BNC Bancorp (BNNC) 10-Q 2015 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________to ________

Commission File Number    000-50128

BNC Bancorp

(Exact name of registrant as specified in its charter)

North Carolina	47-0898685
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3980 Premier Drive, Suite 210
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. Yes x No o

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). Yes x No o

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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o
Smaller reporting company o

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

The number of shares outstanding of the registrant's common stock at May 5, 2015 was 32,580,255.

BNC BANCORP

TABLE OF CONTENTS

	Page No.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2015 and December 31, 2014	3
Consolidated Statements of Income for the three months ended March 31, 2015 and 2014	4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014	5
Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2015 and 2014	6
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014	7
Notes to Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3. Quantitative and Qualitative Disclosures About Market Risk	52
Item 4. Controls and Procedures	52
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	54
Item 1A. Risk Factors	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3. Default Upon Senior Securities	54
Item 4. Mine Safety Disclosures	54
Item 5. Other Information	54
Item 6. Exhibits	54
SIGNATURES	55
EXHIBIT INDEX	56

2

PART I.     FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	March 31, 2015(Unaudited)			December 31, 2014
Assets
Cash and due from banks	$	40,957		$	44,659
Interest-earning deposits in other banks	55,281			40,535
Investment securities available-for-sale, at fair value	290,591			269,290
Investment securities held-to-maturity, at amortized cost (fair value of $230,785 and $241,997 at March 31, 2015 and December 31, 2014, respectively)	224,734			237,092
Federal Home Loan Bank stock, at cost	6,638			10,562
Loans held for sale	25,505			37,280
Loans:
Originated loans	2,262,601			2,116,441
Acquired loans	913,236			958,657
Less allowance for loan losses	(29,351		)	(30,399		)
Net loans	3,146,486			3,044,699
Accrued interest receivable	13,186			14,514
Premises and equipment, net	87,928			87,761
Other real estate owned	39,427			42,531
FDIC indemnification asset	4,839			5,097
Investment in bank-owned life insurance	94,102			93,396
Goodwill and other intangible assets, net	82,861			83,701
Other assets	60,928			61,391
Total assets	$	4,173,463		$	4,072,508
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand	$	544,189		$	534,792
Interest-bearing demand	1,685,200			1,657,931
Time deposits	1,323,537			1,203,674
Total deposits	3,552,926			3,396,397
Short-term borrowings	61,654			127,934
Long-term debt	134,005			133,814
Accrued expenses and other liabilities	25,766			23,975
Total liabilities	3,774,351			3,682,120
Shareholders' equity:
Preferred stock, no par value; authorized 20,000,000 shares; 0 shares issued and outstanding at March 31, 2015 and December 31, 2014	—			—
Common stock, no par value; authorized 60,000,000 shares; 27,895,609 and 27,777,737 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively	283,184			281,488
Common stock, non-voting, no par value; authorized 20,000,000 shares; 4,820,844 shares issued and outstanding at March 31, 2015 and December 31, 2014	33,507			33,507
Retained earnings	72,334			65,211
Stock in directors rabbi trust	(4,949		)	(3,429		)
Directors deferred fees obligation	4,949			3,429
Accumulated other comprehensive income	10,087			10,182
Total shareholders' equity	399,112			390,388
Total liabilities and shareholders' equity	$	4,173,463		$	4,072,508

See accompanying notes to Consolidated Financial Statements.

3

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31,
	2015		2014
Interest income:
Loans, including fees	$	39,420	$	31,115
Investment securities:
Taxable	1,166		1,086
Tax-exempt	3,181		3,389
Interest-earning balances and other	120		128
Total interest income	43,887		35,718
Interest expense:
Demand deposits	1,704		1,550
Time deposits	2,738		2,388
Short-term borrowings	63		112
Long-term debt	1,312		954
Total interest expense	5,817		5,004
Net interest income	38,070		30,714
Provision for loan losses	110		2,561
Net interest income after provision for loan losses	37,960		28,153
Non-interest income:
Mortgage fees	2,499		1,558
Service charges	1,644		1,348
Earnings on bank-owned life insurance	654		580
Gain (loss) on sale of investment securities, net	49		(565		)
Other	1,454		2,204
Total non-interest income	6,300		5,125
Non-interest expense:
Salaries and employee benefits	17,410		13,709
Occupancy	2,581		2,079
Furniture and equipment	1,628		1,598
Data processing and supplies	1,161		904
Advertising and business development	646		689
Insurance, professional and other services	2,259		1,508
FDIC insurance assessments	735		705
Loan, foreclosure and other real estate owned expenses	2,325		1,362
Other	3,246		2,217
Total non-interest expense	31,991		24,771
Income before income tax expense	12,269		8,507
Income tax expense	3,511		2,023
Net income	$	8,758	$	6,484
Basic earnings per common share	$	0.27	$	0.24
Diluted earnings per common share	$	0.27	$	0.24
Dividends declared and paid per common share	$	0.05	$	0.05

See accompanying notes to Consolidated Financial Statements.

4

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2015			2014
Net income	$	8,758		$	6,484
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains on investments securities available-for-sale	1,354			5,803
Tax effect	(501		)	(2,147		)
Reclassification of (gains) losses recognized in net income	(49		)	565
Tax effect	18			(209		)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity	(161		)	(334		)
Tax effect	60			124
Net of tax amount	721			3,802
Cash flow hedging activities:
Unrealized holding losses	(1,296		)	(914		)
Tax effect	480			338
Reclassification of losses recognized in net income	—			457
Tax effect	—			(171		)
Net of tax amount	(816		)	(290		)
Total other comprehensive income (loss)	(95		)	3,512
Total comprehensive income	$	8,663		$	9,996

See accompanying notes to Consolidated Financial Statements.

5

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share data)

	Preferred stock			Common stock					Common stock - nonvoting			Retained earnings			Stock in directors rabbi trust			Directors deferred fees obligation			Accumulated other comprehensive income			Total
	Shares	Amount		Shares		Amount			Shares	Amount
Balance, December 31, 2013	—	$	—	21,310,832		$	181,684		5,992,213	$	44,781	$	41,559		$	(3,143	)	$	3,143		$	3,306		$	271,330
Net income	—	—		—		—			—	—		6,484			—			—			—			6,484
Directors deferred fees	—	—		—		—			—	—		—			71			(71		)	—			—
Other comprehensive income, net of tax	—	—		—		—			—	—		—			—			—			3,512			3,512
Common stock issued pursuant to:
Stock-based compensation	—	—		16,500		464			—	—		—			—			—			—			464
Dividend reinvestment plan	—	—		4,912		84			—	—		—			—			—			—			84
Cash dividends:
Common stock, $0.05 per share	—	—		—		—			—	—		(1,366		)	—			—			—			(1,366		)
Balance, March 31, 2014	—	$	—	21,332,244		$	182,232		5,992,213	$	44,781	$	46,677		$	(3,072	)	$	3,072		$	6,818		$	280,508
Balance, December 31, 2014	—	$	—	27,777,737		$	281,488		4,820,844	$	33,507	$	65,211		$	(3,429	)	$	3,429		$	10,182		$	390,388
Net income	—	—		—		—			—	—		8,758			—			—			—			8,758
Directors deferred fees	—	—		—		—			—	—		—			(1,520		)	1,520			—			—
Other comprehensive loss, net of tax	—	—		—		—			—	—		—			—			—			(95		)	(95		)
Common stock issued pursuant to:
Stock-based compensation	—	—		17,963		720			—	—		—			—			—			—			720
Dividend reinvestment plan	—	—		5,102		84			—	—		—			—			—			—			84
Stock options exercised	—	—		156,125		1,907			—	—		—			—			—			—			1,907
Shares withheld for payment of taxes	—	—		(1,131	)	(19		)	—	—		—			—			—			—			(19		)
Shares traded to exercise stock options	—	—		(60,187	)	(1,047		)	—	—		—			—			—			—			(1,047		)
Excess income tax benefit	—	—		—		51			—	—		—			—			—			—			51
Cash dividends:
Common stock, $0.05 per share	—	—		—		—			—	—		(1,635		)	—			—			—			(1,635		)
Balance, March 31, 2015	—	$	—	27,895,609		$	283,184		4,820,844	$	33,507	$	72,334		$	(4,949	)	$	4,949		$	10,087		$	399,112

See accompanying notes to Consolidated Financial Statements.

6

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2015			2014
Operating activities
Net income	$	8,758		$	6,484
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	110			2,561
Depreciation and amortization	1,472			1,328
Amortization of premiums, net	958			1,103
Amortization of intangible assets	840			369
Accretion of fair value purchase accounting adjustments	(5,362		)	(3,360		)
Cash flow hedge expense	—			163
Stock-based compensation	720			464
Deferred compensation	103			126
Earnings on bank-owned life insurance	(654		)	(580		)
(Gain) loss on sale of investment securities, net	(49		)	565
(Gain) loss on disposal of premises and equipment	(4		)	14
Losses on other real estate owned	1,156			594
Gain on sale of loans (mortgage fees)	(2,499		)	(1,558		)
Origination of loans held for sale	(74,921		)	(61,931		)
Proceeds from sales of loans held for sale	89,922			69,412
Decrease in accrued interest receivable	1,328			1,790
Payments received from FDIC under loss-share agreements	611			2,848
(Increase) decrease in other assets	(432		)	3,569
Increase (decrease) in accrued expenses and other liabilities	1,406			(5,127		)
Net cash provided by operating activities	23,463			18,834
Investing activities
Purchases of investment securities available-for-sale	(46,928		)	(8,298		)
Proceeds from sales of investment securities available-for-sale	14,535			30,682
Proceeds from sales of investment securities held-to-maturity	—			3,476
Proceeds from maturities and payments of investment securities available-for-sale	11,974			6,410
Proceeds from maturities and payments of investment securities held-to-maturity	11,711			1,987
Redemption of Federal Home Loan Bank stock	3,924			4,750
Net increase in loans	(100,512		)	(27,311		)
Purchases of premises and equipment	(1,529		)	(1,149		)
Proceeds from disposal of premises and equipment	25			—
Investment in bank-owned life insurance	(52		)	(52		)
Investment in other real estate owned	(435		)	(210		)
Proceeds from sales of other real estate owned	4,748			7,424
Net cash provided by (used in) investing activities	(102,539		)	17,709
Financing activities
Net increase in deposits	156,942			49,683
Net decrease in short-term borrowings	(66,280		)	(77,680		)
Net increase in long-term-debt	168			—
Common stock issued from exercise of stock options	860			—
Common stock issued pursuant to dividend reinvestment plan	84			84
Common stock repurchased in lieu of income taxes	(19		)	—
Cash dividends paid, net of accretion	(1,635		)	(1,366		)
Net cash provided by (used in) financing activities	90,120			(29,279		)
Net increase in cash and cash equivalents	11,044			7,264
Cash and cash equivalents, beginning of period	85,194			108,390
Cash and cash equivalents, end of period	$	96,238		$	115,654

7

Supplemental Statement of Cash Flows Disclosure
Interest paid	$	5,113	$	5,333
Income taxes paid	520		75
Summary of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	3,093	$	5,313
Transfer of loans held for sale to loans	727		6,081
FDIC indemnification asset increase for losses, net	617		917

See accompanying notes to Consolidated Financial Statements.

8

BNC BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2015 and 2014

NOTE 1 – BASIS OF PRESENTATION

Organization

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.

The Company is subject to the rules and regulations of the Federal Reserve Bank. BNC is operating under the banking laws of North Carolina, and is subject to the rules and regulations of the North Carolina Commissioner of Banks and the Federal Deposit Insurance Corporation (“FDIC”). Accordingly, the Company and BNC are examined periodically by those regulatory authorities.

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, 2014 should be referred to in connection with these unaudited interim consolidated financial statements.

Certain amounts in the 2014 consolidated financial statements have been reclassified to conform to 2015 presentation. These reclassifications had no effect on net income, net income or shareholders' equity as previously reported.

The preparation of consolidated financial statements in conformity with 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.

Recently Adopted and Issued Accounting Standards

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amends the presentation of debt issuance costs in the balance sheet as a direct deduction from the related debt liability. This update affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015. The Company does not expect the adoption of this ASU to have a material impact on the its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends the consolidation analysis required under GAAP. The revised guidance amends the consolidation analysis based on certain fee arrangements or relationships to the reporting entity and, for limited partnerships, requires entities to consider the limited partner’s rights relative to the general partner. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU was developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. The ASU’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. The ASU may be adopted using either a modified retrospective method or a full retrospective method and early adoption is not permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

9

In January 2014, the FASB issued ASU No. 2014-04, Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, to clarify that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method and early adoption is permitted. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

NOTE 2 – ACQUISITIONS

Pending Acquisition of Valley Financial Corporation

On November 17, 2014, the Company entered into an Agreement and Plan of Merger with Valley Financial Corporation ("Valley"), the holding company for Valley Bank, a commercial bank with nine branches located in Roanoke and Salem, Virginia.

Under the merger agreement, Valley's shareholders will receive a fixed price of $20.50 for each share of Valley common stock, payable in shares of the Company's voting common stock, based upon the 20-day volume weighted average price of the Company's common stock prior to the closing of the merger, subject to maximum and minimum exchange ratios. The Company anticipates that the acquisition will close in the third quarter of 2015, subject to customary closing conditions, including regulatory approval and approval of both the Company and Valley’s shareholders.

Acquisition of Harbor Bank Group, Inc.

On December 1, 2014, the Company completed the acquisition of Harbor Bank Group, Inc., the holding company for Harbor National Bank ("Harbor"). Under the merger agreement, Harbor's shareholders received 0.950 shares of the Company's voting common stock for each share of Harbor common stock owned.

A summary of assets received and liabilities assumed for Harbor, as well as the associated fair value adjustments, are as follows:

	As Recorded by Harbor			Fair Value Adjustments				As Recorded by BNC
Assets	(Dollars in thousands)
Cash and due from banks	$	5,833		$	—			$	5,833
Investment securities available-for-sale	9,200			—				9,200
Federal Home Loan Bank stock, at cost	1,259			—				1,259
Loans	293,848			(4,207		)	(1)	289,641
Premises and equipment	1,801			—				1,801
Accrued interest receivable	643			—				643
Other real estate owned	11			—				11
Core deposit intangible	—			3,700			(2)	3,700
Other assets	6,718			381			(3)	7,099
Total assets acquired	$	319,313		$	(126	)		319,187
Liabilities
Deposits	$	(254,521	)	$	(253	)	(4)	(254,774		)
Borrowings	(29,720		)	(184		)	(5)	(29,904		)
Other liabilities	(2,268		)	(85		)	(6)	(2,353		)
Total liabilities assumed	$	(286,509	)	$	(522	)		(287,031		)
Net assets acquired								32,156
Total consideration paid (3,082,714 shares of voting common stock)								51,003
Goodwill								$	18,847

10

Explanation of fair value adjustments:

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

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

(3) Adjustment for the deferred tax asset recognized from acquisition.

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

(5) Adjustment for the fair value of borrowings assumed.

(6) Adjustment for the fair value of leases acquired.

With this acquisition, the Company expanded its presence in Charleston, South Carolina through the addition of four branches, a low-cost base of core deposits and an experienced in-market team that enhances our ability to grow in that market. Additionally, goodwill was also created by the expected cost savings that will be recognized in future periods through the elimination of redundant operations. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

Acquisition of Community First Financial Group, Inc.

On June 1, 2014, the Company completed the acquisition of Community First Financial Group, Inc. ("Community First"), the parent company of Harrington Bank, FSB, pursuant to the terms of the Agreement and Plan of Merger dated December 17, 2013.

Community First shareholders could elect to receive 0.4069 shares of the Company's voting common stock for each share of Community First common stock or cash in the amount of $5.90 per share, subject to allocation and pro-rata procedures to ensure that approximately 75% of Community First common shares were converted into the right to receive the Company's voting common stock, while the remaining 25% were converted into the right to receive cash. As part of the closing, Community First's preferred shareholders received cash payments equal to the liquidation value of their preferred shares.

A summary of assets received and liabilities assumed for Community First, as well as the associated fair value adjustments, are as follows:

	As Recorded by Community First			Fair Value Adjustments				As Recorded by BNC
Assets	(Dollars in thousands)
Cash and due from banks	$	47,330		$	—			$	47,330
Investment securities available-for-sale	12,000			—				12,000
Federal Home Loan Bank stock, at cost	293			—				293
Loans	152,885			(15,139		)	(1)	137,746
Premises and equipment	545			(131		)	(2)	414
Accrued interest receivable	436			—				436
Other real estate owned	1,419			(271		)	(3)	1,148
Core deposit intangible	—			3,624			(4)	3,624
Other assets	6,849			4,552			(5)	11,401
Total assets acquired	$	221,757		$	(7,365	)		214,392
Liabilities
Deposits	$	(191,486	)	$	(180	)	(6)	(191,666		)
Borrowings	(4,560		)	—				(4,560		)
Other liabilities	(1,063		)	(205		)	(7)	(1,268		)
Total liabilities assumed	$	(197,109	)	$	(385	)		(197,494		)
Net assets acquired								16,898
Total consideration paid								26,734
Goodwill								$	9,836

11

Explanation of fair value adjustments:

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

(2) Adjustment for the fair value of premises and equipment.

(3) Adjustment for the fair value of other real estate owned.

(4) Adjustment for the fair value of the core deposit intangible.

(5) Adjustment for the deferred tax asset recognized from acquisition.

(6) Adjustment for the fair value of time deposits.

(7) Adjustment for the fair value of leases acquired.

A summary of the consideration paid is as follows:

	(Dollars in thousands)
Common stock issued (1,190,763 shares)	$	20,128
Redemption of preferred stock	850
Cash payments to common shareholders	5,756
Total consideration paid	$	26,734

With this acquisition, the Company expanded its presence in the Raleigh-Durham-Chapel Hill area of North Carolina through the addition of three branches, a low-cost base of core deposits and an experienced in-market team that enhances our ability to grow in that market. Additionally, goodwill was also created by the expected cost savings that will be recognized in future periods through the elimination of redundant operations. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

Acquisition of South Street Financial Corp.

On April 1, 2014, the Company completed the acquisition of South Street Financial Corp. ("South Street"), the parent company of Home Savings Bank of Albermarle, Inc. SSB, pursuant to the terms of the Agreement and Plan of Merger dated December 17, 2013.

South Street shareholders could elect to receive 0.60 shares of the Company's voting common stock for each share of South Street common stock owned, or cash in the amount of $8.85 per share. Eighty percent of South Street's common shares were converted into the right to receive the Company's voting common stock, while the remaining 20% were converted into the right to receive cash. As part of the closing, each share of South Street's Series A Preferred Stock automatically converted into one share of South Street common stock.

A summary of assets received and liabilities assumed for South Street, as well as the associated fair value adjustments, are as follows:

12

	As Recorded by South Street			Fair Value Adjustments				As Recorded by BNC
Assets	(Dollars in thousands)
Cash and due from banks	$	39,680		$	—			$	39,680
Investment securities available-for-sale	13,000			—				13,000
Federal Home Loan Bank stock, at cost	895			—				895
Loans	188,386			(10,433		)	(1)	177,953
Premises and equipment	9,273			(611		)	(2)	8,662
Accrued interest receivable	592			—				592
Other real estate owned	12,358			(3,788		)	(3)	8,570
Core deposit intangible	—			2,387			(4)	2,387
Other assets	13,554			4,878			(5)	18,432
Total assets acquired	$	277,738		$	(7,567	)		270,171
Liabilities
Deposits	$	(236,526	)	$	(1,188	)	(6)	(237,714		)
Borrowings	(12,300		)	—				(12,300		)
Other liabilities	(7,075		)	—				(7,075		)
Total liabilities assumed	$	(255,901	)	$	(1,188	)		(257,089		)
Net assets acquired								13,082
Total consideration paid								25,763
Goodwill								$	12,681

Explanation of fair value adjustments:

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

(2) Adjustment for the fair value of premises and equipment.

(3) Adjustment for the fair value of other real estate owned.

(4) Adjustment for the fair value of the core deposit intangible.

(5) Adjustment for the deferred tax asset recognized from acquisition.

(6) Adjustment for the fair value of time deposits.

A summary of the consideration paid is as follows:

	(Dollars in thousands)
Common stock issued (1,139,931 shares)	$	19,778
Cash payments to common shareholders	5,985
Total consideration paid	$	25,763

With this acquisition, the Company expanded its presence in the metropolitan Charlotte, North Carolina market through the addition of four branches, an attractive loan portfolio and an experienced in-market team that enhances our ability to grow in that market. Additionally, goodwill was also created by the expected cost savings that will be recognized in future periods through the elimination of redundant operations. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

The Company incurred transaction-related costs of $2.8 million during the three months ended March 31, 2015, which were expensed as incurred as a component of non-interest expense. Transaction-related costs primarily include, but are not limited to, severance costs, professional services, data processing fees, marketing and advertising expenses.

The Company has determined the above noted acquisitions each 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.

13

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 at the acquisition date or if the change results from an event that occurred after the date of acquisition.

NOTE 3 - 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 and restricted stock awards (collectively referred to herein as “Stock Rights”). Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in the periods in which the effect would be anti-dilutive.

The Company's basic and diluted earnings per share calculations are presented in the following table:

	Three Months Ended March 31,
	2015		2014
	(Dollars in thousands, except per share amounts)
Net income	$	8,758	$	6,484
Weighted average participating common shares - basic	32,680,824		27,316,809
Effects of dilutive Stock Rights	73,573		142,799
Weighted average participating common shares - diluted	32,754,397		27,459,608
Basic earnings per common share	$	0.27	$	0.24
Diluted earnings per common share	$	0.27	$	0.24

For the three months ended March 31, 2015 and 2014, respectively, there were no shares of Stock Rights excluded in computing diluted common shares outstanding.

NOTE 4 – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities are presented in the following tables:

14

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2015	(Dollars in thousands)
Available-for-sale:
U.S. Government agencies	$	18,347	$	321	$	—	$	18,668
State and municipals	163,331		11,491		15		174,807
Corporate debt securities	18,030		96		60		18,066
Other debt securities	39,478		44		202		39,320
Equity securities	11,648		167		233		11,582
Mortgage-backed securities:
Residential government sponsored	25,462		854		29		26,287
Other government sponsored	1,738		123		—		1,861
	$	278,034	$	13,096	$	539	$	290,591
Held-to-maturity:
State and municipals	$	210,734	$	7,177	$	276	$	217,635
Corporate debt securities	14,000		70		920		13,150
	$	224,734	$	7,247	$	1,196	$	230,785

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2014	(Dollars in thousands)
Available-for-sale:
U.S. Government agencies	$	17,636	$	252	$	—	$	17,888
State and municipals	178,263		10,899		227		188,935
Corporate debt securities	13,808		4		197		13,615
Other debt securities	12,764		—		198		12,566
Equity securities	6,145		85		321		5,909
Mortgage-backed securities:
Residential government sponsored	27,450		884		60		28,274
Other government sponsored	1,972		131		—		2,103
	$	258,038	$	12,255	$	1,003	$	269,290
Held-to-maturity:
State and municipals	$	213,092	$	6,266	$	389	$	218,969
Corporate debt securities	14,000		48		1,020		13,028
Other debt securities	10,000		—		—		10,000
	$	237,092	$	6,314	$	1,409	$	241,997

The amortized cost and estimated fair value of investment securities at March 31, 2015, by contractual maturity, are shown below. 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.

15

	Amortized Cost		Fair Value
	(Dollars in thousands)
Available-for-sale:
Due within one year	$	1,648	$	1,650
Due after one through five years	21,682		22,121
Due after five through ten years	18,338		18,566
Due after ten years	224,718		236,672
Total debt securities	266,386		279,009
Equity securities	11,648		11,582
	$	278,034	$	290,591
Held-to-maturity:
Due after one year through five years	$	20,904	$	20,586
Due after five through ten years	11,749		11,836
Due after ten years	192,081		198,363
	$	224,734	$	230,785

At March 31, 2015 and December 31, 2014, investment securities with an estimated fair value of approximately $250.2 million and $269.2 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

16

The following table presents a summary of realized gains and losses from the sale of investment securities:

	Three Months Ended March 31,
	2015			2014
	(Dollars in thousands)
Proceeds from sales	$	14,535		$	34,158
Gross realized gains on sales	$	82		$	337
Gross realized losses on sales	(33		)	(902		)
Total realized gains (losses), net	$	49		$	(565	)

During the three months ended March 31, 2014, the Company sold $3.3 million of investment securities classified as held-to-maturity. These securities were state and municipal debt obligations that were downgraded by Moody's as a result of allegations of fraud and multiple pending investigations of the issuer. The Company recorded a realized gain of $0.2 million on this sale. The Company's intent and ability to hold the remaining held-to-maturity securities was not impacted by these sales.

The following tables detail 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:

	Less Than 12 Months					12 Months or More					Total
	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2015	(Dollars in thousands)
Available-for-sale:
State and municipals	2	$	2,369	$	4	1	$	1,067	$	11	$	3,436	$	15
Corporate debt securities	1	4,181		34		1	2,974		26		7,155		60
Other debt securities	6	15,745		43		1	4,614		159		20,359		202
Equity securities	1	5,487		15		1	760		218		6,247		233
Mortgage-backed securities	—	—		—		3	3,745		29		3,745		29
	10	$	27,782	$	96	7	$	13,160	$	443	$	40,942	$	539
Held-to-maturity:
State and municipals	9	$	8,509	$	48	18	$	16,097	$	228	$	24,606	$	276
Corporate debt securities	—	—		—		1	3,080		920		3,080		920
	9	$	8,509	$	48	19	$	19,177	$	1,148	$	27,686	$	1,196

17

	Less Than 12 Months					12 Months or More					Total
	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2014	(Dollars in thousands)
Available-for-sale:
State and municipals	—	$	—	$	—	11	$	24,083	$	227	24,083		$	227
Corporate debt securities	3	10,134		172		1	2,975		25		13,109		197
Other debt securities	—	—		—		1	4,566		198		4,566		198
Equity securities	1	1,850		18		1	676		303		2,526		321
Mortgage-backed securities	1	4,703		11		4	4,476		49		9,179		60
	5	$	16,687	$	201	18	$	36,776	$	802	$	53,463	$	1,003
Held-to-maturity:
State and municipals	2	$	2,148	$	25	36	$	42,297	$	364	$	44,445	$	389
Corporate debt securities	—	—		—		1	2,980		1,020		2,980		1,020
	2	$	2,148	$	25	37	$	45,277	$	1,384	$	47,425	$	1,409

All state and municipal securities in an unrealized loss position were rated as investment grade at March 31, 2015. The Company noted that, of the 30 municipal securities in an unrealized loss position, none of the securities had an unrealized loss of greater than 4% of their carrying value. The corporate debt securities are issued by well-capitalized and sound financial institutions. The other debt securities are rated above Aa2 by Moody’s and, in the aggregate, had an unrealized loss of less than 1% of their carrying value. The gross unrealized losses reported for the mortgage-backed securities relate to investment securities issued by the Federal National Mortgage Association, the Government National Mortgage Association, or Federal Home Loan Mortgage Corporation. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, these investment securities before the anticipated recovery of the amortized cost basis. The unrealized losses for the debt securities are caused by changes in market interest rates and not credit concerns related to the respective issuers.

The equity securities held by the Company in an unrealized loss position at March 31, 2015 consist of publicly-traded common stock of an investment company, as well as preferred stock of a well-capitalized and sound financial institution. The Company concluded there are no concerns about the long-term viability of the issuers. The Company has the positive intent and ability to hold these securities until the anticipated recovery of value occurs.

Based on this analysis, the Company does not consider any investment securities to be other-than-temporarily impaired at March 31, 2015.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major categories of loans are presented below:

	March 31, 2015						December 31, 2014
	Originated		Acquired (1)		Total		Originated		Acquired (1)		Total
	(Dollars in thousands)
Commercial real estate	$	1,327,759	$	385,232	$	1,712,991	$	1,181,492	$	403,672	$	1,585,164
Commercial construction	236,957		44,146		281,103		265,968		48,668		314,636
Commercial and industrial	163,695		35,271		198,966		154,132		38,200		192,332
Leases	21,489		—		21,489		21,100		—		21,100
Total commercial	1,749,900		464,649		2,214,549		1,622,692		490,540		2,113,232
Residential construction	49,614		28,406		78,020		43,298		29,854		73,152
Residential mortgage	451,968		415,067		867,035		439,600		432,818		872,418
Consumer and other	11,119		5,114		16,233		10,851		5,445		16,296
Total portfolio loans	$	2,262,601	$	913,236	$	3,175,837	$	2,116,441	$	958,657	$	3,075,098

18

(1) Amount includes $129.9 million and $137.5 million of acquired loans covered under FDIC loss-share agreements at March 31, 2015 and December 31, 2014, respectively. The unpaid principal balance for acquired loans covered under FDIC loss-share agreements was $132.1 million and $140.4 million at March 31, 2015 and December 31, 2014, respectively.

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 non-accretable difference represents cash flows not expected to be collected. The following table details changes in the carrying amount of covered acquired loans and accretable yield for loans receivable for the three months ended March 31, 2015 and the year ended December 31, 2014:

	2015						2014
	Accretable Yield			Carrying Value			Accretable Yield			Carrying Value
	(Dollars in thousands)
Balance at beginning of period	$	(2,213	)	$	137,459		$	(6,058	)	$	187,661
Reductions from payments and foreclosures, net	—			(8,217		)	—			(54,489		)
Reclass from non-accretable to accretable yield	(14		)	14			(221		)	221
Accretion	599			599			4,066			4,066
Balance at end of period	$	(1,628	)	$	129,855		$	(2,213	)	$	137,459

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 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 substandard 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, 2015 and December 31 2014, real estate loans with carrying values of $1.17 billion and $1.10 billion, respectively, were pledged to secure borrowing facilities from these institutions.

A summary of the changes to the allowance for loan losses, by class of financing receivable, is presented below:

For the three months ended March 31, 2015	Commercial real estate			Commercial construction			Commercial and industrial			Leases			Residential construction			Residential Mortgage			Consumer and other			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance December 31, 2014	$	12,685		$	4,311		$	3,226		$	103		$	570		$	9,313		$	191		$	30,399
Charge-offs	(1,546		)	(6		)	(85		)	—			—			(288		)	(56		)	(1,981		)
Recoveries	177			774			213			—			30			192			11			1,397
Provision (1)	1,573			(1,314		)	(206		)	(18		)	(192		)	195			72			110
Change in FDIC indemnification asset (1)	(87		)	(388		)	(32		)	—			3			(67		)	(3		)	(574		)
Balance March 31, 2015	$	12,802		$	3,377		$	3,116		$	85		$	411		$	9,345		$	215		$	29,351

For the three months ended March 31, 2014	Commercial real estate			Commercial construction			Commercial and industrial			Leases		Residential construction			Residential Mortgage			Consumer and other			Total
	(Dollars in thousands)
Allowance for loan losses:
Balance December 31, 2013	$	14,752		$	6,738		$	3,137		$	56	$	213		$	7,730		$	249		$	32,875
Charge-offs	(1,586		)	(1,580		)	(1,254		)	—		—			(1,064		)	(92		)	(5,576		)
Recoveries	138			549			113			—		10			142			9			961
Provision (2)	67			199			1,200			18		27			949			101			2,561
Change in FDIC indemnification asset (2)	147			(239		)	64			—		(6		)	61			32			59
Balance March 31, 2014	$	13,518		$	5,667		$	3,260		$	74	$	244		$	7,818		$	299		$	30,880

19

(1) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(0.7) million for the three months ended March 31, 2015. This resulted in a decrease in the FDIC indemnification asset of $0.6 million , which is the difference between the net provision on covered loans and the total reduction to the allowance for loan losses allocable to the covered loan portfolio of $0.1 million for the three months ended March 31, 2015.

(2) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $0 for the three months ended March 31, 2014. This resulted in an increase in the FDIC indemnification asset of $0.1 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 $0.1 million for the three months ended March 31, 2014.

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

	Commercial real estate		Commercial construction		Commercial and industrial		Leases		Residential construction		Residential Mortgage		Consumer and other		Total
	(Dollars in thousands)
Balances at March 31, 2015:
Specific reserves:
Impaired loans	$	2,112	$	159	$	479	$	—	$	58	$	1,932	$	9	$	4,749
Purchase credit impaired loans	1,620		226		147		—		3		1,359		9		3,364
Total specific reserves	3,732		385		626		—		61		3,291		18		8,113
General reserves	9,070		2,992		2,490		85		350		6,054		197		21,238
Total	$	12,802	$	3,377	$	3,116	$	85	$	411	$	9,345	$	215	$	29,351
Loans:
Individually evaluated for impairment	$	33,027	$	4,058	$	1,751	$	—	$	512	$	17,357	$	92	$	56,797
Purchase credit impaired loans	78,558		10,974		4,380		—		571		47,742		851		143,076
Loans collectively evaluated for impairment	1,601,406		266,071		192,835		21,489		76,937		801,936		15,290		2,975,964
Total	$	1,712,991	$	281,103	$	198,966	$	21,489	$	78,020	$	867,035	$	16,233	$	3,175,837
Balances at December 31, 2014:
Specific reserves:
Impaired loans	$	1,614	$	118	$	42	$	—	$	230	$	972	$	13	$	2,989
Purchase credit impaired loans	1,727		424		152		—		—		1,556		11		3,870
Total specific reserves	3,341		542		194		—		230		2,528		24		6,859
General reserves	9,344		3,769		3,032		103		340		6,785		167		23,540
Total	$	12,685	$	4,311	$	3,226	$	103	$	570	$	9,313	$	191	$	30,399
Loans:
Individually evaluated for impairment	$	27,578	$	4,080	$	1,264	$	—	$	657	$	13,019	$	126	$	46,724
Purchase credit impaired loans	82,477		11,326		4,591		—		952		50,164		872		150,382
Loans collectively evaluated for impairment	1,475,109		299,230		186,477		21,100		71,543		809,235		15,298		2,877,992
Total	$	1,585,164	$	314,636	$	192,332	$	21,100	$	73,152	$	872,418	$	16,296	$	3,075,098

20

The following tables present information related to impaired loans, excluding purchased impaired loans:

	Impaired Loans - With Allowance						Impaired Loans - With No Allowance
	Recorded Investment		Unpaid Principal Balance		Allowances for Loan Losses Allocated		Recorded Investment		Unpaid Principal Balance
March 31, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	13,223	$	13,188	$	2,068	$	19,435	$	19,416
Commercial construction	1,599		1,595		134		2,269		2,262
Commercial and industrial	1,297		1,287		453		264		267
Residential construction	348		347		43		—		—
Residential mortgage	7,764		7,739		1,120		4,645		4,632
Consumer and other	93		92		9		—		—
Total originated	24,324		24,248		3,827		26,613		26,577
Acquired:
Commercial real estate	424		424		43		628		645
Commercial construction	203		201		25		264		264
Commercial and industrial	198		197		27		—		27
Residential construction	165		165		15		—		—
Residential mortgage	4,024		4,395		812		4,111		4,244
Total acquired	5,014		5,382		922		5,003		5,180
Total loans	$	29,338	$	29,630	$	4,749	$	31,616	$	31,757

	Impaired Loans - With Allowance						Impaired Loans - With No Allowance
	Recorded Investment		Unpaid Principal Balance		Allowances for Loan Losses Allocated		Recorded Investment		Unpaid Principal Balance
December 31, 2014	(Dollars in thousands)
Originated:
Commercial real estate	$	10,110	$	10,089	$	1,571	$	17,095	$	17,071
Commercial construction	1,734		1,728		105		2,227		2,218
Commercial and industrial	798		790		26		268		271
Residential construction	350		349		44		—		—
Residential mortgage	6,278		6,260		694		5,057		5,045
Consumer and other	127		126		13		—		—
Total originated	19,397		19,342		2,453		24,647		24,605
Acquired:
Commercial real estate	429		428		43		796		824
Commercial construction	133		132		13		469		467
Commercial and industrial	204		203		16		1		28
Residential construction	308		308		185		114		114
Residential mortgage	1,574		1,614		279		7,266		7,744
Total acquired	2,648		2,685		536		8,646		9,177
Total loans	$	22,045	$	22,027	$	2,989	$	33,293	$	33,782

21

The following table presents information related to the average recorded investment and interest income recognized on impaired loans, excluding purchased impaired loans:

	Three Months Ended March 31,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Impaired loans with allowance:
Commercial real estate	$	12,565	$	81	$	21,276	$	205
Commercial construction	1,774		18		4,144		37
Commercial and industrial	1,433		12		1,545		10
Residential construction	404		3		365		3
Residential mortgage	9,722		15		7,601		44
Consumer and other	104		1		107		—
Total impaired loans with allowance	$	26,002	$	130	$	35,038	$	299
Impaired loans with no allowance:
Commercial real estate	$	19,308	$	98	$	12,966	$	38
Commercial construction	2,589		15		7,126		37
Commercial and industrial	262		—		326		—
Residential construction	114		—		—		—
Residential mortgage	10,647		46		11,266		45
Consumer and other	—		—		56		—
Total impaired loans with no allowance	$	32,920	$	159	$	31,740	$	120

For the three months ended March 31, 2015 and 2014, 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. The amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

At March 31, 2015 and December 31, 2014, the Company had $1.2 million and $2.5 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in progress.

22

The following tables present an aging analysis of the recorded investment in the Company's loans:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-Accrual		Total Past Due		Current		Total Loans
March 31, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	880	$	—	$	—	$	8,673	$	9,553	$	1,318,206	$	1,327,759
Commercial construction	11		102		—		1,009		1,122		235,835		236,957
Commercial and industrial	131		24		—		502		657		163,038		163,695
Leases	—		—		—		—		—		21,489		21,489
Residential construction	—		—		—		—		—		49,614		49,614
Residential mortgage	1,667		185		—		4,592		6,444		445,524		451,968
Consumer and other	16		81		—		—		97		11,022		11,119
Total originated	2,705		392		—		14,776		17,873		2,244,728		2,262,601
Acquired:
Commercial real estate	814		119		—		3,551		4,484		380,748		385,232
Commercial construction	161		90		—		559		810		43,336		44,146
Commercial and industrial	116		—		—		197		313		34,958		35,271
Residential construction	419		—		—		165		584		27,822		28,406
Residential mortgage	2,060		669		—		8,668		11,397		403,670		415,067
Consumer and other	37		26		—		51		114		5,000		5,114
Total acquired	3,607		904		—		13,191		17,702		895,534		913,236
Total loans	$	6,312	$	1,296	$	—	$	27,967	$	35,575	$	3,140,262	$	3,175,837

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-Accrual		Total Past Due		Current		Total Loans
December 31, 2014	(Dollars in thousands)
Originated:
Commercial real estate	$	1,974	$	—	$	—	$	3,476	$	5,450	$	1,176,042	$	1,181,492
Commercial construction	12		—		—		1,084		1,096		264,872		265,968
Commercial and industrial	102		24		—		417		543		153,589		154,132
Leases	—		—		—		—		—		21,100		21,100
Residential construction	200		—		—		—		200		43,098		43,298
Residential mortgage	1,508		1,268		—		3,498		6,274		433,326		439,600
Consumer and other	6		—		—		—		6		10,845		10,851
Total originated	3,802		1,292		—		8,475		13,569		2,102,872		2,116,441
Acquired:
Commercial real estate	880		155		—		4,508		5,543		398,129		403,672
Commercial construction	230		67		—		779		1,076		47,592		48,668
Commercial and industrial	121		27		—		197		345		37,855		38,200
Residential construction	—		—		—		422		422		29,432		29,854
Residential mortgage	2,200		848		—		10,312		13,360		419,458		432,818
Consumer and other	92		2		—		30		124		5,321		5,445
Total acquired	3,523		1,099		—		16,248		20,870		937,787		958,657
Total loans	$	7,325	$	2,391	$	—	$	24,723	$	34,439	$	3,040,659	$	3,075,098

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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.

The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass are considered to be a satisfactory credit risk and generally considered to be collectible in full.

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 uncollectable and are in the process of being charged-off, as soon as practical, once so classified.

The following tables present the recorded investment in the Company’s loans by credit quality indicator:

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
March 31, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	1,248,008	$	41,450	$	38,301	$	—	$	—	$	1,327,759
Commercial construction	227,477		6,128		3,352		—		—		236,957
Commercial and industrial	155,177		3,854		4,664		—		—		163,695
Leases	21,489		—		—		—		—		21,489
Residential construction	49,267		—		347		—		—		49,614
Residential mortgage	419,218		20,217		12,533		—		—		451,968
Consumer and other	10,640		387		92		—		—		11,119
Total originated	2,131,276		72,036		59,289		—		—		2,262,601
Acquired:
Commercial real estate	324,353		34,310		26,485		84		—		385,232
Commercial construction	31,345		6,475		6,326		—		—		44,146
Commercial and industrial	33,179		788		1,284		20		—		35,271
Residential construction	27,176		394		836		—		—		28,406
Residential mortgage	355,221		36,846		22,499		501		—		415,067
Consumer and other	4,937		126		51		—		—		5,114
Total acquired	776,211		78,939		57,481		605		—		913,236
Total loans	$	2,907,487	$	150,975	$	116,770	$	605	$	—	$	3,175,837

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	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2014	(Dollars in thousands)
Originated:
Commercial real estate	$	1,100,361	$	46,935	$	34,196	$	—	$	—	$	1,181,492
Commercial construction	256,987		5,530		3,451		—		—		265,968
Commercial and industrial	145,722		3,980		4,430		—		—		154,132
Leases	21,100		—		—		—		—		21,100
Residential construction	42,806		143		349		—		—		43,298
Residential mortgage	407,319		20,946		11,335		—		—		439,600
Consumer and other	10,331		428		92		—		—		10,851
Total originated	1,984,626		77,962		53,853		—		—		2,116,441
Acquired:
Commercial real estate	342,240		35,816		25,531		85		—		403,672
Commercial construction	36,346		5,910		6,320		92		—		48,668
Commercial and industrial	36,039		644		1,482		35		—		38,200
Residential construction	28,833		—		1,021		—		—		29,854
Residential mortgage	370,523		36,098		24,616		1,581		���		432,818
Consumer and other	5,256		159		30		—		—		5,445
Total acquired	819,237		78,627		59,000		1,793		—		958,657
Total loans	$	2,803,863	$	156,589	$	112,853	$	1,793	$	—	$	3,075,098

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 or extended interest-only payments and term extensions outside of normal underwriting guidelines.  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, or 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 nonaccrual 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. Once we classify a loan a TDR, the loan is only removed from TDR classification under three circumstances: (1) the loan is paid off, (2) the loan is charged off or (3) if, at the beginning of the current fiscal year, the loan has performed in accordance with the modified terms for a minimum of six consecutive months and at the time of modification the loan’s interest rate represented a then current market interest rate for a loan of similar risk. 

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The following tables provide a summary of loans modified as TDRs:

	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
March 31, 2015	(Dollars in thousands)
Commercial real estate	$	5,077	$	—	$	5,077	$	243
Commercial construction	1,339		50		1,389		14
Commercial and industrial	1,063		—		1,063		398
Residential mortgage	7,596		15		7,611		744
Consumer and other	92		—		92		10
Total modifications	$	15,167	$	65	$	15,232	$	1,409
Number of contracts	35		2		37

	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
December 31, 2014	(Dollars in thousands)
Commercial real estate	$	3,835	$	—	$	3,835	$	165
Commercial construction	1,341		50		1,391		16
Commercial and industrial	651		—		651		25
Residential mortgage	7,625		16		7,641		592
Consumer and other	126		—		126		13
Total modifications	$	13,578	$	66	$	13,644	$	811
Number of contracts	33		2		35

At March 31, 2015 and December 31, 2014, 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.

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The following tables present new TDRs by modification category. All balances represent the recorded investment at the end of the period in which the modification was made.

	Three Months Ended March 31, 2015
	Term Modification		Payment Modification		Combination Modification		Total Modifications
	(Dollars in thousands)
Commercial real estate	$	417	$	—	$	863	$	1,280
Commercial and industrial	—		419		—		419
Total modifications	$	417	$	419	$	863	$	1,699

	Three Months Ended March 31, 2014
	Payment Modification		Total Modifications
	(Dollars in thousands)
Commercial real estate	$	1,338	$	1,338

The following tables summarize the period-end balance for loans modified and classified as TDRs in the previous 12 months for which a payment default has occurred. 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,
	2015		2014
	(Dollars in thousands)
Residential mortgage	$	—	$	110
Consumer and other	34		—

Loans held for sale

The Company originates certain single family, residential first mortgage loans for sale on a presold basis. Loan sale activity is summarized below:

	Three Months Ended March 31,
	2015		2014
	(Dollars in thousands)
Loans held for sale	$	25,505	$	18,895
Proceeds from sales of loans held for sale	89,922		69,412
Mortgage fees	2,499		1,558

NOTE 6 – FDIC INDEMNIFICATION ASSET

The Company has recorded an indemnification asset related to loss-share agreements entered into with the FDIC wherein the FDIC will reimburse the Company for certain amounts related to certain acquired loans and other real estate owned should the Company experience a loss. Under the loss-sharing arrangements, the FDIC has agreed to absorb 80% of all future losses and workout expenses on these assets which occur prior to the expiration of the loss-sharing agreements. The Company entered into the respective loss-share agreements with the acquisitions of Beach First National Bank (“Beach First”) and Blue Ridge Savings Bank (“Blue Ridge”).

Each loss-sharing arrangement consists of one single family residential mortgage loan agreement and one commercial and other loans and other real estate owned agreement. The commercial and other loan and other real estate owned loss-share agreements provide for FDIC loss-sharing for five years from April 9, 2010 and October 14, 2011 for the purchases of Beach First and Blue Ridge, respectively, and reimbursement to the FDIC for eight years from these dates. The Company does not anticipate any material loss related to the expiration of the loss-sharing arrangement for Beach First, which will occur in the second quarter of 2015. The single family residential

27

mortgage loan loss-share agreements provide for FDIC loss-sharing and reimbursement for recoveries to the FDIC for ten years from these dates for the purchases, and reimbursement to the FDIC for ten years from these dates.

The following table presents activity for the FDIC indemnification asset for the three months ended March 31, 2015 and the year ended December 31, 2014:

	2015			2014
	(Dollars in thousands)
Balance at beginning of period	$	5,097		$	16,886
Accretion of present value discount, net	92			1,061
Post-acquisition adjustments	261			(2,920		)
Receipt of payments from FDIC	(611		)	(9,930		)
Balance at end of period	$	4,839		$	5,097

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 other real estate owned ("OREO") change.

NOTE 7 – 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 also has derivatives that are a result of a service it provides to certain qualifying customers, which includes a matched book of derivative instruments offered to customers in order to minimize their interest rate risk.

Derivatives Designated as Cash Flow Hedges of Interest Rate Risk

The Company has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. The Company entered into an interest rate swap transaction with a notional amount of $125 million, which 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. The Company receives interest at the one-month LIBOR rate and pays a fixed interest rate under the terms of the swap agreement. The termination date of the swap agreement is March 18, 2019.

Derivatives Not Designated as Hedges

The Company utilizes derivative financial instruments, which may include interest rate swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. These derivative positions are recorded at fair value on the Company’s consolidated balance sheet and, due to the matched nature of these derivative instruments, changes in fair value do not impact the Company’s earnings. At March 31, 2015 and December 31, 2014, the Company had notional amounts of $35.9 million and $34.7 million, respectively, on interest rate contracts with corporate customers and in offsetting interest rate contracts with another financial institution to mitigate the Company’s rate exposure on its corporate customers’ contracts.

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The following table presents the fair value of the Company’s derivatives:

	March 31, 2015					December 31, 2014
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(Dollars in thousands)
Derivative assets:
Derivatives not designated as hedging instruments:
Interest rate swaps	$	35,926	Other assets	$	1,050	$	34,692	Other assets	$	723
Derivative liabilities:
Derivatives designated as hedging instruments:
Interest rate swap	$	125,000	Accrued expenses and other liabilities	$	1,604	$	125,000	Accrued expenses and other liabilities	$	308
Derivatives not designated as hedging instruments:
Interest rate swaps	$	35,926	Accrued expenses and other liabilities	$	1,050	$	34,692	Accrued expenses and other liabilities	$	723

The derivative 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 sheets is presented in the following table:

							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amount Recognized		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments		Collateral Held/Pledged		Net
	(Dollars in thousands)
March 31, 2015
Derivative assets	$	1,050	$	—	$	1,050	$	—	$	—	$	1,050
Derivative liabilities	2,654		—		2,654		—		2,654		—
Total derivative instruments	$	3,704	$	—	$	3,704	$	—	$	2,654	$	1,050
December 31, 2014
Derivative assets	$	723	$	—	$	723	$	—	$	—	$	723
Derivative liabilities	1,031		—		1,031		—		1,031		—
Total derivative instruments	$	1,754	$	—	$	1,754	$	—	$	1,031	$	723

The Company has recorded a net loss of $1.0 million, net of tax, as accumulated other comprehensive income at March 31, 2015 associated with cash flow hedging instruments and expects $1.4 million, net of tax, to be reclassified as an increase to interest expense during the next 12 months. The following table presents the amounts recorded in the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, respectively, relating to derivative instruments designated as cash flow hedges, net of tax:

	Three Months Ended March 31,
	2015		2014
	(Dollars in thousands)
Amount of net gains losses recorded in OCI (effective portion)	$	816	$	576
Amount of net losses reclassified from OCI to earnings (1)	—		286

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

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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 ended March 31, 2015 and 2014. 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 instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as a default by the Company on its indebtedness or the failure to maintain its regulatory status as a well-capitalized institution. These derivative agreements also contain provisions regarding the posting of collateral by each party. At March 31, 2015, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $2.7 million, for which the Company has posted collateral with a fair value of $4.8 million.

NOTE 8 – BORROWINGS

The following table presents the Company’s short-term borrowings:

	March 31, 2015		December 31, 2014
	(Dollars in thousands)
Repurchase agreements	$	28,654	$	25,834
Advances from FHLB	18,000		102,100
Federal funds purchased	15,000		—
Total short-term borrowings	$	61,654	$	127,934

Securities sold under agreements to repurchase generally mature within one day from the transaction date and are collateralized by either U.S. Government Agency obligations, government sponsored mortgage-backed securities or securities issued by local governmental municipalities.

The following table presents the Company’s long-term debt:

	March 31, 2015		December 31, 2014
	(Dollars in thousands)
FHLB advances	$	52,000	$	52,000
Subordinated notes	60,000		60,000
Junior subordinated debentures	23,713		23,713
	135,713		135,713
Less: FHLB prepayment penalty	1,708		1,899
Total long-term debt	$	134,005	$	133,814

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The following table details the Company's long-term FHLB advances outstanding:

Maturity	Interest Rate	March 31, 2015		December 31, 2014
		(Dollars in thousands)
July 2016	0.88%	$	2,000	$	2,000
August 2016	1.72%	2,000		2,000
January 2018	2.15%	15,000		15,000
January 2018	2.27%	10,000		10,000
July 2018	1.78%	3,000		3,000
January 2020	0.47%	10,000		10,000
January 2020	0.47%	10,000		10,000
		$	52,000	$	52,000

The advances from the FHLB have been made against a $582.1 million line of credit secured by real estate loans and investment securities with carrying values of $821.3 million and $7.4 million, respectively, at March 31, 2015.

The Company has entered into a 364-day revolving credit facility (the “Credit Agreement”) for an aggregate principal amount of up to $15 million at any time outstanding. The Credit Agreement matures on November 13, 2015. There were no borrowings outstanding under the Credit Agreement at March 31, 2015 and December 31, 2014, respectively.

In addition, the Company has the ability to borrow funds from the Federal Reserve Bank of Richmond utilizing the discount window and the borrower-in-custody of collateral arrangement. At March 31, 2015, commercial loans and investment securities with carrying values of $346.2 million and $2.8 million, respectively, were assigned under these arrangements. At March 31, 2015, the Company had approximately $208.1 million in borrowing capacity available under these arrangements with no outstanding balance due.

The Company was not aware of any violations of loan covenants at March 31, 2015.

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in accumulated other comprehensive income, net of taxes:

	Unrealized Holding Gains (Losses) on Investment Securities Available-For-Sale			Unrealized Holding Gains on Investment Securities Transferred from Available-For-Sale to Held-to-Maturity			Unrealized Holding Gains (Losses) on Cash Flow Hedging Activities			Total Accumulated Other Comprehensive Income
	(Dollars in thousands)
Balance at December 31, 2014	$	7,089		$	3,289		$	(196	)	$	10,182
Other comprehensive income (loss) before reclassifications	854			—			(816		)	38
Reclassifications from accumulated other comprehensive income	(31		)	(102		)	—			(133		)
Net current period other comprehensive income (loss)	823			(102		)	(816		)	(95		)
Balance at March 31, 2015	$	7,912		$	3,187		(1,012		)	$	10,087

Balance at December 31, 2013	$	(1,946	)	$	3,811		$	1,441		$	3,306
Other comprehensive income (loss) before reclassifications	3,656			—			(576		)	3,080
Reclassifications from accumulated other comprehensive income	356			(210		)	286			432
Net current period other comprehensive income (loss)	4,012			(210		)	(290		)	3,512
Balance at March 31, 2014	$	2,066		$	3,601		$	1,151		$	6,818

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The following table details reclassification adjustments from accumulated other comprehensive income:

	Three Months Ended March 31,
Component of Accumulated Other Comprehensive Income	2015			2014			Affected Line Item in the Consolidated Statement of Income
	(Dollars in thousands)
Unrealized holding gains (losses) on investment securities available-for-sale	$	49		$	(565	)	Gain (loss) on sale of investment securities, net
	(18		)	209			Income tax expense
	31			(356		)	Total, net of tax
Unrealized holding gains on investment securities transferred from available-for-sale to held-to-maturity (1)	161			334			Interest income - investment securities
	(59		)	(124		)	Income tax expense
	102			210			Total, net of tax
Unrealized holding gains (losses) on cash flow hedging activities	—			(457		)	Interest expense - demand deposits
	—			171			Income tax expense
	—			(286		)	Total, net of tax
Total reclassifications for the period	$	133		$	(432	)

(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 at 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 a portion of our investment in equity securities available-for-sale is determined by observing quoted prices in an active market for identical securities. As such, the Company classifies these securities as Level 1 valuation. The fair value of the remainder 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.

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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 as Level 2 valuation.

The following tables present information about certain assets and liabilities measured at fair value on a recurring basis:

	Total Measured at Fair Value		Fair Value Measured Using
Description			Level 1		Level 2		Level 3
	(Dollars in thousands)
March 31, 2015
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	18,668	$	—	$	18,668	$	—
State and municipals	174,807		—		174,807		—
Corporate debt securities	18,066		—		18,066		—
Other debt securities	39,320		—		39,320		—
Equity securities	11,582		760		10,822		—
Mortgage-backed securities:
Residential government sponsored	26,287		—		26,287		—
Other government sponsored	1,861		—		1,861		—
Total investment securities available-for-sale	290,591		760		289,831		—
Derivative instruments:
Interest rate swap - not designated	1,050		—		1,050		—
Total derivative instruments	1,050		—		1,050		—
Total assets measured at fair value on a recurring basis	$	291,641	$	760	$	290,881	$	—
Liabilities:
Interest rate swap - cash flow hedge	$	1,604	$	—	$	1,604	—
Interest rate swap - not designated	1,050		—		1,050		—
Total liabilities measured at fair value on a recurring basis	$	2,654	$	—	$	2,654	$	—

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	Total Measured at Fair Value		Fair Value Measured Using
Description			Level 1		Level 2		Level 3
	(Dollars in thousands)
December 31, 2014
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	17,888	$	—	$	17,888	$	—
State and municipals	188,935		—		188,935		—
Corporate debt securities	13,615		—		13,615		—
Other debt securities	12,566		—		12,566		—
Equity securities	5,909		676		5,233		—
Mortgage-backed securities:
Residential government sponsored	28,274		—		28,274		—
Other government sponsored	2,103		—		2,103		—
Total investment securities available-for-sale	269,290		676		268,614		—
Derivative instruments:
Interest rate swap - not designated	723		—		723		—
Total derivative instruments	723		—		723		—
Total assets measured at fair value on a recurring basis	$	270,013	$	676	$	269,337	$	—
Liabilities:
Interest rate swap - cash flow hedge	$	308	$	—	$	308	$	—
Interest rate swap - not designated	723		—		723		—
Total liabilities measured at fair value on a recurring basis	$	1,031	$	—	$	1,031	$	—

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.

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The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring basis:

	Total Measured at Fair Value		Fair Value Measured Using
Description			Level 1		Level 2		Level 3
	(Dollars in thousands)
March 31, 2015
Loans held for sale	$	25,505	$	—	$	25,505	$	—
Impaired loans	191,760		—		—		191,760
Other real estate owned	39,427		—		—		39,427
Total assets measured at fair value on a nonrecurring basis	$	256,692	$	—	$	25,505	$	231,187
December 31, 2014
Loans held for sale	$	37,280	$	—	$	37,280	$	—
Impaired loans	190,247		—		—		190,247
Other real estate owned	42,531		—		—		42,531
Total assets measured at fair value on a nonrecurring basis	$	270,058	$	—	$	37,280	$	232,778

The following table presents the valuation and unobservable inputs for Level 3 assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2015:

Description	Fair Value (Dollars in thousands)		Valuation Methodology	Unobservable Inputs	Range of Inputs
Impaired loans	$	191,760	Appraised value	Discount to reflect current market conditions and ultimate collectability	0% - 20%
Other real estate owned	$	39,427	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.

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The following tables present 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:

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
March 31, 2015	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	96,238	$	96,238	$	96,238	$	—	$	—
Investment securities available-for-sale	290,591		290,591		760		289,831		—
Investment securities held-to-maturity	224,734		230,785		—		230,785		—
Federal Home Loan Bank stock	6,638		6,638		—		6,638		—
Loans held for sale	25,505		25,505		—		25,505		—
Loans receivable, net	3,146,486		3,173,125		—		2,981,365		191,760
Accrued interest receivable	13,186		13,186		—		13,186		—
FDIC indemnification asset	4,839		4,839		—		—		4,839
Investment in bank-owned life insurance	94,102		94,102		—		94,102		—
Interest rate swap derivative - not designated	1,050		1,050		—		1,050		—
Financial liabilities:
Demand deposits and savings	$	2,229,389	$	2,229,389	$	—	$	2,229,389	$	—
Time deposits	1,323,537		1,340,133		—		1,340,133		—
Short-term borrowings	61,654		61,654		—		61,654		—
Long-term debt	134,005		132,039		—		132,039		—
Accrued interest payable	2,715		2,715		—		2,715		—
Interest rate swap derivative - cash flow hedge	1,604		1,604		—		1,604		—
Interest rate swap derivative - not designated	1,050		1,050		—		1,050		—

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
December 31, 2014	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	85,194	$	85,194	$	85,194	$	—	$	—
Investment securities available-for-sale	269,290		269,290		676		268,614		—
Investment securities held-to-maturity	237,092		241,997		—		241,997		—
Federal Home Loan Bank stock	10,562		10,562		—		10,562		—
Loans held for sale	37,280		37,280		—		37,280		—
Loans receivable, net	3,044,699		3,070,477		—		2,880,230		190,247
Accrued interest receivable	14,514		14,514		—		14,514		—
FDIC indemnification asset	5,097		5,097		—		—		5,097
Investment in bank-owned life insurance	93,396		93,396		—		93,396		—
Interest rate swap derivative - not designated	723		723		—		723		—
Financial liabilities:
Demand deposits and savings	$	2,192,723	$	2,192,723	$	—	$	2,192,723	$	—
Time deposits	1,203,674		1,218,869		—		1,218,869		—
Short-term borrowings	127,934		127,934		—		127,934		—
Long-term debt	133,814		131,417		—		131,417		—
Accrued interest payable	2,011		2,011		—		2,011		—
Interest rate swap derivative - cash flow hedge	308		308		—		308		—
Interest rate swap derivative - not designated	723		723		—		723		—

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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 – COMMITMENTS AND CONTINGENCIES

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 financial institutions. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent cash requirements.

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The following table presents the outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk:

	March 31, 2015		December 31, 2014
	(Dollars in thousands)
Commitments under unfunded loans and lines of credit	$	699,641	$	663,137
Letters of credit	7,519		6,607
Unused credit card lines	4,361		4,512

In addition to the above noted credit commitments, the Company has committed to invest up to $8.8 million in limited partnership interests of unconsolidated entities, of which $5.6 million was unfunded at March 31, 2015 and December 31, 2014, respectively.

The Company is subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company will be material to the Company’s consolidated financial position. On an on-going basis the Company assesses any potential liabilities or contingencies in connection with such legal proceedings. For those matters where it is deemed probable that the Company will incur losses and the amount of the losses can be reasonably estimated, the Company would record an expense and corresponding liability in its consolidated financial statements.

NOTE 12 – EMPLOYEE BENEFITS

The Compensation Committee of the Company's Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as “Rights”). At March 31, 2015, the Company had Rights outstanding from the 2006 BNC Bancorp Omnibus Stock Ownership and Long Term Incentive Plan (the "2006 Omnibus Plan"), the BNC Bancorp 2013 Omnibus Stock Incentive Plan (the "2013 Omnibus Plan") and the KeySource Non-Statutory and Incentive Stock Option plans (the "KeySource Plans"). The 2013 Omnibus Plan and the KeySource Plans are the only plans that are available for future grants. At March 31, 2015, the Company had 173,683 Rights issued under the 2006 Omnibus Plan, 443,981 Rights issued and 972,007 Rights available for grants or awards under the 2013 Omnibus Plan, and 145,660 stock options issued and 35,607 stock options available for issuance related to the KeySource Plans.

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, 2015.

A summary of the Company’s stock option activity for the three months ended March 31, 2015 is presented below:

	Shares	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(Dollars in thousands, except per share amounts)
Outstanding at December 31, 2014	337,778	$	11.37
Exercised	156,125	12.22
Forfeited or expired	—	—
Outstanding at March 31, 2015	181,653	$	10.63	2.74	$	1,356
Exercisable at March 31, 2015	180,229	$	10.64	2.72	$	1,344
Share options expected to vest	1,424	$	9.67	5.03	$	12

The related compensation expense recognized for stock options was immaterial for the three months ended March 31, 2015 and 2014, respectively. At March 31, 2015, there was an immaterial amount 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 0.11 years.

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Restricted Stock Awards. A summary of the activity of the Company’s unvested restricted stock awards for the three months ended March 31, 2015 is presented below:

	Number of Shares		Weighted Average Grant-Date Fair Value per Share
Unvested at December 31, 2014	601,268		$	14.90
Granted	2,000		16.70
Vested	(17,963	)	16.20
Forfeited	(3,334	)	10.87
Unvested at March 31, 2015	581,971		$	14.89

The Company measures the fair value of restricted shares based on the price of the Company'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, 2015 and 2014 was $0.7 million and $0.5 million, respectively. At March 31, 2015, there was $7.0 million of total unrecognized compensation cost related to unvested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 2.43 years. The grant-date fair value of restricted stock grants vested during the three months ended March 31, 2015 and 2014 was $0.3 million and $0.2 million, respectively.

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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. BNC Bancorp is individually referred to as the "Parent Company."

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:

l 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;

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

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

l adverse changes in credit quality trends;

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

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

l 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;

l 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;

l adequacy of our risk management program;

l increased competitive pressure due to consolidation;

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

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

l 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, 2014.

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 loan losses, valuation of goodwill and intangible assets, and valuation of assets acquired

40

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, 2014. 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, 2014. There have been no changes to the Company’s significant accounting policies during the first quarter of 2015. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 “Basis of Presentation” included herein.

Overview and Executive Summary

BNC Bancorp was formed in 2002 to serve as the holding company for Bank of North Carolina. We provide a wide range of banking services tailored to the particular banking needs of the communities we serve. We are principally engaged in the business of attracting deposits from the general public and using those deposits, together with other funding from our lines of credit, to make primarily consumer and commercial loans. We have pursued a strategy that emphasizes our local affiliations and are continuously developing new and innovative products and equipping our bankers with new technology to further differentiate us as a community bank with sophisticated product delivery. We target business professionals and small to mid-size business customers with credit relationships in the $250,000 to $25 million range through our 47 branches located in North and South Carolina.

Net income for the quarter ended March 31, 2015 was $8.8 million, or $0.27 per diluted share, an increase of 35.1% from net income of $6.5 million, or $0.24 per diluted share, for the quarter ended March 31, 2014. The increase was primarily due to the significant increase in interest-earning assets due to the acquisitions of South Street Financial Corporation (“South Street”) and Community First Financial Group, Inc. (“Community First”), respectively, during the second quarter of 2014, as well as the acquisition of Harbor Bank Group (“Harbor”), which closed on December 1, 2014 (collectively the "acquisitions").

Total assets at March 31, 2015 were $4.17 billion, an increase of 2.5% as compared to total assets of $4.07 billion at December 31, 2014.

The Company continues to see continued growth in economic activity in our markets, which has directly translated to an increase in lending activities. Originated loans increased by $146.2 million, or 6.9%, from December 31, 2014 to March 31, 2015. These increases have been a direct result of our recent acquisitions, credit campaigns and our continued ability to attract and retain experienced loan originators.

Analysis of Results of Operations

Net Interest Income

Net interest income is the primary source of BNC’s 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, and loan prepayment behavior. 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, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.

FTE net interest income for the first quarter of 2015 was $39.9 million, an increase of 22.1% from $32.7 million for the first quarter of 2014. The increase was primarily driven by an increase in average interest-earning assets of $828.7 million, or 28.8%, as compared to first quarter of 2014. These increases were due to interest-earning assets acquired from the acquisitions, as well as continued organic loan growth across the Company's markets.

The Company’s average yield on interest-earning assets was 5.00% for the first quarter of 2015, a decrease of 31 basis points from 5.31% for the first quarter of 2014. The decrease is primarily due to a decrease in the yield earned on the Company’s portfolio loans, which was 5.08% for the first quarter of 2015, as compared 5.49% for the first quarter of 2014. The decrease in yield on the portfolio loans from first quarter of 2014 was partially offset by an additional $1.4 million of loan accretion from the acquired loan portfolio.

Average interest-bearing liabilities were $3.15 billion for the quarter ended March 31, 2015, an increase of 23.4% from $2.55 billion for the first quarter of 2014. The increase was due to an additional $545.7 million of average interest-bearing deposits, primarily from the acquisitions. The Company also increased average borrowings by $50.7 million, which is comprised of additional net borrowings from the issuance of subordinated notes during 2014. The Company’s average cost of interest-bearing liabilities was 0.75% for the first quarter of 2015, a decrease of 5 basis points from 0.80% for the first quarter of 2014.

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The following table details the major components of net interest income and the related yields and rates:

Table 1

Average Balance and Net Interest Income (FTE)

	For the Three Months Ended March 31,
	2015						2014
	Average balance		Interest		Average Rate		Average balance		Interest		Average rate
	(Dollars in thousands)
Interest-earning assets:
Loans and leases (1)	$	3,128,992	$	39,205	5.08	%	$	2,288,490	$	30,965	5.49	%
Loans held for sale	25,747		215		3.39	%	18,737		150		3.25	%
Investment securities, taxable	141,963		1,166		3.33	%	124,268		1,086		3.54	%
Investment securities, tax-exempt (2)	353,624		5,049		5.79	%	385,472		5,379		5.66	%
Interest-earning balances and other	57,926		120		0.84	%	62,579		128		0.83	%
Total interest-earning assets	3,708,252		45,755		5.00	%	2,879,546		37,708		5.31	%
Other assets	388,947						302,177
Total assets	$	4,097,199					$	3,181,723
Interest-bearing liabilities:
Demand deposits	$	1,514,308	$	1,653	0.44	%	$	1,219,507	$	1,501	0.50	%
Savings deposits	140,681		51		0.15	%	103,817		49		0.19	%
Time deposits	1,275,326		2,738		0.87	%	1,061,294		2,388		0.91	%
Borrowings	216,182		1,375		2.58	%	165,499		1,066		2.61	%
Total interest-bearing liabilities	3,146,497		5,817		0.75	%	2,550,117		5,004		0.80	%
Non-interest-bearing deposits	532,348						335,416
Other liabilities	24,320						19,454
Shareholders' equity	394,034						276,736
Total liabilities and shareholder's equity	$	4,097,199					$	3,181,723
Net interest income and
interest rate spread			$	39,938	4.25	%			$	32,704	4.51	%
Net interest margin					4.37	%					4.61	%

(1) Average outstanding balances are net of deferred costs and unearned discounts and include nonaccrual loans.

(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $1.9 million and $2.0 million for the three months ended March 31, 2015 and 2014, respectively.

42

The following table details the variances between the three months ended March 31, 2015 and 2014, respectively, caused by changes in interest rates and changes in volumes:

Table 2

Volume and Rate Variance Analysis

	2015 vs. 2014
	Increase (decrease) due to
	Volume			Rate			Total
	(Dollars in thousands)
Interest income:
Loans and leases	$	10,952		$	(2,712	)	$	8,240
Loans held for sale	57			8			65
Investment securities, taxable	150			(70		)	80
Investment securities, tax-exempt (1)	(450		)	120			(330		)
Interest-earning balances and other	(9		)	1			(8		)
Total interest income	10,700			(2,653		)	8,047
Interest expense:
Deposits:
Demand deposits	342			(190		)	152
Savings deposits	15			(13		)	2
Time deposits	471			(121		)	350
Borrowings	324			(15		)	309
Total interest expense	1,152			(339		)	813
Net interest income increase	$	9,548		$	(2,314	)	$	7,234

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

Provision for Loan Losses

During the quarter ended March 31, 2015, the Company recorded a provision for loan losses of $0.1 million, a decrease from $2.6 million recorded in the first quarter of 2014. Provision for loan losses for loans not covered under loss-share agreements was $0.3 million, while provision for loan losses on loans covered under loss-share agreements was $(0.2) million for the three months ended March 31, 2015. 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 recent 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. See additional discussion under section “Analysis of Allowance for Loan Losses.”

Non-Interest Income

Non-interest income was $6.3 million for the quarter ended March 31, 2015, an increase of 22.9% from $5.1 million for the first quarter of 2014. The following table presents the components of non-interest income:

43

Table 3

Non-Interest Income

	For the Three Months Ended March 31,
	2015		2014
	(Dollars in thousands)
Mortgage fees	$	2,499	$	1,558
Service charges	1,644		1,348
Earnings on bank-owned life insurance	654		580
Gain (loss) on sale of investment securities, net	49		(565		)
Other	1,454		2,204
Total non-interest income	$	6,300	$	5,125

Increases in the volume of mortgage loan closings during the first quarter of 2015, as well as an increased level of service charges due to the increasing deposit base, were the primary drivers for the increase in non-interest income. Other non-interest income for 2014 included $0.8 million of proceeds from an insurance settlement and $0.6 million of amortization of the FDIC loss-share receivable. Many of the non-interest income sources, such as income from recoveries on acquired loans, income derived from the sale of loans partially guaranteed by the SBA, income derived from our investment brokerage services, income derived from our CRA equity investments and income received from the Federal Deposit Insurance Corporation related to our acquired loan portfolio, are volatile and can vary significantly from period to period.

Non-Interest Expense

Non-interest expense was $32.0 million for the quarter ended March 31, 2015, an increase of 29.1% from $24.8 million for the first quarter of 2014. The following table presents the components of non-interest expense:

Table 4

Non-Interest Expense

	For the Three Months Ended March 31,
	2015		2014
	(Dollars in thousands)
Salaries and employee benefits	$	17,410	$	13,709
Occupancy	2,581		2,079
Furniture and equipment	1,628		1,598
Data processing and supplies	1,161		904
Advertising and business development	646		689
Insurance, professional and other services	2,259		1,508
FDIC insurance assessments	735		705
Loan, foreclosure and other real estate owned	2,325		1,362
Other	3,246		2,217
Total non-interest expense	$	31,991	$	24,771

The increase from 2014 is primarily due to additional facilities charges and headcount from the acquisitions, as well as overall Company growth. Non-interest expense for the three months ended March 31, 2015 included $2.8 million of transaction-related expenses, as compared to $0.8 million for the three months ended March 31, 2014.

Income Taxes

Our income tax expense was $3.5 million and $2.0 million for the first quarter 2015 and 2014, respectively. The increase in income tax is a direct result of our increase in taxable income due to our acquisitions, as well as overall Company growth.

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.

44

Due to an increase in our level of taxable income relative to non-taxable income, our effective tax rate for the first quarter of 2015 increased to 28.6%, as compared to an effective tax rate of 23.8% for the first quarter of 2014.

Analysis of Financial Condition

Investment Securities

Our 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 $515.3 million at March 31, 2015, as compared to total investment securities of $506.4 million at December 31, 2014. The vast majority of securities in the portfolio are bank-qualified taxable and tax-exempt debt instruments issued by various U.S. states, counties, cities, municipalities and school districts. We also maintain portfolios of securities consisting of collateralized mortgage obligations issued or guaranteed by U.S. government agencies, as well as mortgage-backed securities issued or guaranteed by U.S. government agencies and corporate debt securities. Our investment securities portfolio is comprised of high quality securities that are designed to enhance liquidity while providing acceptable rates of return.

At March 31, 2015, our investment securities portfolio included 314 taxable and tax-exempt debt instruments issued by various U.S. states, counties, cities, municipalities and school districts. The following table is a summary, by U.S. state, of our investment in the obligations of state and political subdivisions at March 31, 2015:

Table 5

Obligations of State and Political Subdivisions

		Amortized Cost		Fair Value
		(Dollars in thousands)
General obligation bonds:
	Texas	$	120,678	$	126,768
	Washington	29,170		30,425
	Ohio	19,383		20,839
	California	15,344		16,063
	North Carolina	13,645		13,905
	Pennsylvania	10,582		11,342
	Kansas	9,920		10,783
	Other (21 states)	53,959		56,341
Total general obligation bonds:		272,681		286,466
Revenue bonds:
	North Carolina	28,022		29,303
	Indiana	13,815		14,625
	South Carolina	12,258		12,698
	Florida	11,370		11,940
	New York	7,909		8,007
	Texas	7,351		7,751
	Other (10 states)	20,659		21,652
Total revenue bonds:		101,384		105,976
Total obligations of state and political subdivisions		$	374,065	$	392,442

Our largest exposure in general obligation bonds was 64 bonds issued by various school districts in Texas with a total amortized cost basis of $87.0 million and total fair value of $91.7 million at March 31, 2015. Of this total, $71.4 million in amortized cost and $74.9 million in fair value are guaranteed by the Permanent School Fund of the State of Texas.

45

The revenue sources related to our investment in revenue bonds at March 31, 2015 are summarized in the following table:

Table 6

Revenue Bonds by Source

	Amortized Cost		Fair Value
	(Dollars in thousands)
Health, hospitality and nursing home	$	20,212	$	21,308
Water and sewer	18,164		19,148
Power and electricity	12,509		12,741
College and university	12,124		12,703
Lease (abatement)	7,047		7,852
Other	31,328		32,224
Total revenue bonds	$	101,384	$	105,976

Our largest individual exposures in revenue bonds at March 31, 2015 were three bonds issued by the South Carolina Public Service Authority to be repaid by future pledged power and utility revenue, and seven bonds issued by the North Carolina Medical Care Commission to be repaid by future pledged revenues generated from a leading academic healthcare system. The total amortized cost for these 10 securities was $18.8 million and the total fair value was $19.2 million at March 31, 2015.

Currently, all of our investments in state and political subdivisions are rated as investment grade by Standard & Poor's and/or Moody's. Investments in state and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. The factors considered in this analysis include capacity to pay, market and economic data, soundness of budgetary position, sources, strength, and stability of tax or enterprise revenue, review of the credit rating, as provided by one or more nationally recognized credit ratings agencies, as well as any other factors as are available and relevant to the security or issuer.  While we do not place sole reliance on the credit rating of the security, no investment in a state or political subdivision is considered for purchase unless it has an investment grade credit rating by one or more nationally recognized credit ratings agencies.  We perform additional detailed risk analysis should any security be downgraded below investment grade to determine if the security should be retained or sold.  This risk analysis includes, but is not limited to, discussions with third party municipal credit analysts and review of any changes that may affect the credit worthiness of the issuer and its ability to make timely principal and interest payments.

Our evaluation of investments in state and political subdivisions at March 31, 2015 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by Standard & Poor's and/or Moody's.

Loans

Total portfolio loans were $3.18 billion at March 31, 2015, an increase of 3.3% from $3.08 billion at December 31, 2014. Our originated loan portfolio increased by $146.2 million, or 6.9%, to $2.26 billion at March 31, 2015, as compared to $2.12 billion at December 31, 2014.

46

The following table details the composition of our loan portfolio:

Table 7

Loan Portfolio Composition

	March 31, 2015				December 31, 2014
	Amount		% of Total Loans		Amount		% of Total Loans
	(Dollars in thousands)
Originated:
Commercial real estate	$	1,327,759	41.8	%	$	1,181,492	38.4	%
Commercial construction	236,957		7.5	%	265,968		8.6	%
Commercial and industrial	163,695		5.1	%	154,132		5.0	%
Leases	21,489		0.7	%	21,100		0.7	%
Residential construction	49,614		1.6	%	43,298		1.4	%
Residential mortgage	451,968		14.2	%	439,600		14.3	%
Consumer and other	11,119		0.4	%	10,851		0.4	%
Total originated loans	2,262,601		71.3	%	2,116,441		68.8	%
Acquired:
Commercial real estate	$	385,232	12.1	%	$	403,672	13.1	%
Commercial construction	44,146		1.4	%	48,668		1.6	%
Commercial and industrial	35,271		1.1	%	38,200		1.2	%
Residential construction	28,406		0.9	%	29,854		1.0	%
Residential mortgage	415,067		13.1	%	432,818		14.1	%
Consumer and other	5,114		0.1	%	5,445		0.2	%
Total acquired loans	913,236		28.7	%	958,657		31.2	%
Total portfolio loans	$	3,175,837	100.0	%	$	3,075,098	100.0	%

Throughout 2014, the Company has implemented strategic business development efforts in an effort to increase organic loan growth. These efforts are continuing to help drive loan growth in our key markets. As compared to December 31, 2014, increases in the originated loan portfolio were driven by increased commercial and industrial lending, particularly in the large metropolitan markets in which we service, increased lending to home builders as the economies in our markets continue to improve, as well as a the continued funding and completion of commercial real estate projects. In addition, our acquisition of Harbor has contributed to high levels of growth from the Charleston, South Carolina market.

At March 31, 2015, second mortgage loans and home equity lines of credit for which the Company did not own or service the related first mortgage loans totaled approximately $206.7 million, which represented approximately 98% of the total second liens held by the Company.  Since substantially all first mortgage loans originated by the Company are eligible for sale in the secondary market, and the Company typically does not service the related first mortgage loans if they are sold, the Company may be unable to track the delinquency status of the related first mortgage loans and whether such loans are at risk of foreclosure by others.  The Company monitors the increased credit risk associated with second mortgage loans and home equity lines of credit for which the Company does not own or service the related first mortgage loans as part of the overall management of the relationship. If the Company identifies significant deterioration in a borrower’s credit quality, the Company may freeze the borrower’s ability to make additional principal draws under the home equity lines of credit.

Home equity lines of credit are offered as “revolving” lines of credit which have a 15 year maturity and draw period. Borrowers are able to choose scheduled monthly interest-only payments during the term of the line or monthly payments of 1.5% of the outstanding principal, along with associated interest. The full principal amount is due at maturity as a lump-sum balloon payment under the interest-only payment option.  At March 31, 2015, approximately 98% of the home equity lines of credit were paying scheduled monthly interest-only payments. At maturity, home equity loans are re-underwritten based on our current underwriting standards and updated appraisals are obtained.  Our underwriting criteria includes analysis of the loan amount in relation to the borrower's total mortgage debt, in addition to normal credit underwriting guidelines.  If the borrower qualifies under our current underwriting standards, the loans are either converted to conventional second mortgage loans that are fully amortizing or refinanced along with the existing first mortgage into a new first mortgage loan.  Borrowers may be required to repay a portion of the outstanding principal balance to qualify for such renewals.

47

The following table summarizes the maturity dates of our home equity lines of credit at March 31, 2015:

Table 8

Home Equity Line of Credit Maturities

	(Dollars in thousands)
2015	$	3,651
2016	5,509
2017	5,347
2018	6,439
2019	9,220
Thereafter	293,111
	$	323,277

Deposits

We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source. Total deposits at March 31, 2015 were $3.55 billion, an increase of 4.6% from total deposits of $3.40 billion as of December 31, 2014. Wholesale deposits were 28.6% of total deposits at March 31, 2015, an increase compared to 25.7% as of December 31, 2014. The growth in wholesale deposits is part of a dedicated strategy to increase deposit duration for interest rate risk management purposes.

Borrowings

Total borrowings at March 31, 2015 were $195.7 million, a decrease of 25.2% from total borrowings of $261.7 million as of December 31, 2014. At March 31, 2015, $61.7 million of these borrowings were classified as short-term, while the remaining $134.0 million were classified as long-term.

Short-term borrowings are comprised of short-term FHLB advances, securities sold under agreements to repurchase and Federal funds purchased. Many short-term funding sources, particularly Federal funds purchased and securities sold under agreements to repurchase, are expected to be reissued and, therefore, do not represent an immediate need for cash. Long-term funding is comprised of long-term FHLB advances and subordinated notes.

Asset Quality

We consider asset quality to be of primary importance, and employ a formal internal loan review process to ensure adherence to our lending policy as approved by our Board of Directors. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. The Company's internal credit risk review function, through focused review and sampling, validates the accuracy of commercial loan risk grades. Each loan risk grade corresponds to an estimated default probability. In addition, as a given loan's credit quality improves or deteriorates, it is Credit Administration's and the Lender’s responsibility to change the borrower's risk grade accordingly. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in our market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents management's estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. Our policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses.

48

Nonperforming Assets

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and OREO, totaled $67.4 million, or 1.61% of total assets, at March 31, 2015, as compared to $67.3 million, or 1.65% of total assets, at December 31, 2014. Nonperforming assets that were not acquired by the Company totaled $36.6 million at March 31, 2015, an increase of 12.9% from $32.5 million at December 31, 2014.

The following table summarizes total nonperforming assets for the past five fiscal quarters:

Table 9

Nonperforming Assets

	March 31, 2015			December 31, 2014			September 30, 2014			June 30, 2014			March 31, 2014
	(Dollars in thousands)
Nonaccrual loans - Originated	$	14,776		$	8,475		$	9,857		$	14,360		$	11,285
Nonaccrual loans - Acquired	13,191			16,248			18,135			20,406			23,758
OREO - Originated	21,869			23,989			23,754			23,714			25,996
OREO - Acquired	17,558			18,542			22,718			27,009			18,910
90 days past due and accruing - Originated	—			—			—			—			—
90 days past due and accruing - Acquired	—			—			5			738			—
Total nonperforming assets	$	67,394		$	67,254		$	74,469		$	86,227		$	79,949
Total nonperforming assets - Originated	$	36,645		$	32,464		$	33,611		$	38,074		$	37,281
Loans restructured/modified not included in above,
(not 90 days past due or on nonaccrual)	$	15,168		$	13,578		$	15,685		$	14,948		$	17,924
Ratio of nonperforming assets to total assets	1.61		%	1.65		%	1.99		%	2.34		%	2.49		%
Originated nonperforming assets to total assets	0.88		%	0.80		%	0.90		%	1.03		%	1.16		%
Ratio of nonperforming loans to total portfolio loans	0.88		%	0.80		%	1.01		%	1.33		%	1.52		%
Originated nonperforming loans to total portfolio loans	0.47		%	0.28		%	0.36		%	0.54		%	0.49		%

Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans, unless we place a loan on nonaccrual basis. We account for loans on a nonaccrual basis when we have serious doubts about the ability to collect principal or interest in full. Loans are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than ninety (90) days, unless such loans are well-secured and in the process of collection. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected.

At March 31, 2015, we had $28.0 million in nonaccrual loans, an increase of 13.1% from $24.7 million at December 31, 2014. Nonaccrual loans that were originated by the Company increased by $6.3 million, or 74.3%, from December 31, 2014, while acquired nonaccrual loans decreased by 18.8% from December 31, 2104. The increase in non-accrual balance was due to a small number of large dollar loan relationships that moved to non-accrual during the first quarter of 2015. These loans were fully reserved under the allowance for loan losses prior to the move to non-accrual.

At March 31, 2015, we had $39.4 million in OREO, a decrease of 7.3% from $42.5 million at December 31, 2014. OREO properties that were originated by the Company decreased by 8.8%, from December 31, 2014, while acquired OREO property decreased by 5.3% from December 31, 2104. The carrying values of OREO represent the lower of the carrying amount or fair value less costs to sell.

TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in nonaccrual loans, whereas accruing TDRs are excluded from nonaccrual loans as it is probable that all contractual principal and interest due under the restructured terms will be collected. We accrue interest on TDRs at the restructured interest rate when management anticipates that no loss of original principal will occur.

49

Analysis of Allowance for Loan Losses

The allowance for loan losses was $29.4 million at March 31, 2015, a decrease of 3.4% from $30.4 million at December 31, 2014. Loan loss reserves to total portfolio loans were 0.92% and 0.99% at March 31, 2015 and December 31, 2014, respectively. The decrease in the allowance for loan losses was primarily driven by a decrease in the allowance required for the acquired loan portfolio, which decreased from $4.0 million at December 31, 2014 to $3.4 million at March 31, 2015.

The ratio of the allowance for loans originated by the Company to total originated loans was 1.15% at March 31, 2015, as compared to 1.25% at December 31, 2014. While the Company continues to experience improved credit quality and lower levels of net charge-offs, the allowance calculation was impacted by the large level of originated loan growth.

Net loan charge-offs for the first quarter of 2015 were $0.6 million, or 0.08% of average loans, as compared to $4.6 million, or 0.82% of average loans, for the first quarter of 2014. Net charge-offs for the first quarter of 2015 included $1.1 million on loans not covered under loss-share agreements and ($0.5) million on loans covered under loss-share agreements.

During the fourth quarter of 2014, we enhanced the methodology used to calculate the allowance for loan losses by incorporating a detailed loss migration analysis using historical loss experience of 60 months, and changing the assumptions used in calculating loss reserve rates from two-year historical charge-offs to using probability of default and loss-given default. See further details of the Company's accounting policy for the calculation of the allowance for loan losses in Note 1, “Summary of Significant Accounting Policies” to the accompanying Consolidated Financial Statements in Item 8 of Part II of the December 31, 2014 Form 10-K.

The following table presents information related to the allowance for loan losses for the periods presented:

Table 10

Analysis of Allowance for Loan Losses

	Three Months Ended March 31,
	2015			2014
	(Dollars in thousands)
Beginning balance	$	30,399		$	32,875
Provision for credit losses:
Non-covered loans	259			2,561
Covered loans	(149		)	—
Change in FDIC indemnification asset	(574		)	59
Net recoveries (charge-offs) on loans covered under loss-share	559			(1,234		)
Charge-offs on loans not covered under loss-share:
Commercial real estate	(1,530		)	(806		)
Commercial construction	—			(1,269		)
Commercial and industrial	(85		)	(844		)
Residential mortgage	(284		)	(828		)
Consumer and other	(55		)	(36		)
Total charge-offs	(1,954		)	(3,783		)
Recoveries on loans not covered under loss-share:
Commercial real estate	147			130
Commercial construction	301			206
Commercial and industrial	183			28
Residential construction	30			3
Residential mortgage	141			29
Consumer and other	9			6
Total recoveries	811			402
Net charge-offs on loans not covered under loss-share	(1,143		)	(3,381		)
Ending balance	$	29,351		$	30,880

50

The allowance for loan losses represents management's estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. We make specific allowances that are allocated to certain individual loans and pools of loans based on risk characteristics, as discussed below. While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

Capital Resources

Total shareholders’ equity was $399.1 million at March 31, 2015, an increase from shareholders’ equity of $390.4 million at December 31, 2014.

We are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and the regulatory framework for prompt corrective action prescribe specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. We use our capital primarily for our lending activities as well as acquisitions and expansions of our business and other operating requirements.

In July 2013, the Federal Reserve Board approved and published the final Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework (“Basel III”) for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. The Basel III Capital Rules were effective for BNC and the Company on January 1, 2015 (subject to a phase-in period for certain components). CET1 capital for the Company and BNC consists of common stock, related paid-in capital, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in CET1. CET1 for both the Company and BNC is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.

The Company's capital levels remained characterized as "well-capitalized" under the Basel III Capital Rules. The capital adequacy ratios for the Company and BNC are set forth below:

Table 11

Capital Adequacy Ratios

	Well-Capitalized Regulatory Minimum		March 31, 2015 (1)		December 31, 2014 (2)
BNC Bancorp:
Total capital (to total risk-weighted assets)	10.00	%	12.09	%	12.49	%
Tier 1 capital (to total risk-weighted assets)	8.00	%	9.57	%	9.71	%
Tier 1 capital (to total adjusted quarterly average assets)	5.00	%	8.36	%	8.41	%
CET1 (to total risk-weighted assets)	6.50	%	8.92	%	N/A
Bank of North Carolina:
Total capital (to risk-weighted assets)	10.00	%	11.75	%	12.21	%
Tier 1 capital (to risk-weighted assets)	8.00	%	10.92	%	11.26	%
Tier 1 capital (to adjusted quarterly average assets)	5.00	%	9.61	%	9.74	%
CET1 (to risk weighted assets)	6.50	%	10.92	%	N/A

(1) Calculated under framework based on Basel III.

(2) Calculated under framework based on Basel I.

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Liquidity

The objective of liquidity management is to ensure that the Company has the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to satisfy the cash flow requirements of depositors and borrowers and to meet its other commitments as they fall due, including the ability to pay dividends to shareholders, service debt, invest in subsidiaries or acquisitions, and satisfy other operating requirements. In addition to satisfying cash flow requirements in the ordinary course of business, the Company actively monitors and manages its liquidity position to ensure sufficient resources are available to meet cash flow requirements in adverse situations.

The Company also has multiple funding sources that could be used to increase liquidity and provide additional financial flexibility. The Company has filed a $150 million shelf registration statement with the SEC under which the Company may, from time to time, offer senior debt securities, subordinated debt securities, convertible debt securities, preferred stock, common stock, warrants or units. In September 2014, the Company issued $60 million of subordinated notes, callable October 1, 2019, and due October 1, 2024, under the shelf registration statement.

While dividends from BNC and proceeds from issuance of capital are primary funding sources for the Parent Company, these sources could be limited or costly (such as by regulation or subject to the capital needs of its subsidiaries or by market appetite for bank holding company stock). The Parent Company received dividends of $1.5 million during the first quarter of 2015 from subsidiaries.

BNC has $105.0 million of established federal funds and other unsecured lines with counterparty banks, with $15.0 million outstanding at March 31, 2015. BNC also has the ability to borrow from the FHLB and the Federal Reserve Bank, with $582.1 million and $208.1 million, respectively, in available credit at March 31, 2015. BNC also has excess loan and investment securities collateral which could be pledged to secure additional deposits or to counterparty banks, the FHLB or other parties as necessary.

Investment securities are an important tool to the Company’s liquidity objective. Of the $515.3 million in the Company's investment securities portfolio at March 31, 2015, $290.6 million are designated as available-for-sale. Some of these securities are pledged to secure collateralized deposits, borrowings and for other purposes as required or permitted by law. The remaining investment securities could be pledged or sold to enhance liquidity, if necessary.

For the three months ended March 31, 2015, net cash provided by operating activities and financing activities was $23.5 million and $90.1 million, respectively, while net cash used in investing activities was $102.5 million, for a net increase in cash and cash equivalents of $11.0 million since December 31, 2014. The primary cash outflows during the first quarter of 2015 related to the increase in loans and repayment of short-term borrowings, while the primary cash inflows related to cash received from core operations, increases in the deposits, and proceeds from investment securities.

Contractual Obligations

We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no significant changes in those obligations during the three months ended March 31, 2015.

Off-Balance Sheet Arrangements

In the ordinary course of business, we enter into various types of transactions that include commitments to extend credit that are not included in loans receivable, net, presented on our consolidated balance sheets. We apply the same credit standards to these commitments as we use in all our lending activities and have included these commitments in our lending risk evaluations. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. We do not expect that all such commitments will fund. See Note 11 to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report.

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, 2014, 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 BNC’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, 2014 to March 31, 2015.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that

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such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of March 31, 2015, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2015. No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 11 to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report.

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, 2014, 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. There have been no material changes in the risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014.

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

The Company had no unregistered sales of equity securities and did not purchase any shares of its common stock during the period covered by this report.

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.

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SIGNATURES

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

BNC BANCORP

Date:	May 8, 2015	By: /s/ Richard D. Callicutt II
		Richard D. Callicutt II
		President and Chief Executive Officer

Date:	May 8, 2015	By: /s/ David B. Spencer
		David B. Spencer
		Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Amended and Restated Bylaws of BNC Bancorp (effective January 21, 2015) (incorporated by reference from Exhibit 3.2 to the registrant's Current Report on Form 8-K filed on January 27, 2015).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-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 Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley-Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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