BNC Bancorp (BNNC) 10-Q 2005 Q3 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 September 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 7, 2005, the registrant had outstanding 3,488,519 shares of Common Stock, no par value.

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition September 30, 2005 and December 31, 2004	3
	Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 2005 and 2004	4
	Consolidated Statements of Cash Flows Nine Months Ended September 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 6 -	Exhibits	14

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PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

BNC BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	September 30, 2005 (Unaudited)			December 31, 2004*
	(Amounts in thousands)
Assets
Cash and due from banks	$	8,407		$	6,747
Interest-earning balances		14,916			780
Securities available for sale		41,064			35,428
Federal Home Loan Bank stock, at cost		3,019			3,037
Loans held for sale		2,528			1,894
Loans		476,735			420,838
Less allowance for loan losses		(6,130	)		(5,361	)
Net loans		470,605			415,477
Accrued interest receivable		2,448			1,868
Premises and equipment, net		14,163			11,827
Investment in life insurance		12,167			11,713
Goodwill		3,423			3,423
Other assets		6,015			5,355
Total assets	$	578,755		$	497,549
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing demand	$	40,771		$	34,485
Interest-bearing demand		113,283			140,485
Savings		10,129			10,787
Time deposits of $100,000 and greater		199,835			134,696
Other time		99,103			71,027
Total deposits		463,121			391,480
Short-term borrowings		20,290			28,275
Long-term debt		59,496			45,496
Accrued expenses and other liabilities		3,511			3,261
Total liabilities		546,418			468,512
Shareholders’ Equity:
Common stock, no par value; authorized 80,000,000 shares; 3,494,524 and 3,480,548 issued and outstanding at September 30, 2005 and December 31, 2004, respectively		19,860			20,033
Retained earnings		11,943			8,679
Accumulated other comprehensive income		534			325
Total shareholders’ equity		32,337			29,037
Total liabilities and shareholders’ equity	$	578,755		$	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 September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans	$	8,334	$	5,627	$	22,240	$	15,324
Interest on U.S. Treasury and agency securities		2		23		25		89
Interest on state and municipal securities		445		353		1,252		964
Other interest income		87		52		205		117
TOTAL INTEREST INCOME		8,868		6,055		23,722		16,494
INTEREST EXPENSE
Interest on demand deposits		582		548		1,696		1,627
Interest on savings deposits		13		5		39		15
Interest on time deposits of $100,000 and greater		1,749		741		4,474		1,649
Interest on other time deposits		742		340		1,717		918
Interest on short-term borrowings		156		8		435		97
Interest on long-term debt		792		502		1,889		1,295
TOTAL INTEREST EXPENSE		4,034		2,144		10,250		5,601
NET INTEREST INCOME		4,834		3,911		13,472		10,893
PROVISION FOR LOAN LOSSES		610		280		1,615		630
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,224		3,631		11,857		10,263
NON-INTEREST INCOME
Mortgage fee income		141		128		368		422
Service charges on deposit accounts		432		440		1,233		1,202
Investment brokerage fees		41		61		91		228
Increase in cash surrender value of life insurance		102		118		324		311
Gain on sale of investments available for sale		—		138		—		138
Other income		43		—		62		13
TOTAL NON-INTEREST INCOME		759		885		2,078		2,314
NON-INTEREST EXPENSE
Salaries and employee benefits		2,048		1,692		5,621		4,953
Occupancy expenses		185		160		558		480
Furniture and equipment expense		186		192		522		517
Data processing and supply expense		154		130		518		526
Advertising and business development expenses		77		106		308		278
Insurance, professional and other services		278		218		851		704
Other operating expenses		372		566		1,023		1,318
TOTAL NON-INTEREST EXPENSE		3,300		3,064		9,401		8,776
INCOME BEFORE INCOME TAX EXPENSE		1,683		1,452		4,534		3,801
INCOME TAX EXPENSE		463		418		1,249		1,088
NET INCOME	$	1,220	$	1,034	$	3,285	$	2,713
BASIC NET INCOME PER SHARE	$	.28	$	.24	$	.75	$	.62
DILUTED NET INCOME PER SHARE	$	.26	$	.22	$	.71	$	.58

See accompanying notes.

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BNC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	2005			2004
	(Amounts in thousands)
Operating Activities
Net income	$	3,285		$	2,713
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		581			504
Amortization (accretion) of premiums and discounts, net		(341	)		180
Amortization of core deposit intangible		11			19
Provision for loan losses		1,615			630
Gain on sale of securities available for sale		(5	)		(138	)
Net increase in cash surrender value of life insurance		(324	)		(311	)
Loss on disposal of premises and equipment		4			—
(Gain) loss on sales of foreclosed assets		(18	)		76
Changes in assets and liabilities:
(Increase) decrease in loans held for sale		(634	)		493
Increase in accrued interest receivable		(580	)		(297	)
Increase in other assets		(18	)		(478	)
Increase in accrued expenses and other liabilities		741			577
Net cash provided by operating activities		4,317			3,968
Investing Activities
Purchases of securities available for sale		(8,857	)		(9,867	)
Proceeds from calls and maturities of securities available for sale		2,615			3,115
Proceeds from sales of securities available for sale		1,280			4,028
(Purchase) redemption of Federal Home Loan Bank stock		18			(200	)
Investment in life insurance		(130	)		(2,580	)
Net increase in loans		(58,286	)		(90,857	)
Purchase of premises and equipment		(2,913	)		(1,601	)
Proceeds from sales of foreclosed assets		900			1,183
Net cash used by investing activities		(65,373	)		(96,779	)
Financing Activities
Net increase in deposits		71,641			93,362
Net increase (decrease) in short-term borrowings		(7,985	)		4,678
Net increase in long-term debt		14,000			11,000
Proceeds from exercise of stock options		50			8
Purchase and retirement of common stock		(276	)		(507	)
Cash dividends paid		(578	)		(501	)
Net cash provided by financing activities		76,852			108,040
Net increase in cash and cash equivalents		15,796			15,229
Cash and cash equivalents, beginning of period		7,527			11,364
Cash and cash equivalents, end of period	$	23,323		$	26,593

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 nine-month periods ended September 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 nine-month periods ended September 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 September 30, 2005, loan commitments were as follows (in thousands):

Commitments to extend credit	$	70,605
Undisbursed lines of credit		25,030
Letters of credit		1,473
Commitments to sell loans held for sale		2,528

NOTE C - COMPREHENSIVE INCOME

A summary of comprehensive income is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	(In thousands)
Net income	$	1,220		$	1,034		$	3,285		$	2,713
Other comprehensive income:
Unrealized holding gain (losses) on available for sale securities arising during the period		(101	)		1,195			333			126
Tax effect		37			(436	)		(122	)		(46	)
Net of tax amount		(64	)		759			211			80
Reclassification of gains recognized in net income		—			(138	)		(5	)		(138	)
Tax effect		—			50			2			50
Net of tax amount		—			(88	)		(3	)		(88	)
Total comprehensive income (loss)	$	1,156		$	1,705		$	3,493		$	2,705

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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 nine-months ended September 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 September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	(Amounts in thousands, except per share data)
Net income:
As reported	$	1,220		$	1,034		$	3,285		$	2,713
Deduct: Total stock-based employee compensation expenses determined under fair value method for all amounts, net of related tax effects		(48	)		(7	)		(148	)		(19	)
Pro forma	$	1,172		$	1,027		$	3,137		$	2,694
Basic net income per share:
As reported	$	.28		$	.24		$	.75		$	.62
Pro forma		.27			.24			.72			.62
Diluted net income per share:
As reported	$	.26		$	.22		$	.71		$	.58
Pro forma		.25			.22			.68			.58

For the three-month and nine-month periods ending September 30, 2005 and 2004, there were no antidilutive options.

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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 after adjusting for a 5-for-4 stock split to be distributed on November 15, 2005. 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 September 30,		Nine Months Ended September 30,
	2005	2004	2005	2004
Weighted average number of common shares used in computing basic net income per share	4,358,032	4,341,044	4,361,272	4,355,664
Effect of dilutive stock options	261,168	290,975	265,489	291,249
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share	4,619,200	4,632,019	4,626,761	4,646,913

NOTE F – RECENT ACCOUNTING PRONOUNCEMENT

In December 2004, the FASB issued SFAS No. 123(R),Accounting for Stock-Based Compensation (SFAS No. 123(R). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. This Statement was amended on April 14, 2005 to make the provisions of this Statement effective at the beginning of the next fiscal year that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) on January 1, 2006. Since it is likely that we will grant additional stock options in the future, the adoption of SFAS No. 123(R) is expected to have a material effect on our consolidated financial statements.

NOTE G – SUBSEQUENT EVENT

On September 20, 2005, the Board of Directors of the Company approved a five-for-four split of the Company’s common stock to be distributed on November 15, 2005 to shareholders of record on October 31, 2005.

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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 September 30, 2005 and December 31, 2004

During the nine-month period ending September 30, 2005, our total assets increased by $81.2 million to $578.8 million from $497.5 million at December 31, 2004. The largest component of this growth consisted of loans receivable. At September 30, 2005, our loans totaled $476.7 million, an increase of $55.9 million, or 13.3%, during the nine months, with the majority of the increase occurring in the commercial loan portfolio. Increases in funding through deposits and borrowings exceeded our loan growth for the nine months, with that excess principally invested to enhance our liquidity position. Total liquid assets, which includes cash and cash equivalents and securities available for sale, increased by $21.9 million during the nine months, to $64.9 million or 11.2% of total assets at September 30, 2005 versus $43.0 million, or 8.6% of total assets, at December 31, 2004. Cash and cash equivalents, which includes cash and due from banks and interest-earning balances in other banks, increased by a total of $15.8 million, with interest-earning balances providing $14.1 million of that increase. Securities available for sale increased by $6.6 million to a total of $41.1 million. Premises and equipment increased $2.3 million, net of depreciation, from $11.7 million at December 31, 2004 to $14.2 million at September 30, 2005. This increase was primarily due to the construction on new bank branches.

Deposits continue to be our primary funding source. At September 30, 2005, deposits totaled $463.1 million, an increase of $71.6 million, or 18.3%, 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 to support balance sheet management and growth. We had $59.5 million of long-term debt outstanding at September 30, 2005 compared to $45.5 million at December 31, 2004. The long-term debt comprised of $35.0 million in FHLB borrowings, $16.5 million in junior subordinated debentures referred to as trust-preferred securities, qualifies as regulatory capital, and $8.0 million in subordinated debt that qualifies as Tier II capital for regulatory purposes. Short-term borrowings decreased by $8.0 million during the nine months of 2005 to $20.3 million from $28.3 million. Short-term borrowings consists of FHLB term advances with remaining maturities of less than one year, Federal funds purchased from correspondent banks and securities sold under repurchase agreements.

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Our capital position remains strong. At September 30, 2005, our shareholders’ equity totaled $32.3 million, an increase of $3.7 million from the December 31, 2004 balance. The increase in shareholders’ equity resulted primarily from net income during the period of $3.3 million. At September 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 September 30, 2005 and 2004

Net Income. Net income for the three months ended September 30, 2005 was $1.2 million, an increase of $186,000 from net income of $1.0 million for the same three-month period in 2004. Net income per share was $.26 diluted for the three months ended September 30, 2005, up from $.22 diluted for the same period in 2004. We have experienced strong growth, with total assets averaging $566.5 million during the current three-month period as compared to $462.1 million in the prior year period, an increase of $104.4 million, or 22.6%. Increases in net interest income for the quarter ended September 30, 2005 of $923,000 exceeded the increases of $330,000 and $236,000 in the provision for loan losses and in non-interest expenses, respectively. In addition, we experienced a reduction in non-interest income of $126,000 for the quarter ended September 30, 2005.

Net Interest Income. Net interest income increased by $923,000, or 23.6%, to $4.8 million for the three months ended September 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 $102.0 million, or 24.3%, during the third quarter of 2005 as compared with the same period in 2004. The average tax equivalent yield on total interest-earning assets for the current three month period was 7.00%, a 109 basis point increase from the 5.91% in the third quarter of 2004 that reflects the upward trend in interest rates from period to period.

Our average total interest-bearing liabilities increased by $93.5 million, or 23.5%, slightly less than our increase in interest-earning assets. Our average cost of total interest-bearing liabilities increased 115 basis points from 2.14% to 3.29%, largely due to rising CD costs during the past twelve months and the $24.5 million of subordinated debt tied to LIBOR, of which $8.0 million was issued during the second quarter of 2005. For the three months ended September 30, 2005, our tax equivalent net interest spread was 3.72% and our tax equivalent net interest margin was 3.89%. For the three months ended September 30, 2004, our tax equivalent net interest rate spread was 3.77%, and our tax equivalent net interest margin was 3.88%.

Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2005 was $610,000, representing an increase of $330,000, or 117.9%, from the $280,000 provision for the three months ended September 30, 2004, resulting from growth in loans during the period combined with higher levels of net loan charge-offs and non-accrual loans. Net loan charge-offs were $412,000 during the three months ended September 30, 2005, as compared with net loan recoveries of $30,000 in the same period of 2004. The level of our non-accrual loans at September 30, 2005 amounted to $1.0 million, or .21%, of total loans compared to .12% at September 30, 2004 and .08% at December 31, 2004. The level of our allowance expressed as a percentage of gross loans increased 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 September 30, 2005, non-interest income decreased $126,000, or 14.2%, to $759,000 from $885,000 for the same period in the prior year. This decrease resulted principally from a decrease in gains from the sale of investments securities. We recognized gains of $138,000 from the sale of investment securities in the third quarter of 2004, while no sales of investment securities occurred in the current quarter, and consequently no gains were realized. All other non-interest income categories remained relatively stable, with minimal increases or decreases reported.

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 September 30, 2005, total non-interest expenses increased $236,000, principally as a result of growth achieved from period to period. This increase resulted principally from salary and employee benefit expenses increases in the amount $356,000, 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. Largely offsetting this and other non-interest expense increases was a decrease in other operating expenses of $194,000, primarily from a decrease of $161,000 in operational charge-offs for the three-month period ended September 30, 2005 when compared to the same three-month period in 2004.

Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 27.5% and 28.8%, respectively, for the three months ended September 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

Nine Months Ended September 30, 2005 and 2004

Net Income. Net income for the nine months ended September 30, 2005 was $3.3 million, an increase of $572,000 over net income of $2.7 million for the same nine-month period in 2004. Net income per share was $.71 diluted for the nine months ended September 30, 2005, up from $.58 diluted for the same period in 2004. We have experienced strong growth, with total assets averaging $539.1 million during the current nine-month period as compared to $427.3 million in the prior year period, an increase of $111.8 million, or 26.2%. Increases in net interest income for the nine months ended September 30, 2005 of $2.6 million exceeded the increases of $985,000 and $625,000 in the provision for loan losses and in non-interest expenses, respectively. In addition, we have had a reduction in non-interest income of $236,000 for the year to date period ended September 30, 2005.

Net Interest Income. Net interest income increased by $2.6 million, or 23.7%, to $13.5 million for the nine months ended September 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 $103.9 million, or 26.6%, during the nine months ended September 30, 2005 as compared with the same period in 2004. Our average tax equivalent yield on total interest-earning assets increased by 78 basis points from 5.84% to 6.62%, reflecting the upward trend in interest rates.

Our average total interest-bearing liabilities increased by $101.4 million, or 27.8%, slightly greater than our increase in interest-earning assets due to increases in non-interest bearing deposits and in equity. Our average cost of total interest-bearing liabilities increased 88 basis points from 2.06% to 2.94%, largely due to rising CD costs during the past twelve months and the $24.5 million of subordinated debt tied to LIBOR, of which $8.0 million was issued during the second quarter of 2005. For the nine months ended September 30, 2005, our tax equivalent net interest spread was 3.68% and our tax equivalent net interest margin was 3.84%. For the nine months ended September 30, 2004, our tax equivalent net interest rate spread was 3.79%, and our tax equivalent net interest margin was 3.92%.

Provision for Loan Losses. The provision for loan losses for the nine months ended September 30, 2005 was $1.6 million, representing an increase of $985,000, or 156.3%, from the $630,000 provision for the nine months ended September 30, 2004 resulting from growth in loans during the period combined with higher levels of net loan charge-offs and non-accrual loans. Net loan charge-offs were $830,000 during the nine months ended September 30, 2005, as compared with net loan charge-offs of $97,000 in the same period of 2004. The level of our non-accrual loans at September 30, 2005 amounted to $1.0 million, or .21%, of total loans compared to .12% at September 30, 2004 and .08% at December 31, 2004. The level of our allowance expressed as a percentage of gross loans increased slightly from 1.27% at the end of 2004 to 1.29% at the end of the current quarter.

Non-Interest Income. For the nine months ended September 30, 2005, non-interest income decreased $236,000, or 10.2%, to $2.1 million from $2.3 million for the same period in the prior year. This decrease resulted principally from a decrease in mortgage fee income of $54,000, a decrease in investment brokerage fees of $137,000, and a

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decrease of $138,000 in gains from the sale of investment securities. in 2005 compared to 2004. The decrease in mortgage fee income resulted from a drop in the level of originations during the first six months of the respective periods. 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. We recognized gains of $138,000 from the sale of investment securities in the third quarter of 2004, while no sales of investment securities occurred in the current quarter, and consequently no gains were realized. Offsetting these decreases were increases in service charges on deposit accounts, income from cash surrender value of life insurance and other income of $31,000, $13,000 and $49,000, respectively.

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 nine months ended September 30, 2005, total non-interest expenses increased $625,000, principally as a result of growth achieved from period to period. Salary and employee benefit expenses increased $668,000, 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 $78,000, also due to the opening of our city office in High Point. Insurance and professional fees increased by $147,000 as a result of additional legal and auditing expense associated with the requirements mandated by the Sarbanes-Oxley Act of 2002 and other legislation and regulation. Largely offsetting these increases were decreases in other operating expenses of $295,000, primarily from a decrease of $205,000 in operational charge-offs for the nine-month period ended September 30, 2005 and gains from other real estate disposals of $18,000, compared to other real estate losses reported in the prior year period of $76,000.

Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 27.5% and 28.6%, respectively, for the nine months ended September 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 $64.9 million at September 30, 2005 compared to $43.0 million at December 31, 2004. Supplementing

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customer deposits as a source of funding, we have the ability to borrow up to $86.8 million from the FHLB of Atlanta, with $45.0 million outstanding at September 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 the second quarter of 2005, we issued $8.0 million in subordinated debt that is treated as Tier II capital for regulatory purposes. This new issuance of 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.

At September 30, 2005, our Tier I risk-based capital ratio for the Bank was 8.79% 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

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2005.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares That May Yet Be Purchased Under the Program
July 1, 2005 to July 30, 2005	5,000	$	20.05	5,000	226,091
August 1, 2005 to August 31, 2005	8,970	$	18.42	8,970	217,121
September 1, 2005 to September 30, 2005	560	$	18.66	560	216,561
Year-to-date	14,530	$	18.99	14,530

The above includes purchases and retirement of common stock by the Company. 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 September 30, 2005, the maximum of stock able to be purchased by the Company amounted to 349,000 shares, with 132,439 shares repurchased. The above share and per share data has not been adjusted to reflect the 5-for-4 stock split to be distributed on November 15, 2005.

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: November 11, 2005	By:	/s/ W. Swope Montgomery, Jr.
		W. Swope Montgomery, Jr.
		President and Chief Executive Officer
Date: November 11, 2005	By:	/s/ David B. Spencer
		David B. Spencer
		Chief Financial Officer

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