME

A summary of comprehensive income is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(In thousands)
Net income	$	1,107		$	900		$	2,065		$	1,679
Other comprehensive income
Unrealized holding gain (losses) on available for sale securities arising during the period		655			(1,471	)		434			(1,069	)
Tax effect		(240	)		537			(158	)		390
Reclassification of gains recognized in net income		(5	)		—			(5	)		—
Tax effect		2			—			2			—
Total comprehensive income (loss)	$	1,519		$	(34	)	$	2,338		$	1,000

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BNC BANCORP

Notes to Consolidated Financial Statements

NOTE D - STOCK OPTIONS

Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, encourages but does not require that companies record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. All of the Company’s stock options have no intrinsic value at grant date and, consequently, no compensation cost is recognized for them.

An employer that continues to apply the intrinsic value accounting method rather than the fair value based method must disclose certain pro forma information. Under the fair value based method, compensation cost is measured at the grant date of the option based on the value of the award and is recognized over the service period, which is usually the vesting period. As required by SFAS No. 123, disclosures are presented below for the effect on the net income and net income per share for the three-months and six-months ended June 30, 2005 and 2004 that would result from the use of the fair value based method to measure compensation cost related to stock option grants. The effects of applying the provisions of SFAS No. 123 are not necessarily indicative of future effects.

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(Amounts in thousands, except per share data)
Net income:
As reported	$	1,107		$	900		$	2,065		$	1,679
Deduct: Total stock-based employee compensation expenses determined under fair value method for all amounts, net of related tax effects		(23	)		(6	)		(46	)		(12	)
Pro forma	$	1,084		$	894		$	2,019		$	1,667
Basic net income per share:
As reported	$	.32		$	.26		$	.59		$	.48
Pro forma		.31			.26			.58			.48
Diluted net income per share:
As reported	$	.30		$	.24		$	.56		$	.45
Pro forma		.29			.24			.55			.45

For the three-month period ending June 30, 2005, there were 65,000 stock options that were antidilutive since the exercise price exceeded the average market price for the period.

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BNC BANCORP

Notes to Consolidated Financial Statements

NOTE E - NET INCOME PER SHARE

Basic and diluted net income per share has been computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The weighted average number of shares outstanding or assumed to be outstanding are summarized below:

	Three Months Ended June 30,		Six Months Ended June 30,
	2005	2004	2005	2004
Weighted average number of common shares used in computing basic net income per share	3,492,588	3,487,840	3,490,335	3,490,443
Effect of dilutive stock options	209,048	236,506	213,436	233,110
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share	3,701,636	3,724,346	3,703,771	3,723,553

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

This report contains forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated, including general and local economic conditions; changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; and other competitive, technological, governmental and regulatory factors affecting our operations, pricing, products, and services.

Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of 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-KSB for the year ended December 31, 2004.

We are a commercial bank holding company that was incorporated on December 16, 2002. The accompanying consolidated financial statements include the accounts and transactions of BNC Bancorp and its wholly owned subsidiary, Bank of North Carolina. All significant intercompany transactions and balances are eliminated in consolidation.

Bank of North Carolina was incorporated and began banking operations in 1991. The Bank is engaged in commercial banking predominantly in Davidson and Randolph Counties, North Carolina, and to a lesser extent, Guilford, Forsyth and Rowan Counties, North Carolina. The Bank is operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank’s primary source of revenue is derived from loans to customers, who are predominantly individuals and small to medium size businesses in Davidson, Forsyth, Guilford, Randolph and Rowan Counties.

Financial Condition at June 30, 2005 and December 31, 2004

During the six-month period ending June 30, 2005, total assets increased by $65.8 million to $563.3 million from $497.5 million at December 31, 2004. At June 30, 2005, loans totaled $461.8 million, an increase of $41.0 million, or 9.7%, during the six months, with the majority of the increase occurring in the commercial loan portfolio. Loans held for sale decreased by $857,000, from $1.9 million at December 31, 2004 to $1.0 million at June 30, 2005.

Total liquid assets, which includes cash and due from banks, interest-earning deposits and investment securities, increased by $23.8 million during the six months, to $66.7 million or 11.8% of total assets at June 30, 2005 versus $43.0 million, or 8.6% of total assets, at December 31, 2004.

Deposits continue to be our primary funding source. At June 30, 2005, deposits totaled $455.2 million, an increase of $63.7 million, or 16.3%, from year-end 2004. This significant increase was primarily due to 1) the utilization of out of market time deposits which offered greater term flexibility at comparable interest rates to that of our current local market, and 2) time deposit campaigns in our local markets that increases CD totals less than $100,000. In addition, we have also utilized borrowings from the FHLB to support balance sheet management and growth. Borrowings from the FHLB decreased by $5.9 million to $45.0 million at June 30, 2005, as we paid off $21.9 million in short-term variable rate borrowings and refinanced into $16.0 million of medium-term fixed rate advances from the FHLB. Trust preferred securities, regulatory capital instruments classified as long-term debt, increased $5 million during the second half of 2004, explaining the change from $11.0 million outstanding at June 30, 2004, to $16.0 million at June 30, 2005 and December 31, 2004. At the end of the second quarter, the Bank issued $8 million in subordinated debt that is treated as Tier II capital for regulatory purposes. The subordinated debt carries a variable rate tied to 3-month LIBOR and is classified as long-term debt.

Our capital position remains strong, with all of our regulatory capital ratios at levels that make us “well capitalized” under federal bank regulatory capital guidelines. At June 30, 2005, our shareholders’ equity totaled $31.4 million,

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an increase of $2.4 million from the December 31, 2004 balance. The increase in shareholders’ equity resulted primarily from net income during the period of $2.0 million. At June 30, 2005, both the Company and the Bank were considered to be “well capitalized” as such term is defined in applicable regulations.

Results of Operations for the

Three Months Ended June 30, 2005 and 2004

Net Income. Net income for the three months ended June 30, 2005 was $1.1 million, an increase of $207,000 from net income of $900,000 for the same three-month period in 2004. Net income per share was $.30 diluted for the three months ended June 30, 2005, up from $.24 diluted for the same period in 2004. We have experienced strong growth, with total assets averaging $538.5 million during the current three-month period as compared to $431.9 million in the prior year period, an increase of $106.5 million, or 24.7%. Increases in net interest income for the quarter ended June 30, 2005 of $811,000 exceeded the increases of $295,000 and $181,000 in the provision for loan losses and in non-interest expenses, respectively. In addition, we experienced a reduction in non-interest income in the amount of $92,000 for the quarter ended June 30, 2005.

Net Interest Income. Net interest income increased by $811,000, or 22.6%, to $4.4 million for the three months ended June 30, 2005. Our total interest income benefited from strong growth in the level of average earning assets, primarily in the loan portfolio. Average interest-earning assets increased $99.8 million, or 25.6%, during the second quarter of 2005 as compared with the same period in 2004. The average tax equivalent yield on total interest-earning assets for the three month period was 6.61%, a 76 basis point increase from the 5.85% in the second quarter of 2004.

Our average total interest-bearing liabilities increased by $99.4 million, or 27.2%, virtually the same as our increase in interest-earning assets. Our average cost of total interest-bearing liabilities increased 92 basis points from 2.07% to 2.98%, largely due to repricing of our premium money market accounts, the $16 million of junior subordinated debt tied to LIBOR, and rising CD costs during the past twelve months. For the three months ended June 30, 2005, our tax equivalent net interest spread was 3.63% and our tax equivalent net interest margin was 3.80%. For the three months ended June 30, 2004, our tax equivalent net interest rate spread was 3.78%, and our tax equivalent net interest margin was 3.91%.

Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2005 was $525,000, representing an increase of $295,000, or 128.3%, from the $230,000 provision for the three months ended June 30, 2004. Net loan charge-offs were $213,000 during the three months ended June 30, 2005, as compared with net loan charge-offs in the amount of $74,000 in the same period of 2004. The allowance increased primarily due to our increase in loans, which amounted to $461.8 million at June 30, 2005, an increase of $93.6 million from loans outstanding at June 30, 2004. The level of our non-accrual loans at June 30, 2005 amounted to $1,478,000, or .32% of total loans compared to .29% at June 30, 2004 and .08% at December 31, 2004. While the allowance for loan losses increased $312,000 during the quarter to $5.9 million at June 30, 2005, the level of the allowance expressed as a percentage of gross loans increased only slightly from 1.27% at the end of 2004 to 1.29% at the end of the current quarter.

Non-Interest Income. For the three months ended June 30, 2005, non-interest income decreased $92,000, or 11.6%, to $702,000 from $794,000 for the same period in the prior year. This decrease resulted principally from a decrease in mortgage fee income of $25,000 and a decline in investment brokerage fees of $91,000 in 2005 compared to 2004. The decrease in investment brokerage fees is due to deposit rates becoming much more competitive as investment options when compared to fee based, fixed rate investment products. Offsetting these declines was an increase in service charges on deposit accounts of $20,000.

Non-Interest Expense. We strive to maintain levels of non-interest expense that we believe are appropriate given the nature of our operations and the investments in personnel and facilities that have been necessary to generate growth. One of the keys to the momentum we have experienced on the loan side has been our continuous investment in our loan platform, both in people and locations. As we strive to maintain this momentum, we will incur costs associated with investments in people, facilities, and technology that we anticipate will benefit our shareholders as these investments reach their potential.

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For the three-months ended June 30, 2005, total non-interest expenses increased $181,000, principally as a result of growth achieved from period to period. Salary and employee benefit expenses increased $140,000, reflecting the addition of personnel resulting from the operation of the full service office in High Point, as well as normal growth and compensation increases. In addition, occupancy expense increased by $27,000, also due to the opening of our city office in High Point. Insurance and professional fees were virtually unchanged, and advertising costs increased due to our time deposit campaigns during the quarter.

Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 27.1% and 29.4%, respectively, for the three months ended June 30, 2005 and 2004. The decline in the effective tax rate was due to the increased level of tax-exempt interest income and nontaxable income from investments in state and municipal investment securities and Company owned life insurance.

Results of Operations for the

Six Months Ended June 30, 2005 and 2004

Net Income. Net income for the six months ended June 30, 2005 was $2.6 million, an increase of $386,000 over net income of $1.7 million for the same six-month period in 2004. Net income per share was $.56 diluted for the six months ended June 30, 2005, up from $.45 diluted for the same period in 2004. We have experienced strong growth, with total assets averaging $525.1 million during the current six-month period as compared to $409.7 million in the prior year period, an increase of $115.4 million, or 28.2%. Increases in net interest income for the six months ended June 30, 2005 of $1.7 million exceeded the increases of $655,000 and $389,000 in the provision for loan losses and in non-interest expenses, respectively. In addition, we have had a reduction in non-interest income in the amount of $110,000 for the year to date period ended June 30, 2005.

Net Interest Income. Net interest income increased by $1.7 million, or 23.7%, to $8.6 million for the six months ended June 30, 2005. Our total interest income benefited from strong growth in the level of average earning assets, primarily in the loan portfolio. Average interest-earning assets increased $106.6 million, or 28.6%, during the first half of 2005 as compared with the same period in 2004. Our average tax equivalent yield on total interest-earning assets increased by 61 basis points from 5.83% to 6.44%.

Our average total interest-bearing liabilities increased by $105.6 million, or 30.3%, slightly less than our increase in interest-earning assets. Our average cost of total interest-bearing liabilities increased 75 basis points from 2.01% to 2.76%, largely due to repricing of our premium money market accounts, the $16 million of junior subordinated debt tied to LIBOR, and rising CD costs during the first half of 2005. For the six months ended June 30, 2005, our tax equivalent net interest spread was 3.67% and our tax equivalent net interest margin was 3.82%. For the six months ended June 30, 2004, our tax equivalent net interest rate spread was 3.82%, and our tax equivalent net interest margin was 3.96%.

Provision for Loan Losses. The provision for loan losses for the six months ended June 30, 2005 was $1.0 million, representing an increase of $655,000, or 187.1%, from the $350,000 provision for the six months ended June 30, 2004. Net loan charge-offs were $418,000 during the six months ended June 30, 2005, as compared with net loan charge-offs in the amount of $136,000 in the same period of 2004. The allowance increased primarily due to our increase in loans, which amounted to $461.8 million at June 30, 2005, an increase of $93.6 million from loans outstanding at June 30, 2004. The level of our non-accrual loans at June 30, 2005 amounted to $1,478,000, or .32% of total loans compared to .29% at June 30, 2004 and .08% at December 31, 2004. While the allowance for loan losses increased $587,000 during the first six months of 2005 to $5.9 million at June 30, 2005, the level of the allowance expressed as a percentage of gross loans increased only slightly from 1.27% at the end of 2004 to 1.29% at the end of the current quarter.

Non-Interest Income. For the six months ended June 30, 2005, non-interest income decreased $110,000, or 7.7%, to $1,319,000 from $1,429,000 for the same period in the prior year. This decrease resulted principally from a decrease in mortgage fee income of $67,000 and a decline in investment brokerage fees of $117,000 in 2005 compared to 2004. The decrease in investment brokerage fees is due to deposit rates becoming much more competitive as investment options when compared to fee based, fixed rate investment products. Offsetting these declines was an increase in service charges on deposit accounts of $38,000.

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Non-Interest Expense. We strive to maintain levels of non-interest expense that we believe are appropriate given the nature of our operations and the investments in personnel and facilities that have been necessary to generate growth. One of the keys to the momentum we have experienced on the loan side has been our continuous investment in our loan platform, both in people and locations. As we strive to maintain this momentum, we will incur costs associated with investments in people, facilities, and technology that we anticipate will benefit our shareholders as these investments reach their potential.

For the six-months ended June 30, 2005, total non-interest expenses increased $389,000, principally as a result of growth achieved from period to period. Salary and employee benefit expenses increased $312,000, reflecting the addition of personnel resulting from the operation of the full service office in High Point, as well as normal growth and compensation increases. In addition, occupancy expense increased by $53,000, also due to the opening of our city office in High Point. Advertising costs increased due to our time deposit campaigns during the first half of 2004, and insurance and professional fees increased by $87,000 as a result of additional legal and auditing expense associated with the requirements mandated by the Sarbanes-Oxley legislation.

Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 27.6% and 28.5%, respectively, for the six months ended June 30, 2005 and 2004. The decline in the effective tax rate was due to the increased level of tax-exempt interest income and nontaxable income from investments in state and municipal investment securities and Company owned life insurance.

LIQUIDITY AND CAPITAL RESOURCES

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. 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 borrowings from correspondent banks under unsecured overnight federal funds credit lines and secured lines of credit. In addition to interest rate-sensitive deposits, the Bank’s primary demand for liquidity is anticipated fundings under credit commitments to customers.

Because of our continued growth, at the end of the second quarter we maintained a relatively high position of liquidity in the form of cash and due from banks, interest-bearing bank deposits and investment securities. These aggregated $66.7 million at June 30, 2005 compared to $43.0 million at December 31, 2004. Supplementing customer deposits as a source of funding, we have the ability to borrow up to $72.5 million from the FHLB of Atlanta, with $45.0 million outstanding at June 30, 2005 and $50.9 million at December 31, 2004. We repaid $21.9 million in short-term, variable rate borrowings at the FHLB, and borrowed $16 million in medium-term, fixed rate FHLB Advances. All borrowings must be adequately collateralized. During 2005, we have not issued any additional trust-preferred securities. The $16.0 million junior subordinated debt obligations outstanding, referred to as trust-preferred securities, supplements our regulatory capital. At the end of the second quarter, the Bank issued $8 million in subordinated debt that is treated as Tier II capital for regulatory purposes. The subordinated debt carries a variable rate tied to 3-month LIBOR. 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.

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At June 30, 2005, our Tier I risk-based capital ratio was 9.10% and all of our capital ratios exceeded the minimums established for a well-capitalized bank by regulatory measures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest-earning assets or the cost of its interest-bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of, and adherence to, the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest-earning assets and interest-bearing liabilities so as to mitigate the effect of changes in the rate environment. The Company’s market risk profile has not changed significantly since December 31, 2004.

Item 4. - Controls and Procedures

(a) As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

(b) No change in the Company’s internal control over financial reporting occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no purchases and retirement of common stock by the Company during the quarter ended June 30, 2005. The maximum amount of shares that may be purchased in the stock repurchase program will be limited to 10% of the outstanding common stock. As of June 30, 2005, the maximum of stock able to be purchased by the Company amounted to 349,000 shares, with 106,580 shares repurchased.

Item 4. Submission of Matters to a Vote of Securities Holders

The Annual Meeting of Shareholders was held on May 17, 2005. Of the 3,613,958 shares entitled to vote at the meeting, 2,859,956 voted. The following matters were voted on at the meeting:

Proposal 1: To elect three members of the Board of Directors for three-year terms until the Annual Meeting of Shareholders in 2008. Votes for each nominee were as follows:

Name	For	Withheld
Larry L. Callahan	2,850,917	9,039
Joseph M. Coltrane, Jr.	2,845,990	13,966
W. Groome Fulton, Jr.	2,851,793	8,163

Proposal 2: To ratify the appointment of Dixon Hughes PLLC as the Company’s independent auditors for the year ending December 31, 2005.

For	Against	Abstain
2,843,061	13,769	3,126

Item 6. Exhibits

Exhibit (11)	Statement Re: Computation of Per Share Earnings (See the information in Note E).
Exhibit (31)	Rule 13a-14(a)\15d-14(a) Certifications.
Exhibit (32)	Section 1350 Certification.

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SIGNATURES

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

	BNC BANCORP
Date: August 12, 2005		/s/ W. Swope Montgomery, Jr.
		W. Swope Montgomery, Jr.
		President and Chief Executive Officer
Date: August 12, 2005	By:	/s/ David B. Spencer
		David B. Spencer
		Chief Financial Officer

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