BNC Bancorp (BNNC) 10-Q 2015 Q3 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 September 30, 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 November 4, 2015 was 38,147,976.

BNC BANCORP

TABLE OF CONTENTS

	Page No.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	3
Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014	4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014	5
Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2015 and 2014	6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	7
Notes to Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3. Quantitative and Qualitative Disclosures About Market Risk	59
Item 4. Controls and Procedures	59
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	60
Item 1A. Risk Factors	60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3. Defaults Upon Senior Securities	60
Item 4. Mine Safety Disclosures	60
Item 5. Other Information	60
Item 6. Exhibits	60
SIGNATURES	61
EXHIBIT INDEX	62

2

PART I.     FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	September 30, 2015(Unaudited)			December 31, 2014
Assets
Cash and due from banks	$	50,883		$	44,659
Interest-earning deposits in other banks	19,624			40,535
Investment securities available-for-sale, at fair value	404,594			269,290
Investment securities held-to-maturity, at amortized cost (fair value of $245,131 and $241,997 at September 30, 2015 and December 31, 2014, respectively)	241,138			237,092
Federal Home Loan Bank stock, at cost	8,511			10,562
Loans held for sale	37,437			37,280
Loans:
Originated loans	2,587,572			2,116,441
Acquired loans	1,391,061			958,657
Less allowance for loan losses	(30,833		)	(30,399		)
Net loans	3,947,800			3,044,699
Accrued interest receivable	15,528			14,514
Premises and equipment, net	99,955			87,761
Other real estate owned	37,280			42,531
FDIC indemnification asset	2,080			5,097
Investment in bank-owned life insurance	115,914			93,396
Goodwill and other intangible assets, net	146,623			83,701
Other assets	73,751			61,391
Total assets	$	5,201,118		$	4,072,508
Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand	$	738,529		$	534,792
Interest-bearing demand	2,157,801			1,657,931
Time deposits	1,478,161			1,203,674
Total deposits	4,374,491			3,396,397
Short-term borrowings	77,409			127,934
Long-term debt	189,661			133,814
Accrued expenses and other liabilities	37,060			23,975
Total liabilities	4,678,621			3,682,120
Shareholders' equity:
Preferred stock, no par value; authorized 20,000,000 shares; 0 shares issued and outstanding at September 30, 2015 and December 31, 2014	—			—
Common stock, no par value; authorized 60,000,000 shares; 33,317,088 and 27,777,737 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	389,802			281,488
Common stock, non-voting, no par value; authorized 20,000,000 shares; 4,820,844 shares issued and outstanding at September 30, 2015 and December 31, 2014	33,507			33,507
Retained earnings	91,753			65,211
Stock in directors rabbi trust	(4,964		)	(3,429		)
Directors deferred fees obligation	4,964			3,429
Accumulated other comprehensive income	7,435			10,182
Total shareholders' equity	522,497			390,388
Total liabilities and shareholders' equity	$	5,201,118		$	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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Interest Income:
Loans, including fees	$	48,050	$	36,330	$	127,964	$	101,490
Investment securities:
Taxable	1,842		1,139		4,269		3,415
Tax-exempt	3,259		3,257		9,600		9,931
Interest-earning balances and other	162		150		414		391
Total interest income	53,313		40,876		142,247		115,227
Interest Expense:
Demand deposits	2,168		1,377		5,575		4,163
Time deposits	3,097		2,218		9,020		7,030
Short-term borrowings	37		106		152		327
Long-term debt	1,752		1,035		4,438		2,952
Total interest expense	7,054		4,736		19,185		14,472
Net Interest Income	46,259		36,140		123,062		100,755
Provision for loan losses	198		1,304		609		6,005
Net interest income after provision for loan losses	46,061		34,836		122,453		94,750
Non-Interest Income:
Mortgage fees	3,031		2,128		8,307		5,640
Service charges	2,284		1,631		5,738		4,457
Earnings on bank-owned life insurance	705		559		1,960		1,748
Gain (loss) on sale of investment securities, net	794		54		839		(511		)
Other	2,355		1,935		7,318		5,903
Total non-interest income	9,169		6,307		24,162		17,237
Non-Interest Expense:
Salaries and employee benefits	20,114		15,759		53,726		44,780
Occupancy	3,211		2,647		8,410		6,788
Furniture and equipment	1,655		1,652		4,880		4,820
Data processing and supplies	1,268		895		3,502		2,864
Advertising and business development	493		667		1,756		2,041
Insurance, professional and other services	3,155		2,128		7,256		6,936
FDIC insurance assessments	824		821		2,261		2,232
Loan, foreclosure and other real estate owned expenses	2,352		2,586		8,213		6,307
Other	5,113		2,673		11,571		7,343
Total non-interest expense	38,185		29,828		101,575		84,111
Income before income tax expense	17,045		11,315		45,040		27,876
Income tax expense	5,106		3,047		13,329		6,991
Net Income	$	11,939	$	8,268	$	31,711	$	20,885
Basic earnings per common share	$	0.31	$	0.28	$	0.92	$	0.73
Diluted earnings per common share	$	0.31	$	0.28	$	0.92	$	0.73
Dividends declared and paid per common share	$	0.05	$	0.05	$	0.15	$	0.15

See accompanying notes to Consolidated Financial Statements.

4

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	11,939		$	8,268		$	31,711		$	20,885
Other comprehensive (loss) income:
Investment securities:
Unrealized holding gains (losses) on investments securities available-for-sale	908			2,910			(827		)	12,745
Tax effect	(336		)	(1,077		)	306			(4,716		)
Reclassification of (gains) losses recognized in net income	(794		)	(54		)	(839		)	511
Tax effect	293			20			310			(189		)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity	(204		)	(161		)	(561		)	(657		)
Tax effect	76			59			208			243
Net of tax amount	(57		)	1,697			(1,403		)	7,937
Cash flow hedging activities:
Unrealized holding (losses) gains	(1,390		)	484			(2,134		)	(2,088		)
Tax effect	514			(179		)	790			773
Reclassification of losses recognized in net income	—			—			—			457
Tax effect	—			—			—			(171		)
Net of tax amount	(876		)	305			(1,344		)	(1,029		)
Total other comprehensive (loss) income	(933		)	2,002			(2,747		)	6,908
Total comprehensive income	$	11,006		$	10,270		$	28,964		$	27,793

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	—	—		—		—			—		—			20,885			—			—		—			20,885
Directors deferred fees	—	—		—		—			—		—			—			(34		)	34		—			—
Other comprehensive income, net of tax	—	—		—		—			—		—			—			—			—		6,908			6,908
Common stock repurchased	—	—		—		—			(300,000	)	(5,081		)	—			—			—		—			(5,081		)
Common stock issued pursuant to:																									—
Acquisition of South Street Financial	—	—		1,139,931		19,778			—		—			—			—			—		—			19,778
Purchase of Community First Financial	—	—		1,190,763		20,128			—		—			—			—			—		—			20,128
Stock-based compensation	—	—		133,327		1,187			—		—			—			—			—		—			1,187
Shares withheld for payment of income taxes	—	—		(32,279	)	(542		)	—		—			—			—			—		—			(542		)
Stock options exercised	—	—		62,258		701			—		—			—			—			—		—			701
Shares traded to exercise stock options	—	—		(37,158	)	(663		)	—		—			—			—			—		—			(663		)
Excess income tax benefit	—	—		—		27			—		—			—			—			—		—			27
Dividend reinvestment plan	—	—		14,827		252			—		—			—			—			—		—			252
Cash dividends:
Common stock, $0.15 per share	—	—		—		—			—		—			(4,263		)	—			—		—			(4,263		)
Balance, September 30, 2014	—	$	—	23,782,501		$	222,552		5,692,213		$	39,700		$	58,181		$	(3,177	)	$	3,177	$	10,214		$	330,647
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	—	—		—		—			—		—			31,711			—			—		—			31,711
Directors deferred fees	—	—		—		—			—		—			—			(1,535		)	1,535		—			—
Other comprehensive loss, net of tax	—	—		—		—			—		—			—			—			—		(2,747		)	(2,747		)
Common stock repurchased	—	—		(200,000	)	(3,622		)	—		—			—			—			—		—			(3,622		)
Common stock issued pursuant to:
Acquisition of Valley Financial	—	—		5,500,697		108,700			—		—			—			—			—		—			108,700
Stock-based compensation	—	—		111,413		1,994			—		—			—			—			—		—			1,994
Dividend reinvestment plan	—	—		12,673		231			—		—			—			—			—		—			231
Stock options exercised	—	—		206,140		2,440			—		—			—			—			—		—			2,440
Shares withheld for payment of taxes	—	—		(31,385	)	(576		)	—		—			—			—			—		—			(576		)
Shares traded to exercise stock options	—	—		(60,187	)	(1,047		)	—		—			—			—			—		—			(1,047		)
Excess income tax benefit	—	—		—		194			—		—			—			—			—		—			194
Cash dividends:
Common stock, $0.15 per share	—	—		—		—			—		—			(5,169		)	—			—		—			(5,169		)
Balance, September 30, 2015	—	$	—	33,317,088		$	389,802		4,820,844		$	33,507		$	91,753		$	(4,964	)	$	4,964	$	7,435		$	522,497

See accompanying notes to Consolidated Financial Statements.

6

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2015			2014
Operating activities
Net income	$	31,711		$	20,885
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	609			6,005
Depreciation and amortization	4,792			4,341
Amortization of premiums, net	3,048			3,200
Amortization of intangible assets	2,782			1,621
Accretion of fair value purchase accounting adjustments	(16,621		)	(8,697		)
Cash flow hedge expense	—			163
Stock-based compensation	1,994			1,187
Deferred compensation	265			338
Earnings on bank-owned life insurance	(1,960		)	(1,748		)
(Gain) loss on sale of investment securities, net	(839		)	511
Gain on disposal of premises and equipment	(382		)	(21		)
Losses on other real estate owned	4,359			3,136
Gain on sale of loans held for sale	(8,307		)	(5,640		)
Origination of loans held for sale	(274,734		)	(211,835		)
Proceeds from sales of loans held for sale	281,344			212,809
Decrease in accrued interest receivable	1,249			1,768
Payments received from FDIC under loss-share agreements	4,758			9,076
Decrease (increase) in other assets	1,278			(9,164		)
Increase (decrease) in accrued expenses and other liabilities	12,382			(10,863		)
Net cash provided by operating activities	47,728			17,072
Investing activities
Purchases of investment securities available-for-sale	(137,909		)	(21,339		)
Purchases of investment securities held-to-maturity	(17,910		)	(5,269		)
Proceeds from sales of investment securities available-for-sale	118,709			40,646
Proceeds from sales of investment securities held-to-maturity	—			8,651
Proceeds from maturities and payments of investment securities available-for-sale	32,865			36,899
Proceeds from maturities and payments of investment securities held-to-maturity	11,788			2,831
Redemption of Federal Home Loan Bank stock	6,389			1,974
Net increase in loans	(285,871		)	(167,127		)
Purchases of premises and equipment	(7,801		)	(3,201		)
Proceeds from disposal of premises and equipment	1,416			21
Investment in bank-owned life insurance	(674		)	(171		)
Investment in other real estate owned	(1,414		)	(957		)
Proceeds from sales of other real estate owned	15,503			23,116
Net cash received from acquisitions	13,263			74,418
Net cash used in investing activities	(251,646		)	(9,508		)

7

Financing activities
Net increase (decrease) in deposits	332,088			(51,115		)
Net (decrease) increase in short-term borrowings	(136,316		)	(4,029		)
Net increase in long-term-debt	1,202			58,500
Common stock repurchased	(3,622		)	(5,081		)
Common stock issued from exercise of stock options, net of taxes	2,440			38
Common stock issued pursuant to dividend reinvestment plan	231			252
Common stock repurchased in lieu of income taxes	(1,623		)	(542		)
Cash dividends paid	(5,169		)	(4,263		)
Net cash provided by (used in) financing activities	189,231			(6,240		)
Net (decrease) increase in cash and cash equivalents	(14,687		)	1,324
Cash and cash equivalents, beginning of period	85,194			108,390
Cash and cash equivalents, end of period	$	70,507		$	109,714
Supplemental Statement of Cash Flows Disclosure
Interest paid	$	18,379		$	17,863
Income taxes paid	1,785			2,400
Summary of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	7,205		$	17,055
Transfer of loans held for sale to loans	2,405			14,659
FDIC indemnification asset increase for losses, net	2,026			1,795

See accompanying notes to Consolidated Financial Statements.

8

BNC BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 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 Carolina, South Carolina, and Virginia. 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 Board of Governors of the Federal Reserve System. 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 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 September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805), which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize measurement period adjustments during the period in which it determines the amount of the adjustment. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30), 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 its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 Amendments to the Consolidation Analysis (Topic 810), 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 of 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 does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

9

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. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The ASU may be adopted using either a modified retrospective method or a full retrospective method. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (Subtopic 310-40), 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 Southcoast Financial Corporation

On August 14, 2015, the Company entered into a Purchase and Assumption Agreement to acquire Southcoast Financial Corporation ("Southcoast"), the holding company for Southcoast Community Bank. Southcoast operates ten branches in and around Charleston, South Carolina and has approximately $506 million in total assets.

Under the merger agreement, Southcoast's shareholders will receive a fixed price of $13.35 for each share of Southcoast 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 the acquisition will close in the first quarter of 2016, subject to customary closing conditions, including regulatory approval and approval of Southcoast’s shareholders.

Acquisition of Branches from CertusBank, N.A.

On October 13, 2015, the Company completed the acquisition of seven branches in upstate South Carolina from CertusBank, N.A., pursuant to the terms of the Purchase and Assumption Agreement dated June 1, 2015.

The Company is in the process of obtaining third-party valuations to determine the fair value of assets acquired and liabilities assumed from CertusBank, N.A. As a result, it is impracticable to disclose the preliminary purchase price allocation as of the filing date of these unaudited consolidated financial statements.

Acquisition of Valley Financial Corporation

On July 1, 2015, the Company completed the acquisition of Valley Financial Corporation ("Valley"), the holding company for Valley Bank, pursuant to the terms of the Agreement and Plan of Merger dated November 17, 2014. Under the merger agreement, Valley's shareholders received 1.1081 shares of the Company's voting common stock for each share of Valley common stock owned.

10

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

	As Recorded by Valley			Fair Value Adjustments				As Recorded by BNC
Assets	(Dollars in thousands)
Cash and due from banks	$	13,263		$	—			$	13,263
Investment securities available-for-sale	152,125			(796		)	(1)	151,329
Federal Home Loan Bank stock, at cost	4,338			—				4,338
Loans	624,006			(15,973		)	(2)	608,033
Premises and equipment	8,934			892			(3)	9,826
Accrued interest receivable	2,263			—				2,263
Other real estate owned	8,114			—				8,114
Core deposit intangible	—			6,964			(4)	6,964
Other assets	31,297			3,641			(5)	34,938
Total assets acquired	$	844,340		$	(5,272	)		839,068
Liabilities
Deposits	$	(646,053	)	$	(1,086	)	(6)	(647,139		)
Borrowings	(141,087		)	548			(7)	(140,539		)
Other liabilities	(972		)	(458		)	(8)	(1,430		)
Total liabilities assumed	$	(788,112	)	$	(996	)		(789,108		)
Net assets acquired								49,960
Total consideration paid								108,700
Goodwill								$	58,740

Explanation of fair value adjustments:

(1) Adjustment to reflect estimated fair value of investment securities available-for-sale.

(2) Adjustment to reflect estimated fair value of loans.

(3) Adjustment to reflect estimated fair value of premises and equipment.

(4) Adjustment to reflect recording of core deposit intangible.

(5) Adjustment to reflect recording of deferred tax asset recognized from acquisition.

(6) Adjustment to reflect estimated fair value of time deposits based on market rates for similar products.

(7) Adjustment to reflect estimated fair value of borrowings based on market rates for similar products.

(8) Adjustment to reflect the estimated fair market value of certain leases.

A summary of the consideration paid is as follows:

	(Dollars in thousands)
Common stock issued (5,500,697 shares)	$	107,924
Fair value of Valley stock options assumed	773
Cash payments to shareholders	3
Total consideration paid	$	108,700

With this acquisition, the Company expanded its footprint into Roanoke, Virginia with the addition of nine branches and an experienced in-market team that enhances the Company’s ability to compete in that market. The Company projects cost savings 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.

11

The following table presents financial information regarding the former Valley operations included in our Consolidated Statements of Income from the date of acquisition through September 30, 2015 under the column “Actual from acquisition date.” These amounts do not include direct costs as explained above. The following table presents unaudited pro-forma information as if the acquisition of Valley had occurred on January 1, 2015 under the “Pro-forma” columns. In addition, the following table presents unaudited pro-forma information as if the acquisition of Valley, Harbor Bank Group, Inc., Community First Financial Group, Inc., and South Street Financial Corp. had occurred on January 1, 2014 under the “Pro-forma” columns. This pro-forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects and is based on our historical results for the periods presented. Transaction-related costs related to the acquisition are not reflected in the pro-forma amounts. The pro-forma information does not necessarily reflect the results of operations that would have occurred had the Company acquired Valley at the beginning of 2014. Cost savings are also not reflected in the unaudited pro-forma amounts for three and nine months ended September 30, 2015 and 2014, respectively (dollars in thousands).

	Actual from acquisition date through September 30, 2015		Pro-forma for three months ended September 30,				Pro-forma for nine months ended September 30,
			2015		2014		2015		2014
Net interest income	$	6,390	$	46,259	$	45,439	$	137,779	$	134,836
Non-interest income	413		9,169		8,302		26,944		24,637
Net income	1,382		11,939		12,413		28,498		36,836
Pro-forma earnings per share:
Basic			$	0.31	$	0.33	$	0.75	$	0.97
Diluted			$	0.31	$	0.32	$	0.75	$	0.96

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:

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	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

Explanation of fair value adjustments:

(1) Adjustment to reflect estimated fair value of loans.

(2) Adjustment to reflect recording of core deposit intangible.

(3) Adjustment to reflect recording of deferred tax asset recognized from acquisition.

(4) Adjustment to reflect estimated fair value of time deposits based on market rates for similar products.

(5) Adjustment to reflect estimated fair value of borrowings based on market rates for similar products.

(6) Adjustment to reflect the estimated fair market value of certain leases.

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.

13

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

Explanation of fair value adjustments:

(1) Adjustment to reflect estimated fair value of loans.

(2) Adjustment to reflect estimated fair value of premises and equipment.

(3) Adjustment to reflect estimated fair value of other real estate owned.

(4) Adjustment to reflect recording of core deposit intangible.

(5) Adjustment to reflect recording of deferred tax asset recognized from acquisition.

(6) Adjustment to reflect estimated fair value of time deposits based on market rates for similar products.

(7) Adjustment to reflect the estimated fair market value of certain leases.

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.

14

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 Albemarle, 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:

	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 to reflect estimated fair value of loans.

(2) Adjustment to reflect estimated fair value of premises and equipment.

(3) Adjustment to reflect estimated fair value of other real estate owned.

(4) Adjustment to reflect recording of core deposit intangible.

(5) Adjustment to reflect recording of deferred tax asset recognized from acquisition.

(6) Adjustment to reflect estimated fair value of time deposits based on market rates for similar products.

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.

15

The Company incurred transaction-related costs of $4.9 million and $9.0 million during the three and nine months ended September 30, 2015, which were expensed as incurred as a component of non-interest expense. Transaction-related costs primarily included, but were 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.

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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(Dollars in thousands, except per share amounts)
Net income	$	11,939	$	8,268	$	31,711	$	20,885
Weighted average participating common shares - basic	38,057,633		29,471,545		34,460,987		28,558,941
Effects of dilutive Stock Rights	107,448		95,769		83,925		107,539
Weighted average participating common shares - diluted	38,165,081		29,567,314		34,544,912		28,666,480
Basic earnings per common share	$	0.31	$	0.28	$	0.92	$	0.73
Diluted earnings per common share	$	0.31	$	0.28	$	0.92	$	0.73

For the three and nine months ended September 30, 2015 and 2014, respectively, there were no shares of Stock Rights excluded in computing diluted common shares outstanding.

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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:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2015	(Dollars in thousands)
Available-for-sale:
U.S. Government agencies	$	12,024	$	348	$	—	$	12,372
State and municipals	171,229		9,819		41		181,007
Corporate debt securities	36,758		38		136		36,660
Asset-backed debt securities	74,720		10		1,204		73,526
Equity securities	11,563		207		497		11,273
Mortgage-backed securities:
Residential government sponsored	87,050		1,009		68		87,991
Other government sponsored	1,664		101		—		1,765
	$	395,008	$	11,532	$	1,946	$	404,594
Held-to-maturity:
State and municipals	$	227,138	$	5,494	$	608	$	232,024
Corporate debt securities	14,000		67		960		13,107
	$	241,138	$	5,561	$	1,568	$	245,131

	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
Asset-backed 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
Asset-backed 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 September 30, 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.

17

	Amortized Cost		Fair Value
	(Dollars in thousands)
Available-for-sale:
Due within one year	$	233	$	237
Due after one through five years	19,031		20,074
Due after five through ten years	39,581		39,997
Due after ten years	324,600		333,013
Total debt securities	383,445		393,321
Equity securities	11,563		11,273
	$	395,008	$	404,594
Held-to-maturity:
Due within one year	$	1,546	$	1,572
Due after one year through five years	25,706		25,698
Due after five through ten years	18,132		18,213
Due after ten years	195,754		199,648
	$	241,138	$	245,131

At September 30, 2015 and December 31, 2014, investment securities with an estimated fair value of approximately $348.5 million and $269.2 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Proceeds from sales	$	99,626		$	15,140		$	119,503		$	49,297
Gross realized gains on sales	$	812		$	137		$	894		$	474
Gross realized losses on sales	(18		)	(83		)	(55		)	(985		)
Total realized gains (losses), net	$	794		$	54		$	839		$	(511	)

During the nine months ended September 30, 2014, the Company made two sales of investment securities classified as held-to-maturity. The Company sold $3.3 million of 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. As a result of the downgrade of the securities, the Company's intent to hold these securities changed and management elected to divest of its interest in the downgraded securities. The Company recorded a realized gain of $0.2 million on this sale.

The Company also sold $5.2 million of corporate debt securities due to regulatory capital restrictions. The Company recorded a realized loss of $0.1 million on this sale.

As the Company's intent and ability to hold the remaining held-to-maturity securities was not impacted by these sales, the Company did not reclassify the remaining securities to the available-for-sale category.

18

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
September 30, 2015	(Dollars in thousands)
Available-for-sale:
State and municipals	3	$	7,622	$	27	1	$	1,054	$	14	$	8,676	$	41
Corporate debt securities	3	13,974		111		1	2,975		25		16,949		136
Asset-backed debt securities	17	61,056		870		1	4,457		334		65,513		1,204
Equity securities	1	5,350		67		1	549		430		5,899		497
Mortgage-backed securities	5	6,147		30		2	2,299		38		8,446		68
	29	$	94,149	$	1,105	6	$	11,334	$	841	$	105,483	$	1,946
Held-to-maturity:
State and municipals	41	$	49,090	$	393	11	$	9,690	$	215	$	58,780	$	608
Corporate debt securities	—	—		—		1	3,040		960		3,040		960
	41	49,090		393		12	12,730		1,175		61,820		1,568

	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
Asset-backed 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 September 30, 2015. The Company continually assesses the risk of credit default for the municipal bond portfolio and believes the portfolio has a low risk of credit default. The corporate debt securities are issued by well-capitalized and sound financial institutions. The asset-backed debt securities are rated at least Aa2 by Moody’s and the majority of these securities have been in an unrealized loss position for less than 12 months. The gross unrealized losses reported for the mortgage-backed securities relate to investment securities issued or guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, or the 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, as opposed to credit concerns related to the respective issuers.

The equity securities held by the Company in an unrealized loss position at September 30, 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

19

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 September 30, 2015.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major categories of loans are presented below:

	September 30, 2015						December 31, 2014
	Originated		Acquired (1)		Total		Originated		Acquired (1)		Total
	(Dollars in thousands)
Commercial real estate	$	1,510,589	$	622,130	$	2,132,719	$	1,181,492	$	403,672	$	1,585,164
Commercial construction	277,251		63,698		340,949		265,968		48,668		314,636
Commercial and industrial	235,879		104,332		340,211		154,132		38,200		192,332
Leases	25,593		—		25,593		21,100		—		21,100
Total commercial	2,049,312		790,160		2,839,472		1,622,692		490,540		2,113,232
Residential construction	57,349		34,213		91,562		43,298		29,854		73,152
Residential mortgage	468,141		560,835		1,028,976		439,600		432,818		872,418
Consumer and other	12,770		5,853		18,623		10,851		5,445		16,296
Total portfolio loans	$	2,587,572	$	1,391,061	$	3,978,633	$	2,116,441	$	958,657	$	3,075,098

(1) Amount includes $45.5 million and $137.5 million of acquired loans covered under FDIC loss-share agreements at September 30, 2015 and December 31, 2014, respectively. The unpaid principal balance for acquired loans covered under FDIC loss-share agreements was $46.0 million and $140.4 million at September 30, 2015 and December 31, 2014, respectively.

On July 1, 2015, the Company’s loss-share agreement related to the non-single family residential mortgage loans acquired from Beach First National Bank (“Beach First”) expired. Accordingly, the Company will bear all future losses on this portfolio of loans. Immediately prior to the expiration of the loss-sharing arrangement, the loans in this portfolio had a carrying value of $74.4 million.

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 nine months ended September 30, 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
Reduction from payments and foreclosures, net	—			(19,337		)	—			(54,489		)
Reduction from expiration of loss-share coverage	480			(74,400		)	—			—
Reclass from non-accretable to accretable yield	(113		)	113			(221		)	221
Accretion	1,662			1,662			4,066			4,066
Balance at end of period	$	(184	)	$	45,497		$	(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 following table presents loans acquired during the nine months ended September 30, 2015, at acquisition date, accounted for under ASC 310-30:

20

Contractually required payments receivable	$	35,772
Contractual cash flows not expected to be collected (non-accretable)	(6,368		)
Expected cash flows	29,404
Interest component of expected cash flows	(480		)
Fair value of loans acquired	$	28,924

The acquisition date unpaid balance of loans acquired during the nine months ended September 30, 2015 that did not have credit deterioration was $588.4 million with an estimated fair value of $575.7 million. The discount will be amortized on a level-yield basis over the economic life of the loans.

The Company has the ability to borrow funds from the Federal Home Loan Bank (“FHLB”) and from the Federal Reserve Bank. At September 30, 2015 and December 31, 2014, real estate loans with carrying values of $1.51 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 September 30, 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 June 30, 2015	$	12,940		$	5,547		$	3,255		$	92		$	463	$	8,138		$	200		$	30,635
Charge-offs	(593		)	—			(42		)	—			—		(536		)	(36		)	(1,207		)
Recoveries	403			113			689			—			5		313			10			1,533
Provision (1)	271			(842		)	78			(4		)	57		581			57			198
Change in FDIC indemnification asset (1)	1			157			(100		)	—			—		(386		)	2			(326		)
Balance September 30, 2015	$	13,022		$	4,975		$	3,880		$	88		$	525	$	8,110		$	233		$	30,833

For the three months ended September 30, 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 June 30, 2014	$	12,087		$	5,184		$	3,331		$	54		$	160	$	9,036		$	277		$	30,129
Charge-offs	(878		)	(324		)	(379		)	—			—		(1,267		)	(18		)	(2,866		)
Recoveries	680			377			383			—			3		1,002			96			2,541
Provision (2)	2,299			760			(509		)	(28		)	334		(1,391		)	(161		)	1,304
Change in FDIC indemnification asset (2)	35			(265		)	(150		)	—			—		(1		)	(5		)	(386		)
Balance September 30, 2014	$	14,223		$	5,732		$	2,676		$	26		$	497	$	7,379		$	189		$	30,722

For the nine months ended September 30, 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	(2,153		)	(80		)	(151		)	—			—			(1,223		)	(302		)	(3,909		)
Recoveries	955			1,606			1,175			—			39			782			130			4,687
Provision (1)	1,616			(578		)	(200		)	(15		)	(87		)	(331		)	204			609
Change in FDIC indemnification asset (1)	(81		)	(284		)	(170		)	—			3			(431		)	10			(953		)
Balance September 30, 2015	$	13,022		$	4,975		$	3,880		$	88		$	525		$	8,110		$	233		$	30,833

21

For the nine months ended September 30, 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	(2,956		)	(3,468		)	(2,128		)	—			—			(3,705		)	(182		)	(12,439		)
Recoveries	1,190			1,693			805			—			16			1,650			118			5,472
Provision (2)	1,401			1,457			1,081			(30		)	274			1,847			(25		)	6,005
Change in FDIC indemnification asset (2)	(164		)	(688		)	(219		)	—			(6		)	(143		)	29			(1,191		)
Balance September 30, 2014	$	14,223		$	5,732		$	2,676		$	26		$	497		$	7,379		$	189		$	30,722

(1) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $0.1 million and $(0.1) million for the three and nine months ended September 30, 2015, respectively. This resulted in a decrease in the FDIC indemnification asset of $0.3 million and $1.0 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 $(0.5) million and $(1.3) million for the three and nine months ended September 30, 2015, respectively.

(2) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(0.1) million and $(0.3) million for the three and nine months ended September 30, 2014, respectively. This resulted in a decrease in the FDIC indemnification asset of $0.4 million and $1.2 million, which is the difference between the net provision on covered loans and the total additions to the allowance for loan losses allocable to the covered loan portfolio of $(0.5) million and $(1.5) million for the three and nine months ended September 30, 2014, respectively.

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 September 30, 2015:
Specific reserves:
Impaired loans	$	1,817	$	165	$	617	$	—	$	53	$	1,637	$	1	$	4,290
Purchase credit impaired loans	1,327		406		59		—		16		1,208		4		3,020
Total specific reserves	3,144		571		676		—		69		2,845		5		7,310
General reserves	9,878		4,404		3,204		88		456		5,265		228		23,523
Total	$	13,022	$	4,975	$	3,880	$	88	$	525	$	8,110	$	233	$	30,833
Loans:
Individually evaluated for impairment	$	25,528	$	3,480	$	1,642	$	—	$	478	$	15,995	$	10	$	47,133
Purchase credit impaired loans	92,669		15,728		3,080		—		1,252		44,393		219		157,341
Loans collectively evaluated for impairment	2,014,522		321,741		335,489		25,593		89,832		968,588		18,394		3,774,159
Total	$	2,132,719	$	340,949	$	340,211	$	25,593	$	91,562	$	1,028,976	$	18,623	$	3,978,633
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

22

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
September 30, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	10,477	$	10,446	$	1,737	$	14,136	$	14,099
Commercial construction	1,595		1,591		142		1,714		1,707
Commercial and industrial	1,425		1,417		572		—		—
Residential construction	345		344		41		—		—
Residential mortgage	7,504		7,480		819		3,278		3,266
Consumer and other	10		10		1		—		—
Total originated	21,356		21,288		3,312		19,128		19,072
Acquired:
Commercial real estate	660		673		80		1,103		1,125
Commercial construction	182		181		23		181		181
Commercial and industrial	223		227		45		—		27
Residential construction	111		111		12		24		588
Residential mortgage	4,214		4,627		819		4,877		5,029
Total acquired	5,390		5,819		979		6,185		6,950
Total impaired loans	$	26,746	$	27,107	$	4,291	$	25,313	$	26,022

	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 impaired loans	$	22,045	$	22,027	$	2,989	$	33,293	$	33,782

23

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 September 30,								Nine Months Ended September 30,
	2015				2014				2015				2014
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(Dollars in thousands)
Impaired loans with allowance:
Commercial real estate	$	11,238	$	109	$	13,364	$	121	$	12,120	$	302	$	27,158	$	311
Commercial construction	1,620		15		1,411		12		1,638		53		5,905		72
Commercial and industrial	1,487		17		941		5		1,456		46		603		10
Residential construction	382		4		352		3		378		11		433		4
Residential mortgage	7,318		46		6,902		32		7,329		105		11,299		129
Consumer and other	10		—		179		3		42		1		21		—
Total impaired loans with allowance	$	22,055	$	191	$	23,149	$	176	$	22,963	$	518	$	45,419	$	526
Impaired loans with no allowance:
Commercial real estate	$	17,621	$	147	$	13,901	$	143	$	19,766	$	386	$	9,146	$	149
Commercial construction	2,001		14		7,145		41		2,406		44		6,667		166
Commercial and industrial	281		1		21		—		316		1		481		6
Residential construction	82		—		—		—		101		—		—		—
Residential mortgage	12,646		43		11,985		73		12,588		89		11,389		164
Consumer and other	—		—		12		—		81		—		41		—
Total impaired loans with no allowance	$	32,631	$	205	$	33,064	$	257	$	35,258	$	520	$	27,724	$	485

For the three and nine months ended September 30, 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 September 30, 2015 and December 31, 2014, the Company had $1.6 million and $2.5 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in progress.

24

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
September 30, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	743	$	741	$	—	$	1,984	$	3,468	$	1,507,121	$	1,510,589
Commercial construction	—		83		—		594		677		276,574		277,251
Commercial and industrial	372		129		—		169		670		235,209		235,879
Leases	—		—		—		—		—		25,593		25,593
Residential construction	—		—		—		—		—		57,349		57,349
Residential mortgage	1,067		310		—		3,167		4,544		463,597		468,141
Consumer and other	52		—		—		—		52		12,718		12,770
Total originated	2,234		1,263		—		5,914		9,411		2,578,161		2,587,572
Acquired:
Commercial real estate	—		658		—		4,847		5,505		616,625		622,130
Commercial construction	41		—		—		443		484		63,214		63,698
Commercial and industrial	57		314		—		120		491		103,841		104,332
Residential construction	—		52		—		134		186		34,027		34,213
Residential mortgage	588		348		—		8,749		9,685		551,150		560,835
Consumer and other	23		12		—		29		64		5,789		5,853
Total acquired	709		1,384		—		14,322		16,415		1,374,646		1,391,061
Total loans	$	2,943	$	2,647	$	—	$	20,236	$	25,826	$	3,952,807	$	3,978,633

	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

25

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 practicable, 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
September 30, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	1,440,104	$	42,584	$	27,901	$	—	$	—	$	1,510,589
Commercial construction	264,222		6,356		6,673		—		—		277,251
Commercial and industrial	225,869		5,578		4,432		—		—		235,879
Leases	25,593		—		—		—		—		25,593
Residential construction	56,981		24		344		—		—		57,349
Residential mortgage	436,247		21,059		10,835		—		—		468,141
Consumer and other	12,177		583		10		—		—		12,770
Total originated	2,461,193		76,184		50,195		—		—		2,587,572
Acquired:
Commercial real estate	542,028		33,484		46,618		—		—		622,130
Commercial construction	46,501		5,520		11,541		136		—		63,698
Commercial and industrial	94,400		429		9,503		—		—		104,332
Residential construction	31,643		1,065		1,505		—		—		34,213
Residential mortgage	499,997		37,466		22,580		792		—		560,835
Consumer and other	5,693		131		28		1		—		5,853
Total acquired	1,220,262		78,095		91,775		929		—		1,391,061
Total loans	$	3,681,455	$	154,279	$	141,970	$	929	$	—	$	3,978,633

26

	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

Loan modifications are considered troubled debt restructurings ("TDR") if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings, which are considered and accounted for as impaired loans. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual status.

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 as 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. 

27

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

	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
September 30, 2015	(Dollars in thousands)
Commercial real estate	$	6,724	$	—	$	6,724	$	238
Commercial construction	894		48		942		15
Commercial and industrial	1,219		—		1,219		510
Residential mortgage	6,715		14		6,729		424
Consumer and other	10		—		10		1
Total modifications	$	15,562	$	62	$	15,624	$	1,188
Number of contracts	36		2		38

	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 September 30, 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 September 30, 2015				Nine Months Ended  September 30, 2015
	Term		Total		Term		Payment		Interest Only		Combination		Total
	(Dollars in thousands)
Commercial real estate	$	1,403	$	1,403	$	1,820	$	—	$	358	$	863	$	3,041
Commercial and industrial	—		—		93		419		231		—		743
Residential mortgage	149		149		149		—		—		—		149
Total modifications	$	1,552	$	1,552	$	2,062	$	419	$	589	$	863	$	3,933

	Three Months Ended September 30, 2014								Nine Months Ended September 30, 2014
	Term		Payment		Combination		Total		Term		Interest Only		Payment		Combination		Total
	(Dollars in thousands)
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	1,338	$	—	$	1,338
Commercial and industrial	—		—		158		158		—		—		—		158		158
Residential construction	—		—		—		—		—		479		—		—		479
Residential mortgage	755		—		—		755		755		—		—		—		755
Consumer and other	—		11		—		11		—		—		11		—		11
Total modifications	$	755	$	11	$	158	$	924	$	755	$	479	$	1,349	$	158	$	2,741

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. No TDRs defaulted during the three months ended September 30, 2015 and 2014, respectively.

	Nine Months Ended September 30,
	2015		2014
	(dollars in thousands)
Commercial real estate	$	—	$	1,210
Commercial construction	—		1,245
Residential mortgage	—		129
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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(Dollars in thousands)
Loans held for sale	$	37,437	$	20,906	$	37,437	$	20,906
Proceeds from sales of loans held for sale	105,373		76,206		281,344		212,809
Mortgage fees	3,031		2,128		8,307		5,640

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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 on April 9, 2010 and Blue Ridge Savings Bank on October 14, 2011.

Each loss-sharing arrangement consists of one single family residential mortgage loan agreement and one non-single family residential loan agreement. The non-single family residential loan loss-share agreements provide for FDIC loss-sharing to the end of the fiscal quarter five years from the purchase date and reimbursement to the FDIC to the end of the fiscal quarter eight years from the purchase date. The single family residential mortgage loan loss-share agreements provide for FDIC loss-sharing and reimbursement for recoveries to the FDIC to the end of the fiscal quarter ten years from the purchase date.

On July 1, 2015, the Company’s loss-share agreement related to the non-single family residential mortgage loans of Beach First expired. Accordingly, the Company will bear all future losses on this portfolio of loans and foreclosed real estate. Immediately prior to the expiration of the loss-sharing arrangement, the loans in this portfolio had a carrying value of $74.4 million and the foreclosed real estate in this portfolio had a carrying value of $0.5 million.

The following table presents activity for the FDIC indemnification asset for the nine months ended September 30, 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	173			1,061
Post-acquisition adjustments	1,568			(2,920		)
Receipt of payments from FDIC	(4,758		)	(9,930		)
Balance at end of period	$	2,080		$	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. The interest rate swap was designated as a hedge against 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.

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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 September 30, 2015 and December 31, 2014, the Company had notional amounts of $58.1 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.

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

	September 30, 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	$	58,074	Other assets	$	1,829	$	34,692	Other assets	$	723
Derivative liabilities:
Derivatives designated as hedging instruments:
Interest rate swap	$	125,000	Accrued expenses and other liabilities	$	2,442	$	125,000	Accrued expenses and other liabilities	$	308
Derivatives not designated as hedging instruments:
Interest rate swaps	$	58,074	Accrued expenses and other liabilities	$	1,829	$	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)
September 30, 2015
Derivative assets	$	1,829	$	—	$	1,829	$	—	$	—	$	1,829
Derivative liabilities	4,271		—		4,271		—		4,271		—
Total derivative instruments	$	6,100	$	—	$	6,100	$	—	$	4,271	$	1,829
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

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The Company has recorded a net loss of $1.5 million, net of tax, as component of accumulated other comprehensive income at September 30, 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 September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
	(Dollars in thousands)
Amount of net gains (losses) recorded in OCI (effective portion)	$	(876	)	$	305	$	(1,344	)	$	(1,315	)
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.

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 and nine months ended September 30, 2015 and 2014, respectively. 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 September 30, 2015, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $4.3 million, for which the Company has posted collateral with a fair value of $6.3 million.

NOTE 8 – BORROWINGS

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

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Repurchase agreements (1)	$	63,409	$	25,834
Advances from FHLB	14,000		102,100
Total short-term borrowings	$	77,409	$	127,934

(1) 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:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Advances from FHLB	$	83,108	$	52,000
Subordinated notes	71,896		60,000
Junior subordinated debentures	36,328		23,713
	191,332		135,713
Less: Prepayment penalty on extinguishment of FHLB advances	1,671		1,899
Total long-term debt	$	189,661	$	133,814

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

Maturity	Interest Rate (1)	September 30, 2015		December 31, 2014
		(Dollars in thousands)
July 2016	0.88%	$	—	$	2,000
August 2016	1.72%	—		2,000
January 2018	2.15%	—		15,000
January 2018	2.27%	—		10,000
March 2018	1.17%	10,000		—
July 2018	3.53%	10,000		—
July 2018	1.78%	3,000		3,000
September 2018	1.34%	20,000		—
June 2019	3.70%	5,000		—
June 2019	3.97%	13,000		—
January 2020	0.53%	10,000		10,000
January 2020	0.53%	10,000		10,000
		81,000		52,000
Unamortized premium		2,108		—
		$	83,108	$	52,000

(1) Interest rate on advances at September 30, 2015.

The advances from the FHLB have been made against a $783.9 million line of credit secured by real estate loans and investment securities with carrying values of $1.08 billion and $6.5 million, respectively, at September 30, 2015.

On July 1, 2015, in conjunction with the Valley acquisition, the Company acquired the Valley Trusts with outstanding subordinated debentures totaling $16.5 million. On the date of such acquisition, the Company recorded the assumed subordinated debentures owed to the Valley Trusts at estimated fair value of $12.6 million, based on an independent third party valuation, to reflect a current market interest rate for comparable obligations. The fair value adjustment of $3.9 million is being amortized, using a level-yield methodology over the estimated holding period of between approximately 18 and 22 years, as an increase in interest expense of the subordinated debentures owed to the Valley Trusts. In addition to the subordinated debentures of the Valley Trusts, the Company also acquired $0.5 million of trust common equity issued by the Valley Trusts.

The trust preferred securities issued by Valley Trust I and the related subordinated debentures bear interest, adjustable quarterly, at 90-day London Interbank Offered Rates (“LIBOR”) plus 3.10% and contain a final maturity of June 26, 2033. The trust preferred securities issued by Valley Trust II and the related subordinated debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 1.49% and contain a final maturity of December 15, 2035. The trust preferred securities issued by Valley Trust III and the related subordinated debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 1.73% and contain a final maturity of January 30, 2037.

In addition, the Company assumed a junior subordinated note in conjunction with the Valley acquisition with an outstanding balance of $10.8 million. The Company recorded the assumed subordinated note at an estimated fair value of $12.0 million, based on an independent third party valuation, to reflect a current market interest rate for comparable obligations. The fair value adjustment of $1.2 million is being amortized, using a level-yield methodology over the estimated holding period of approximately eight years, as a decrease in interest expense of the subordinated note. The junior subordinated note bears interest at a variable rate of LIBOR plus 5.00% per annum, with a floor of 5.50% and a cap of 9.50%, and has a maturity date of October 15, 2023. The interest rate for the subordinated note is 5.50% at September 30, 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 September 30, 2015.

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 September 30, 2015, commercial loans and investment securities with carrying values of $428.5 million and $2.8 million, respectively, were assigned under these arrangements. At September 30, 2015, the Company had approximately $244.5 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 September 30, 2015.

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NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME

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

Three Months Ended September 30, 2015 and 2014	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 June 30, 2015	$	5,968		$	3,064		$	(664	)	$	8,368
Other comprehensive income (loss) before reclassifications	572			—			(876		)	(304		)
Reclassifications from accumulated other comprehensive income	(501		)	(128		)	—			(629		)
Net current period other comprehensive income (loss)	71			(128		)	(876		)	(933		)
Balance at September 30, 2015	$	6,039		$	2,936		(1,540		)	$	7,435

Balance at June 30, 2014	$	4,606		$	3,499		$	107	$	8,212
Other comprehensive income before reclassifications	1,833			—			305		2,138
Reclassifications from accumulated other comprehensive income	(34		)	(102		)	—		(136		)
Net current period other comprehensive income (loss)	1,799			(102		)	305		2,002
Balance at September 30, 2014	$	6,405		$	3,397		$	412	$	10,214

Nine Months Ended September 30, 2015 and 2014	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 loss before reclassifications	(521		)	—			(1,344		)	(1,865		)
Reclassifications from accumulated other comprehensive income	(529		)	(353		)	—			(882		)
Net current period other comprehensive loss	(1,050		)	(353		)	(1,344		)	(2,747		)
Balance at September 30, 2015	$	6,039		$	2,936		(1,540		)	$	7,435

Balance at December 31, 2013	$	(1,946	)	$	3,811		$	1,441		$	3,306
Other comprehensive income (loss) before reclassifications	8,029			—			(1,315		)	6,714
Reclassifications from accumulated other comprehensive income	322			(414		)	286			194
Net current period other comprehensive income (loss)	8,351			(414		)	(1,029		)	6,908
Balance at September 30, 2014	$	6,405		$	3,397		$	412		$	10,214

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

	Three Months Ended September 30,
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	$	794		$	54		Gain (loss) on sale of investment securities, net
	(293		)	(20		)	Income tax expense
	501			34			Total, net of tax
Unrealized holding gains on investment securities transferred from available-for-sale to held-to-maturity (1)	204			161			Interest income - investment securities
	(76		)	(59		)	Income tax expense
	128			102			Total, net of tax
Total reclassifications for the period	$	629		$	136

	Nine Months Ended September 30,
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	$	839		$	(511	)	Gain (loss) on sale of investment securities, net
	(310		)	189			Income tax expense
	529			(322		)	Total, net of tax
Unrealized holding gains on investment securities transferred from available-for-sale to held-to-maturity (1)	561			657			Interest income - investment securities
	(208		)	(243		)	Income tax expense
	353			414			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	$	882		$	(194	)

(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.

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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.

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)
September 30, 2015
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	12,372	$	—	$	12,372	$	—
State and municipals	181,007		—		181,007		—
Corporate debt securities	36,660		—		36,660		—
Other debt securities	73,526		—		73,526		—
Equity securities	11,273		549		10,724		—
Mortgage-backed securities:
Residential government sponsored	87,991		—		87,991		—
Other government sponsored	1,765		—		1,765		—
Total investment securities available-for-sale	404,594		549		404,045		—
Derivative instruments:
Interest rate swap - not designated	1,829		—		1,829		—
Total derivative instruments	1,829		—		1,829		—
Total assets measured at fair value on a recurring basis	$	406,423	$	549	$	405,874	$	—
Liabilities:
Interest rate swap - cash flow hedge	$	2,442	$	—	$	2,442	—
Interest rate swap - not designated	1,829		—		1,829		—
Total liabilities measured at fair value on a recurring basis	$	4,271	$	—	$	4,271	$	—

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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.

37

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)
September 30, 2015
Loans held for sale	$	37,437	$	—	$	37,437	$	—
Impaired loans	197,164		—		—		197,164
Other real estate owned	37,280		—		—		37,280
Total assets measured at fair value on a nonrecurring basis	$	271,881	$	—	$	37,437	$	234,444
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 September 30, 2015:

Description	Fair Value (in thousands)		Valuation Methodology	Unobservable Inputs	Range of Inputs
Impaired loans	$	197,164	Appraised value	Discount to reflect current market conditions and ultimate collectability	0% - 20%
Other real estate owned	$	37,280	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.

38

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
September 30, 2015	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	70,507	$	70,507	$	70,507	$	—	$	—
Investment securities available-for-sale	404,594		404,594		549		404,045		—
Investment securities held-to-maturity	241,138		245,131		—		245,131		—
Federal Home Loan Bank stock	8,511		8,511		—		8,511		—
Loans held for sale	37,437		37,437		—		37,437		—
Loans receivable, net	3,947,800		4,000,155		—		3,802,991		197,164
Accrued interest receivable	15,528		15,528		—		15,528		—
FDIC indemnification asset	2,080		2,080		—		—		2,080
Investment in bank-owned life insurance	115,914		115,914		—		115,914		—
Interest rate swap derivative - not designated	1,829		1,829		—		1,829		—
Financial liabilities:
Demand deposits and savings	$	2,896,330	$	2,896,330	$	—	$	2,896,330	$	—
Time deposits	1,478,161		1,491,808		—		1,491,808		—
Short-term borrowings	77,409		77,409		—		77,409		—
Long-term debt	189,661		186,839		—		186,839		—
Accrued interest payable	971		971		—		971		—
Interest rate swap derivative - cash flow hedge	2,442		2,442		—		2,442		—
Interest rate swap derivative - not designated	1,829		1,829		—		1,829		—

	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		—

39

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.

40

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

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Commitments under unfunded loans and lines of credit	$	904,773	$	663,137
Letters of credit	16,560		6,607
Unused credit card lines	—		4,512

In addition to the above noted credit commitments, the Company has committed to invest up to $10.8 million in limited partnership interests of unconsolidated entities, of which $7.1 million was unfunded at September 30, 2015.

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 September 30, 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 September 30, 2015, the Company had 128,683 Rights issued under the 2006 Omnibus Plan, 475,104 Rights issued and 880,970 Rights available for grants or awards under the 2013 Omnibus Plan, and 107,408 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.

A summary of the Company’s stock option activity for the nine months ended September 30, 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
Issued	57,037	8.11
Exercised	206,140	11.83
Forfeited or expired	—	—
Outstanding at September 30, 2015	188,675	$	9.87	2.98	$	2,332
Exercisable at September 30, 2015	188,651	$	9.87	2.98	$	2,332
Share options expected to vest	24	$	4.77	0.00	$	—

41

The stock options issued during the nine months ended September 30, 2015 were replacement awards to certain Valley employees in connection with the business combination. These stock options were fully vested at the acquisition date.

The related compensation expense recognized for stock options was immaterial for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015, there was no unrecognized compensation cost related to non-vested stock options granted under the plans.

Restricted Stock Awards. A summary of the activity of the Company’s unvested restricted stock awards for the nine months ended September 30, 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	39,000		19.67
Vested	(111,409	)	13.24
Forfeited	(6,334	)	13.99
Unvested at September 30, 2015	522,525		$	15.62

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 nine months ended September 30, 2015 and 2014 was $2.0 million and $1.2 million, respectively. At September 30, 2015, there was $6.4 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 2.33 years. The grant-date fair value of restricted stock grants vested during the nine months ended September 30, 2015 was $1.5 million.

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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 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.

Our forward-looking statements are based upon our beliefs and assumptions using information available at the time the statements are made. We caution the reader not to place undue reliance on our forward-looking statements (i) as these statements are neither a prediction nor a guarantee of future events or circumstances and (ii) the assumptions, beliefs, expectations and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward-looking statement to reflect developments occurring after the statement is made, except as otherwise required by law.

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.

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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 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 third quarter of 2015. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 “Basis of Presentation” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report.

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.

On July 1, 2015, the Company completed the previously announced merger with Valley Financial Corporation (“Valley”). The financial information and results of operations as of and for the three and nine months ended September 30, 2015 include the impact of this transaction.

We currently have 64 banking offices located in North Carolina, South Carolina, and Virginia, which includes the acquisition of seven branch offices in South Carolina from CertusBank, N.A, which was completed on October 13, 2015. The Bank’s 19 locations in South Carolina and nine locations in Virginia operate as BNC Bank.

Net income for the third quarter of 2015 was $11.9 million, or $0.31 per diluted share, an increase of 44.4% from net income of $8.3 million, or $0.28 per diluted share, for the third quarter of 2014. Net income for the nine months ended September 30, 2015 was $31.7 million, an increase of 51.8% from net income of $20.9 million for the nine months ended September 30, 2014. The increase was primarily due to the increase in interest-earning assets from our recent acquisitions and continued organic loan growth. In addition to the acquisition of Valley, the Company acquired South Street Financial Corporation and Community First Financial Group, Inc., during the second quarter of 2014, and Harbor Bank Group (“Harbor”) during the fourth quarter of 2014.

Total assets at September 30, 2015 were $5.20 billion, an increase of 27.7% as compared to total assets of $4.07 billion at December 31, 2014. This increase was due to the acquisition of Valley, as well as a $457.2 million increase in originated loans, excluding previously acquired loans that were reclassified.

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.

44

FTE net interest income for the third quarter of 2015 was $48.2 million, an increase of 26.6% from $38.1 million for the third quarter of 2014. The increase was primarily driven by an increase in average interest-earning assets of $1.33 billion, or 40.2%, as compared to the third quarter of 2014, which was primarily due to the acquisition of Valley. For the nine months ended September 30, 2015, FTE net interest income was $128.7 million, an increase of 20.7% from $106.6 million for the nine months ended September 30, 2014. Total interest-earnings assets for the nine months ended September 30, 2015 were $4.06 billion, an increase of $935.2 million, or 29.9%, as compared to the nine months ended September 30, 2014. In addition to the assets acquired from Valley, the Company continues to see continued growth in economic activity in our markets, which has directly translated to an increase in lending activities across all our metropolitan markets.

The Company’s average yield on interest-earning assets was 4.70% for the third quarter of 2015, a decrease of 41 basis points from 5.11% for the third quarter of 2014. The decrease is primarily due to a decrease in the yield earned on the Company’s portfolio loans, which was 4.83% for the third quarter of 2015, as compared to 5.27% for the third quarter of 2014. The decrease in yield earned on the loan portfolio is primarily due to variable rate loans that are repricing at lower interest rates.

For the nine months ended September 30, 2015, the Company’s average yield on interest-earning assets was 4.87%, a decrease of 31 basis points from 5.18% for the nine months ended September 30, 2014. The yield earned on our loan portfolio was 4.97% for the nine months ended September 30, 2015, as compared to 5.35% for the comparable period of 2014. The reduction in interest rates on portfolio loans was partially offset by additional loan accretion recognized from the acquired loan portfolio. Loan accretion for the three and nine months ended September 30, 2015 was $4.8 million and $14.9 million, respectively, as compared to $3.5 million and $10.0 million for the comparable periods of 2014.

Average interest-bearing liabilities were $3.87 billion for the third quarter of 2015, an increase of 34.3% from $2.88 billion for the third quarter of 2014. The increase was due to an additional $898.9 million of average interest-bearing deposits, primarily from acquisitions. The Company also increased average borrowings by $90.2 million, which is comprised of additional advances from the FHLB, as well as subordinated notes and junior subordinated debentures acquired from Valley. The Company’s average cost of interest-bearing liabilities was 0.72% for the third quarter of 2015, an increase of 7 basis points from 0.65% for the third quarter of 2014. For the nine months ended September 30, 2015, the average cost of interest-bearing liabilities was 0.75%, a slight increase compared to 0.71% for the nine months ended September 30, 2014. The increase was primarily due to increased time deposit rates, which were offset by reduced interest rates on borrowings.

45

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 September 30,
	2015						2014
	Average balance		Interest		Average Rate		Average balance		Interest		Average rate
	(Dollars in thousands)
Interest-earning assets:
Loans and leases (1)	$	3,915,162	$	47,621	4.83	%	$	2,721,425	$	36,125	5.27	%
Loans held for sale	42,684		429		3.99	%	21,101		205		3.85	%
Investment securities, taxable	267,797		1,842		2.73	%	121,529		1,139		3.72	%
Investment securities, tax-exempt (2)	363,610		5,173		5.64	%	369,749		5,170		5.55	%
Interest-earning balances and other	68,201		162		0.94	%	89,166		150		0.67	%
Total interest-earning assets	4,657,454		55,227		4.70	%	3,322,970		42,789		5.11	%
Other assets	497,236						382,948
Total assets	$	5,154,690					$	3,705,918
Interest-bearing liabilities:
Demand deposits	$	1,881,693	$	2,092	0.44	%	$	1,396,590	$	1,317	0.37	%
Savings deposits	177,092		76		0.17	%	116,984		60		0.20	%
Time deposits	1,480,606		3,097		0.83	%	1,126,903		2,218		0.78	%
Borrowings	334,584		1,789		2.12	%	244,341		1,141		1.85	%
Total interest-bearing liabilities	3,873,975		7,054		0.72	%	2,884,818		4,736		0.65	%
Non-interest-bearing deposits	733,659						469,712
Other liabilities	29,221						24,250
Shareholders' equity	517,835						327,138
Total liabilities and shareholder's equity	$	5,154,690					$	3,705,918
Net interest income and
interest rate spread			$	48,173	3.98	%			$	38,053	4.46	%
Net interest margin					4.10	%					4.54	%

46

	For the Nine Months Ended September 30,
	2015						2014
	Average balance		Interest		Average Rate		Average balance		Interest		Average rate
	(Dollars in thousands)
Interest-earning assets:
Loans and leases (1)	$	3,420,188	$	127,025	4.97	%	$	2,522,868	$	100,956	5.35	%
Loans held for sale	33,093		939		3.79	%	19,474		534		3.67	%
Investment securities, taxable	191,838		4,269		2.98	%	123,371		3,415		3.70	%
Investment securities, tax-exempt (2)	355,483		15,238		5.73	%	375,641		15,763		5.61	%
Interest-earning balances and other	59,009		414		0.94	%	83,064		391		0.63	%
Total interest-earning assets	4,059,611		147,885		4.87	%	3,124,418		121,059		5.18	%
Other assets	421,789						353,635
Total assets	$	4,481,400					$	3,478,053
Interest-bearing liabilities:
Demand deposits	$	1,620,760	$	5,394	0.44	%	$	1,312,229	$	3,987	0.41	%
Savings deposits	153,548		181		0.16	%	120,033		176		0.20	%
Time deposits	1,352,145		9,020		0.89	%	1,117,594		7,030		0.84	%
Borrowings	277,069		4,590		2.21	%	189,665		3,279		2.31	%
Total interest-bearing liabilities	3,403,522		19,185		0.75	%	2,739,521		14,472		0.71	%
Non-interest-bearing deposits	613,953						402,903
Other liabilities	26,226						22,054
Shareholders' equity	437,699						313,575
Total liabilities and shareholder's equity	$	4,481,400					$	3,478,053
Net interest income and
interest rate spread			$	128,700	4.12	%			$	106,587	4.47	%
Net interest margin					4.24	%					4.56	%

(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 for the three months ended September 30, 2015 and 2014, respectively. The taxable-equivalent adjustment was $5.6 million and $5.8 million for the nine months ended September 30, 2015 and 2014, respectively.

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The following table details the variances between the three and nine months ended September 30, 2015 and 2014, respectively, caused by changes in interest rates and changes in volumes:

Table 2

Volume and Rate Variance Analysis

	Three Months Ended September 30, 2015 vs. 2014								Nine Months Ended September 30, 2015 vs. 2014
	Increase (decrease) due to								Increase (decrease) due to
	Volume			Rate			Total		Volume			Rate			Total
	(Dollars in thousands)								(Dollars in thousands)
Interest income:
Loans and leases	$	15,183		$	(3,687	)	$	11,496	$	34,617		$	(8,548	)	$	26,069
Loans held for sale	213			11			224		380			25			405
Investment securities, taxable	1,188			(485		)	703		1,710			(856		)	854
Investment securities, tax-exempt (1)	(86		)	89			3		(855		)	330			(525		)
Interest-earning balances and other	(43		)	55			12		(141		)	164			23
Total interest income	16,455			(4,017		)	12,438		35,711			(8,885		)	26,826
Interest expense:
Deposits:
Demand deposits	498			277			775		982			425			1,407
Savings deposits	28			(12		)	16		44			(39		)	5
Time deposits	718			161			879		1,520			470			1,990
Borrowings	452			196			648		1,479			(168		)	1,311
Total interest expense	1,696			622			2,318		4,025			688			4,713
Net interest income increase (decrease)	$	14,759		$	(4,639	)	$	10,120	$	31,686		$	(9,573	)	$	22,113

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

Provision for Loan Losses

The Company recorded a provision for loan losses of $0.2 million for the third quarter of 2015, a decrease of 84.8% from $1.3 million recorded in the third quarter of 2014. The Company recorded a provision for loan losses of $0.6 million for the nine months ended September 30, 2015, a decrease of 89.8% from $6.0 million for the nine months ended September 30, 2014. 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 $9.2 million for the third quarter of 2015, an increase of 45.4% from $6.3 million for the third quarter of 2014.

Non-interest income was $24.2 million for the nine months ended September 30, 2015, an increase of 40.2% from $17.2 million for the nine months ended September 30, 2014. As part of a rebalancing strategy after the Valley acquisition, $0.8 million of gains were recognized during the three and nine months ended September 30, 2015, respectively, on the sale of investment securities, as compared to a gain of $0.1 million and a loss of $0.5 million for the three and nine months ended September 30, 2014, respectively. The Company also continued to experience growth from the mortgage operations business, as mortgage originations have increased for the three and nine months ended September 30, 2015, as compared to the same periods of 2014. Income from deposit service charges continues to increase as a result of the growth in transaction-based deposits.

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 and income derived from our investment brokerage services, are volatile and can vary significantly from period to period.

48

The following table presents the components of non-interest income:

Table 3

Non-Interest Income

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
	(Dollars in thousands)
Mortgage fees	$	3,031	$	2,128	$	8,307	$	5,640
Service charges	2,284		1,631		5,738		4,457
Earnings on bank-owned life insurance	705		559		1,960		1,748
Gain (loss) on sale of investment securities, net	794		54		839		(511		)
Other	2,355		1,935		7,318		5,903
Total non-interest income	$	9,169	$	6,307	$	24,162	$	17,237

Non-Interest Expense

Non-interest expense was $38.2 million for the third quarter of 2015, an increase of 28.0% from $29.8 million for the third quarter of 2014. The increase in expense is primarily due to additional employees and facilities related to the Valley acquisition. Included in non-interest expense for the third quarter of 2015 is $4.9 million of transaction-related expenses, as compared to $2.3 million for the comparable period of 2014. The Company also incurred $0.8 million of expense during the third quarter of 2015 from the early extinguishment of FHLB advances.

Non-interest expense was $101.6 million for the nine months ended September 30, 2015, an increase of 20.8% from $84.1 million for the nine months ended September 30, 2014. Included in non-interest expense for the nine months ended September 30, 2015 is $9.0 million of transaction-related expenses, as compared to $6.7 million for the comparable period of 2014. The increase is due to the acquisition of Valley, as well as the facilities and headcount obtained in the acquisition of Harbor. The Company also incurred an elevated level of OREO expenses during 2015, as the Company initiated an aggressive disposition strategy by writing down targeted properties to facilitate sale.

The following table presents the components of non-interest expense:

Table 4

Non-Interest Expense

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
	(Dollars in thousands)
Salaries and employee benefits	$	20,114	$	15,759	$	53,726	$	44,780
Occupancy	3,211		2,647		8,410		6,788
Furniture and equipment	1,655		1,652		4,880		4,820
Data processing and supplies	1,268		895		3,502		2,864
Advertising and business development	493		667		1,756		2,041
Insurance, professional and other services	3,155		2,128		7,256		6,936
FDIC insurance assessments	824		821		2,261		2,232
Loan, foreclosure and other real estate owned	2,352		2,586		8,213		6,307
Other	5,113		2,673		11,571		7,343
Total non-interest expense	$	38,185	$	29,828	$	101,575	$	84,111

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Income Taxes

Income tax expense was $5.1 million for the third quarter of 2015, an increase of 67.6% from $3.0 million for the third quarter of 2014. 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. Due to an increase in our level of taxable income relative to non-taxable income, our effective tax rate for the third quarter of 2015 was 30.0%, as compared to an effective tax rate of 26.9% for the third quarter of 2014.

Income tax expense was $13.3 million for the nine months ended September 30, 2015, an increase of 90.7% from $7.0 million for the nine months ended September 30, 2014. Our effective tax rate for the nine months ended September 30, 2015 was 29.6%, an increase compared to an effective tax rate of 25.1% for the nine months ended September 30, 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 had a total carrying value of $645.7 million at September 30, 2015, as compared to investment securities with a total carrying value 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 September 30, 2015, our investment securities portfolio included 348 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 September 30, 2015:

50

Table 5

Obligations of State and Political Subdivisions

		Amortized Cost		Fair Value
		(Dollars in thousands)
General obligation bonds:
	Texas	$	120,856	$	125,522
	Washington	28,969		29,940
	Ohio	19,301		20,500
	North Carolina	18,930		19,194
	California	15,285		15,878
	Pennsylvania	11,203		11,807
	Kansas	9,839		10,584
	Other (22 states)	59,425		61,367
Total general obligation bonds:		283,808		294,792
Revenue bonds:
	North Carolina	34,675		35,360
	Indiana	17,059		17,951
	South Carolina	12,143		12,491
	Florida	11,280		11,687
	Texas	7,503		7,870
	Washington	6,684		6,784
	New York	5,859		5,966
	Other (11 states)	19,356		20,130
Total revenue bonds:		114,559		118,239
Total obligations of state and political subdivisions		$	398,367	$	413,031

Our largest exposure in general obligation bonds was 65 bonds issued by various school districts in Texas with a total amortized cost basis of $87.4 million and total fair value of $91.1 million at September 30, 2015. Of this total, $71.3 million in amortized cost and $74.1 million in fair value are guaranteed by the Permanent School Fund of the State of Texas.

The revenue sources related to our investment in revenue bonds at September 30, 2015 are summarized in the following table:

Table 6

Revenue Bonds by Source

	Amortized Cost		Fair Value
	(Dollars in thousands)
College and university	$	20,351	$	20,827
Health, hospitality and nursing home	20,085		20,894
Water and sewer	18,017		18,872
Power and electricity	12,370		12,544
Lease (abatement)	7,039		7,707
Other	36,697		37,395
Total revenue bonds	$	114,559	$	118,239

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Our largest individual exposures in revenue bonds at September 30, 2015 were three bonds to be repaid by future pledged power and utility revenue, and seven bonds to be repaid by future pledged revenues generated from a leading academic healthcare system. The total amortized cost for these 10 securities was $18.5 million and the total fair value was $18.9 million at September 30, 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 September 30, 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 $3.98 billion at September 30, 2015, an increase of 29.4% from $3.08 billion at December 31, 2014. The following table details the composition of our loan portfolio:

Table 7

Loan Portfolio Composition

	September 30, 2015				December 31, 2014
	Amount		% of Total Loans		Amount		% of Total Loans
	(Dollars in thousands)
Originated:
Commercial real estate	$	1,510,589	38.0	%	$	1,181,492	38.4	%
Commercial construction	277,251		7.0	%	265,968		8.6	%
Commercial and industrial	235,879		5.9	%	154,132		5.0	%
Leases	25,593		0.6	%	21,100		0.7	%
Residential construction	57,349		1.4	%	43,298		1.4	%
Residential mortgage	468,141		11.8	%	439,600		14.3	%
Consumer and other	12,770		0.3	%	10,851		0.4	%
Total originated loans	2,587,572		65.0	%	2,116,441		68.8	%
Acquired:
Commercial real estate	$	622,130	15.6	%	$	403,672	13.1	%
Commercial construction	63,698		1.6	%	48,668		1.6	%
Commercial and industrial	104,332		2.6	%	38,200		1.2	%
Residential construction	34,213		0.9	%	29,854		1.0	%
Residential mortgage	560,835		14.1	%	432,818		14.1	%
Consumer and other	5,853		0.2	%	5,445		0.2	%
Total acquired loans	1,391,061		35.0	%	958,657		31.2	%
Total portfolio loans	$	3,978,633	100.0	%	$	3,075,098	100.0	%

52

Excluding loans that were reclassified from acquired, our originated loan portfolio has increased $457.2 million, or 21.6%, during the nine months ended September 30, 2015. The following factors have contributed to our organic loan growth during this time frame:

• Originated commercial real estate loans have increased by $329.1 million, or 27.9%, during the nine months ended September 30, 2015. We continue to experience strong demand for commercial real estate loans, our largest category of loans, across the large metropolitan areas in which we do business. This includes both the generation of new loans and increased funding for previously booked loans;

• The Company has focused additional efforts on growing the commercial and industrial loan portfolio, which has grown by $81.7 million, or 53.0%, during the nine months ended September 30, 2015. One of the drivers for this growth has been increased lending to municipalities and county governments throughout our footprint;

• Our recent acquisitions have allowed us to further penetrate key markets and these focused efforts are also leading to growth in smaller community markets as well. Our entry and transition into the Southern Virginia market with the acquisition of Valley is progressing as planned, with loan production and loan pipelines continuing to improve. Our increased presence in the Charleston, South Carolina market has also led to improvement in loan production; and

• The Company's residential builder finance product has continued to expand as the inventory of new homes in large metropolitan areas continues to tighten.

At September 30, 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 $225.6 million, which represented approximately 97% 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 September 30, 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.

The following table summarizes the maturity dates of our home equity lines of credit at September 30, 2015:

Table 8

Home Equity Line of Credit Maturities

	(Dollars in thousands)
2015	$	2,495
2016	8,437
2017	7,024
2018	7,483
2019	11,783
Thereafter	318,294
	$	355,516

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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 September 30, 2015 were $4.37 billion, an increase of 28.8% from total deposits of $3.40 billion at December 31, 2014. The Company continues to grow its transactional deposit base, which has increased by $703.6 million, or 32.1%, during the nine months ended September 30, 2015. This increase is due to the acquisition of Valley, as well as the Company's continued success in attracting new customers in our metropolitan markets. Wholesale deposits were 26.1% of total deposits at September 30, 2015, an increase compared to 25.7% at December 31, 2014.

Borrowings

Total borrowings at September 30, 2015 were $267.1 million, a slight increase from total borrowings of $261.7 million at December 31, 2014. At September 30, 2015, $77.4 million of these borrowings were classified as short-term, while the remaining $189.7 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.

In conjunction with the Valley acquisition, the Company assumed $16.5 million of subordinated debentures and a junior subordinated note with an outstanding balance of $10.8 million. See Note 8 “Borrowings” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report for more information on these borrowings.

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.

Nonperforming Assets

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and OREO, totaled $57.5 million, or 1.11% of total assets, at September 30, 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 $24.7 million at September 30, 2015, a decrease of 23.9% from $32.5 million at December 31, 2014. While acquired nonperforming assets steadily decreased during the first half of 2015, the balance increased during the third quarter of 2015 as a result of the Valley acquisition.

54

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

Table 9

Nonperforming Assets

	September 30, 2015			June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014
	(Dollars in thousands)
Nonaccrual loans - Originated	$	5,914		$	12,998		$	14,776		$	8,475		$	9,857
Nonaccrual loans - Acquired	14,322			12,391			13,191			16,248			18,135
OREO - Originated	18,791			20,767			21,869			23,989			23,754
OREO - Acquired	18,489			12,241			17,558			18,542			22,718
90 days past due and accruing - Originated	—			—			—			—			—
90 days past due and accruing - Acquired	—			14			—			—			5
Total nonperforming assets	$	57,516		$	58,411		$	67,394		$	67,254		$	74,469
Total nonperforming assets - Originated	$	24,705		$	33,765		$	36,645		$	32,464		$	33,611
Loans restructured/modified not included in above,
(not 90 days past due or on nonaccrual)	$	15,562		$	14,100		$	15,168		$	13,578		$	15,685
Ratio of nonperforming assets to total assets	1.11		%	1.37		%	1.61		%	1.65		%	1.99		%
Originated nonperforming assets to total assets	0.47		%	0.79		%	0.88		%	0.80		%	0.90		%
Ratio of nonperforming loans to total portfolio loans	0.51		%	0.78		%	0.88		%	0.80		%	1.01		%
Originated nonperforming loans to total portfolio loans	0.15		%	0.40		%	0.47		%	0.28		%	0.36		%

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 September 30, 2015, we had $20.2 million in nonaccrual loans, a decrease of 18.1% from $24.7 million at December 31, 2014. Nonaccrual loans that were not acquired by the Company decreased 30.2% as compared December 31, 2014, primarily due to a few large dollar relationships that were fully repaid during the current quarter.

At September 30, 2015, we had $37.3 million in OREO, a decrease of 12.3% from $42.5 million at December 31, 2014. OREO properties that were originated by the Company had a net decrease of $5.2 million during the nine months ended September 30, 2015, which was driven by a focused disposition strategy undertaken by the Company.

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.

Analysis of Allowance for Loan Losses

The allowance for loan losses was $30.8 million at September 30, 2015, a slight increase from $30.4 million at December 31, 2014. The ratio of the allowance for loan losses to total portfolio loans was 0.77% and 0.99% at September 30, 2015 and December 31, 2014, respectively. The ratio of the allowance for loans originated by the Company to total originated loans was 1.05% at September 30, 2015, as compared to 1.25% at December 31, 2014.

The Company experienced $0.3 million in net recoveries of previously charged-off loans during the third quarter 2015, compared to net charge-offs of $0.3 million, or 0.05% of average loans, during the third quarter of 2014. Gross charge-offs were $1.2 million during the third quarter of 2015, as compared to $2.9 million during the third quarter of 2014.

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The Company has net recoveries of $0.8 million for the nine months ended September 30, 2015, as compared to net charge-offs of $7.0 million, or 0.37% of average loans, for the nine months ended September 30, 2014. Gross charge-offs were $3.9 million during the nine months ended September 30, 2015, as compared to $12.4 million during the nine months ended September 30, 2014.

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 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 Consolidated Financial Statements in Item 8 of Part II of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Beginning balance	$	30,635		$	30,129		$	30,399		$	32,875
Provision for credit losses:
Non-covered loans	327			1,403			916			6,319
Covered loans	(129		)	(99		)	(307		)	(314		)
Change in FDIC indemnification asset	(326		)	(386		)	(953		)	(1,191		)
Net recoveries (charge-offs) on loans covered under loss-share	325			170			777			(525		)
Charge-offs on loans not covered under loss-share:
Commercial real estate	(593		)	(704		)	(2,123		)	(1,794		)
Commercial construction	(1		)	(286		)	(9		)	(2,794		)
Commercial and industrial	(42		)	(339		)	(151		)	(1,674		)
Residential mortgage	(536		)	(1,116		)	(994		)	(2,984		)
Consumer and other	(22		)	(11		)	(252		)	(114		)
Total charge-offs	(1,194		)	(2,456		)	(3,529		)	(9,360		)
Recoveries on loans not covered under loss-share:
Commercial real estate	313			664			830			871
Commercial construction	102			112			1,054			367
Commercial and industrial	627			179			1,023			345
Residential construction	6			3			40			9
Residential mortgage	138			923			464			1,230
Consumer and other	9			80			119			96
Total recoveries	1,195			1,961			3,530			2,918
Net recoveries (charge-offs) on loans not covered under loss-share	1			(495		)	1			(6,442		)
Ending balance	$	30,833		$	30,722		$	30,833		$	30,722

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.

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Capital Resources

Total shareholders’ equity was $522.5 million at September 30, 2015, an increase of 33.8% from shareholders’ equity of $390.4 million at December 31, 2014. On July 1, 2015, in connection with the acquisition of Valley, the Company issued 5.5 million shares of voting common stock as consideration.

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.

Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.50% of CET1 capital, Tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.50% on January 1, 2019. When fully phased in on January 1, 2019, Basel III will require (i) a minimum ratio of CET1 capital to risk-weighted assets of at least 4.50%, plus a 2.50% capital conservation buffer, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.00%, plus the 2.50% capital conservation buffer and (iv) a minimum leverage ratio of 4.00%.

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		September 30, 2015 (1)		December 31, 2014 (2)
BNC Bancorp:
Total capital (to total risk-weighted assets)	10.00	%	11.65	%	12.49	%
Tier 1 capital (to total risk-weighted assets)	8.00	%	9.36	%	9.71	%
Tier 1 capital (to total adjusted quarterly average assets)	5.00	%	8.23	%	8.41	%
CET1 (to total risk-weighted assets)	6.50	%	8.58	%	N/A
Bank of North Carolina:
Total capital (to risk-weighted assets)	10.00	%	11.37	%	12.21	%
Tier 1 capital (to risk-weighted assets)	8.00	%	10.67	%	11.26	%
Tier 1 capital (to adjusted quarterly average assets)	5.00	%	9.37	%	9.74	%
CET1 (to risk weighted assets)	6.50	%	10.67	%	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. In August 2014, the Company 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 $10.1 million during the nine months ended September 30, 2015 from subsidiaries.

BNC has $110.0 million of established federal funds and other unsecured lines with counterparty banks, with no outstanding borrowings at September 30, 2015. BNC also has the ability to borrow from the FHLB and the Federal Reserve Bank, with $688.9 million and $244.5 million, respectively, in available credit at September 30, 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. In addition, the Company has a $15 million line of credit facility with no outstanding borrowings as of September 30, 2015.

Investment securities are an important tool to the Company’s liquidity objective. Of the $645.7 million in the Company's investment securities portfolio at September 30, 2015, $404.6 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 nine months ended September 30, 2015, net cash provided by operating activities and financing activities was $47.7 million and $189.2 million, respectively, while net cash used in investing activities was $251.6 million, for a net decrease in cash and cash equivalents of $14.7 million since December 31, 2014. The primary cash outflows during the nine months ended September 30, 2015 related to the funding the Company's continued organic loan growth, as well as the repayment of short-term borrowings, while the primary cash inflows related to cash received from core operations, increases in deposits, and cash received from Valley as part of the acquisition.

For the nine months ended September 30, 2014, net cash provided by operating activities was $17.1 million, while net cash used in investing and financing activities was $9.5 million and $6.2 million, respectively, for a net increase in cash and cash equivalents of $1.3 million since December 31, 2013. The primary cash outflows during the nine months ended September 30, 2014 related to the increase in loans and decrease in deposits, while the primary cash inflows related to cash received from core operations, cash received from acquisitions, and cash received from payments and sale of investment securities.

Contractual Obligations

We presented our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2014. The only significant changes that have occurred during the nine months ended September 30, 2015 were the assumption of subordinated debt and junior subordinated debentures from the acquisition of Valley. See Note 8 “Borrowings” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report for more information on these borrowings.

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 "Commitments and Contingencies" to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report.

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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 September 30, 2015. See Note 7 “Derivatives” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report for more information on the Company’s strategies to hedge its interest rate risk.

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

As of September 30, 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 September 30, 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 “Commitments and Contingencies” 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:	November 9, 2015	By: /s/ Richard D. Callicutt II
		Richard D. Callicutt II
		President and Chief Executive Officer (Principal Executive Officer)

Date:	November 9, 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
2.1	Agreement and Plan of Merger, dated August 14, 2015, by and between BNC Bancorp and Southcoast Financial Corporation (incorporated by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K filed with the SEC on August 14, 2015.)
10.1	Employee Restricted Stock Unit Award Agreement, dated September 30, 2015, by and between BNC Bancorp and Ronald J. Gorczynski
10.2	Form of Employee Restricted Stock Unit Award Agreement
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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