BNC Bancorp (BNNC) 10-K 2013 FY Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

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
High Point, North Carolina	27265
(Address of principal executive offices)	(Zip Code)

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

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common stock, no par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]

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

Indicate by check mark whether 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 [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]     Accelerated filer [X ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company)    Smaller reporting company [ ]

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

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2013 was $282.7 million (based on the closing price of such stock as of June 30, 2013). As of March 10, 2014, there were 27,324,457 shares of the Company‘s common stock (no par value) outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2014 Annual Meeting of Stockholders of BNC Bancorp to be held on May 20, 2014, are incorporated by reference into Item 5 of Part II and Part III.

BNC BANCORP

2013 FORM 10-K TABLE OF CONTENTS

		Page No.
PART I.
Item 1.	Business	4
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	26
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4.	Mine Safety Disclosures	27
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 8.	Financial Statements and Supplementary Data	62
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	118
Item 9A.	Controls and Procedures	118
Item 9B.	Other Information	118
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	119
Item 11.	Executive Compensation	119
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	119
Item 13.	Certain Relationships and Related Transactions, and Director Independence	119
Item 14.	Principal Accountant Fees and Services	119
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	120

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PART I

Forward-Looking Statements

This Annual Report on Form 10-K 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 BNC Bancorp that are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:

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

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

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

• adverse changes in credit quality trends;

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

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

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

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

• adequacy of our risk management program;

• increased competitive pressure due to consolidation;

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

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

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

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ITEM 1.    BUSINESS

General

BNC Bancorp (the “Company”) was formed in 2002 to serve as a one-bank holding company for Bank of North Carolina (“BNC”). BNC is a full service commercial bank, incorporated under the laws of the State of North Carolina on November 15, 1991, that opened for business on December 3, 1991. Because BNC is our sole banking subsidiary, the majority of our income is derived from BNC's operations. Throughout this Annual Report, results of operations will relate to BNC’s operation, unless a specific reference is made to the Company and its operating results other than through BNC’s business and activities. The terms “we” and “ours” will be used throughout this report when discussing our operations except in circumstances where a reference is specific to either the Company or BNC.

We are registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the bank holding company laws of North Carolina. BNC operates under the rules and regulations of and is subject to examination by the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Office of the Commissioner of Banks, North Carolina Department of Commerce (the “NCOCB”). BNC is also subject to certain regulations of the Federal Reserve governing the reserves to be maintained against deposits and other matters. Our administrative office is located at 3980 Premier Drive, High Point, North Carolina 27265, and BNC’s main office is located at 831 Julian Avenue, Thomasville, North Carolina 27360.

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. This business strategy stresses the provision of high quality banking services to individuals and small to medium-sized local businesses. Specifically, we make business loans secured by real estate, personal property and accounts receivable; unsecured business loans; consumer loans, which are secured by consumer products, such as automobiles and boats; unsecured consumer loans; commercial real estate loans; and other loans. We also offer a wide range of banking services, including traditional products such as checking and savings accounts. We are also continuously developing new and innovative products, including a new Wealth Management product suite, and equipping our bankers with new technology to further differentiate us as a community bank with sophisticated product delivery.

During recent years, we have focused much of our growth and expansion efforts on acquisitions of community banks located in our key markets. As a result of these efforts, we have completed the following whole-bank and branch acquisitions over the past two years:

• On October 1, 2013, we acquired Randolph Bank & Trust Company (“Randolph”), a commercial bank that served small businesses and professionals and operated six branches in the Piedmont-Triad area of North Carolina. This acquisition aligns with the Company’s strategy of growth focused within existing markets.

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

• On September 21, 2012, we acquired the deposits and certain other assets of two branches that were owned by The Bank of Hampton Roads (“BHR”), a subsidiary of Hampton Roads Bankshares, Inc., located in Cary, North Carolina and Chapel Hill, North Carolina.

• On September 14, 2012, we acquired KeySource Financial, Inc., a North Carolina corporation serving as a one-bank holding company for KeySource Commercial Bank, a North Carolina banking corporation (“KeySource”), with one branch in Durham, North Carolina. The acquisition of KeySource, as well as the acquisition of the BHR branches, further increased our presence in the combined Raleigh-Durham Metropolitan Statistical Area, the market with the highest forecasted five-year growth rate in North Carolina.

• On June 8, 2012, we acquired certain assets and liabilities of Carolina Federal Savings Bank (“Carolina Federal”) in Charleston, South Carolina, pursuant to a Purchase and Assumption agreement with the FDIC. Under the terms of the agreement, we acquired certain assets and deposits from the FDIC as receiver of Carolina Federal. There was no loss-share arrangement with the FDIC in regards to this transaction.

In December 2013, we announced merger agreements with both South Street Financial Corporation, the parent company of Home Savings Bank, FSB in Albemarle, North Carolina ("South Street"), and Community First Financial Group, Inc. ("Community First"), the parent company of Harrington Bank, FSB in Chapel Hill, North Carolina. These acquisitions will further enhance our presence in the Charlotte and Raleigh-Durham areas, respectively, which we have identified as key markets. These acquisitions are expected to close in the second quarter of 2014, subject to customary regulatory and shareholder approvals.

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We target business professionals and small to mid-size business customers with credit relationships in the $250,000 to $25 million range that are too small for regional banks but too large for smaller community banks with lower legal lending limits. We offer our customers superior customer service, 39 convenient branch locations and experienced bankers. Our primary sources of revenue are interest and fee income from our lending and investing activities, primarily consisting of making business loans for small to medium-sized businesses, and, to a lesser extent, from our investment portfolio. The majority of our senior lending officers have been in the banking industry for more than 20 years and have experienced several economic and real estate cycles during their banking careers.

We continue to make significant investment in our mortgage origination business, which has grown from less than $100 million in originations when it was restructured in 2011 to over $325 million in originations during 2013. The mortgage division is a full correspondent lender that offers a full array of products and services to our bank clients. The mortgage division has obtained all necessary approvals to become an FHA Direct Endorsement Lender, VA Automatic Lender, NC Housing, and USDA Rural Housing approved lender, as well as being approved with many of the larger aggregators to deliver Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") products, which are being sold with mortgage servicing rights released. The mortgage division has focused on building a sustainable business model as the markets change and continues to focus on funding the purchase of residential real estate.

The Company has several programs designed to attract depository accounts offered to consumers and to small and middle market businesses at interest rates generally consistent with market conditions. Deposits provide the most significant funding source for the Company’s interest earning assets. Deposits are attracted principally from clients within our retail branch network through the offering of a broad array of deposit products to individuals and businesses, including non-interest bearing demand deposit accounts, interest-bearing transaction accounts, savings accounts, money market deposit accounts, and time deposit accounts. Terms vary among deposit products with respect to commitment periods, minimum balances, and applicable fees. Interest paid on deposits represents the largest component of our interest expense. Interest rates offered on interest-bearing deposits are determined based on a number of factors, including, but not limited to, (1) interest rates offered in local markets by competitors, (2) current and expected economic conditions, (3) anticipated future interest rates, (4) the expected amount and timing of funding needs, and (5) the availability and cost of alternative funding sources. Management believes that the rates it offers, which are posted weekly on deposit accounts, are generally competitive with other financial institutions in the Company’s respective market areas.

The Company also holds public funds as deposits. Public deposits typically require the pledging of collateral, most commonly marketable securities. This requirement is taken into account when determining the level of interest to be paid on public deposits. Public funds have not historically presented any special risks to the Company.

The Company also holds brokered deposits as part of its funding. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), only “well-capitalized” and “adequately-capitalized” institutions may accept brokered deposits. The Company issues brokered deposits through the use of third-party intermediaries. As of December 31, 2013, brokered deposits represented approximately 32.8% of BNC's total deposits.

Competition and Market Area

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources than we do. Such competitors primarily include national, regional, and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

We have traditionally operated in markets that have not experienced the tremendous property value increases recognized in other parts of the country and as a result the property valuation declines have not been quite as severe. Based on SNL Financial data, our North Carolina markets had population growth of 3.1% from 2010-2013, as compared to the population growth rate of 1.9% for the United States. Our North Carolina markets have a projected population growth rate of 5.4% for 2013 to 2018, as compared to the projected growth rate of 3.6% for the United States. Our South Carolina markets had population growth of 3.2% from 2000-2013, and a projected population growth rate of 5.2% for 2013 to 2018.

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Since 2011, we have focused expansion efforts in Raleigh, the state capital of North Carolina, and the second most populated city in the state, where the industrial base includes electrical, medical, electronic and telecommunications equipment; clothing and apparel; food processing; paper products; and pharmaceuticals. The acquisitions of KeySource and the branches acquired from BHR enabled us to establish offices in Durham, Cary, and Chapel Hill, North Carolina which, along with Raleigh, are part of North Carolina's Research Triangle, one of the country's largest and most successful research parks and a major center in the United States for high-tech and biotech research, as well as advanced textile development. We currently have four locations in this area and our deposit market share in Durham-Chapel Hill is 1.2%, while our deposit market share in Raleigh-Cary is less than 1%. The pending acquisition of Community First, as well as the construction of a new branch in Raleigh that will open during the first quarter of 2014, will further assist us in improving our market share in this high growth area.

We have also focused expansion efforts in Charlotte, the largest city in North Carolina, which is located in Mecklenburg County. It is surrounded by Cabarrus, Iredell and Catawba Counties. Many people who work in Charlotte live in the surrounding counties where we have branches. In addition to being the second largest banking center in the United States, the Charlotte metro-area is the headquarters of five Fortune 500 companies. Charlotte also has over 240 companies directly tied to the energy sector, a growing source of jobs in the area. The acquisition of First Trust in 2012 increased our presence to three locations in Charlotte, and we believe the pending acquisition of South Street will further allow us to improve our market share in this area.

We have four offices in our largest market, Davidson County, which includes both Thomasville and Lexington, with a combined market share of 38.9%. We have four offices in Guilford County, two in High Point and two in Greensboro, with combined market share of 2.5%. We have five offices in Randolph county, three in Asheboro, one in Randleman and one in Archdale, where we have 17.7% of the county market share. Lexington, High Point, Archdale and Thomasville’s traditional economic base includes furniture and textile manufacturing, which have been negatively impacted by the recession. Greensboro’s economic base is more diversified and service-oriented and is also home to several colleges and universities. Winston-Salem, located in Forsyth County, like Greensboro and High Point in Guilford County, is part of the Piedmont Triad Region of North Carolina. This region, due to its proximity to four major interstate highways, a Federal Express shipping hub, and central location on the east coast, is transitioning into more of a logistical hub with the trucking and distribution industries growing in prominence. Winston-Salem is home to numerous educational institutions and two large medical centers, as well as being home to Hanesbrands (textiles) and Reynolds Tobacco. The Piedmont Triad Research Park also located in Winston-Salem is a highly interactive, master-planned innovation community developed to support life science and information technology research and development. We have two branches in Forsyth County, with one in Winston-Salem. Our deposit market share in Forsyth County is minimal at this point, but we believe the Piedmont Triad Region has high future growth potential.

Rowan, Iredell and Cabarrus Counties are located in the growing Piedmont region of North Carolina between the Charlotte metro-market and the High Point and Thomasville markets on the I-85 corridor. Rowan and Cabarrus Counties offer a premier location for warehouses, manufacturing and distribution facilities because the largest consolidated rail system in the country is centered in the region. Rowan County is home to over 45 freight companies. Cabarrus County is the home to Lowes Motor Speedway and Cabarrus and Iredell counties have numerous NASCAR-related suppliers and team headquarters. Lowe’s Companies (building supplies), a Fortune 500 company is headquartered in Mooresville, Iredell County. We currently have four offices in these counties where we have 8.2% deposit market share in Cabarrus County, 5.2% market share in Rowan County and a 3.2% market share in Iredell County. We believe the area has high growth potential because of NASCAR, Lowe’s Companies and its proximity to the Charlotte metro area.

Asheville, Hendersonville, and Brevard are markets that we entered as part of the Blue Ridge acquisition in the fourth quarter of 2011. All of these markets are located in the mountainous region of Western North Carolina. We have one branch in each of these locations. Asheville has been ranked as one of the country's "Best Places for Business and Careers" by Forbes Magazine and ranks among the top destinations for outdoor recreation and adventures. We have a 7.6% market share in Brevard, a 2.3% market share in Hendersonville and a less than 1.0% market share in Asheville.

Our market areas in South Carolina are located in the coastal and Upstate regions. In the coastal areas our market area centers predominately in the metro regions of Charleston, Myrtle Beach and Hilton Head Island, South Carolina. Myrtle Beach is situated on the center of a large and continuous stretch of beach known as the Grand Strand and is considered to be a major tourist destination in the Southeast, attracting an estimated 14.6 million visitors each summer. Hilton Head Island is a Lowcountry resort town that is also a popular vacation destination. In Horry County and Beaufort County, we have a total of five branches and deposit market share of 4.0% and 1.2%, respectively.

A long-time popular tourist and vacation destination, the greater Charleston metropolitan area has experienced unprecedented business growth over the past several years with investment by new and existing corporations including Boeing, Google, Bosch, Force Protection, Daimler and BAE Systems. The Charleston area is also a fast-growing area for IT and software jobs and is home to small and medium software development companies. We operate three branches in the Charleston metropolitan area.

The Upstate is the fastest growing region in the state with Greenville as the largest city in the region and the base of most commercial activity. BMW’s manufacturing facility, Michelin’s North American Headquarters, Caterpillar’s diesel engine manufacturing plant, and

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General Electric’s gas turbine and wind energy manufacturing operation are located in the Upstate of South Carolina in close proximity to our market center in Greenville. At December 31, 2013, we operated one branch in Greenville County with a deposit market share of 0.4%. We opened a new branch in Greenville in February 2014, which gives us ten total branches in South Carolina.

Employees

At December 31, 2013, we employed 620 full-time equivalent employees, and we believe our employee relations to be good.

Subsidiaries

In addition to BNC, we have wholly-owned subsidiaries to issue trust preferred securities: BNC Bancorp Capital Trust I, BNC Bancorp Capital Trust II, BNC Capital Trust III and BNC Capital Trust IV. Each of these subsidiaries was formed under the laws of the state of Delaware. These long-term obligations, which qualify as Tier I capital for the Company, constitute a full and unconditional guarantee by us of the trusts’ obligations under the preferred securities.

BNC also has wholly-owned subsidiaries that operate in the mortgage and real estate areas: BNC Credit Corp., which serves as BNC’s trustee on deeds of trust, and Sterling Real Estate Holdings, LLC and Sterling Real Estate Development of North Carolina, LLC, which hold and dispose of BNC’s real estate owned. Each of these subsidiaries is incorporated or organized under the laws of the State of North Carolina.

Operating Segments

The Company’s operations are managed along two operating segments consisting of banking operations and mortgage origination. The primary purpose of the mortgage origination operating segment is the origination and subsequent sale of residential mortgage loans, while all other banking activities are performed in the banking operations segment. These operating segments are aggregated into a single reportable operating segment in the Consolidated Financial Statements in Item 8 herein.

Available Information

We maintain a website at www.bncbancorp.com. Our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are made available, free of charge, on the Investor Relations page on our website, as soon as reasonably practicable after we electronically file them or furnish them to the Securities and Exchange Commission (“SEC”). In addition, copies of the Company‘s annual report will be made available, free of charge, upon written request.

Supervision and Regulation

Bank holding companies and state commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect us. This summary contains what management believes to be the material information related to our supervision and regulation but is not intended to be an exhaustive description of the statutes or regulations applicable to our business. Our supervision, regulation and examination by the regulatory agencies are intended primarily for the protection of depositors rather than our shareholders. We cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which our business may be affected by a statute or regulation. The discussion is qualified in its entirety by reference to applicable laws and regulations.  Changes in such laws and regulations may have a material effect on our business and prospects.

Federal Bank Holding Company Regulation and Structure

As a bank holding company, we are subject to regulation under the BHCA and to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve"). BNC has a North Carolina state charter and is subject to regulation, supervision and examination by the FDIC and the NCOCB.

The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before:

• it may acquire direct or indirect ownership or control of any voting shares of any other bank holding company if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the other bank holding company;

• it may acquire direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank;

• it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or

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• it may merge or consolidate with any other bank holding company.

The BHCA further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the performance under the Community Reinvestment Act of 1977, both of which are discussed elsewhere in more detail.

Subject to various exceptions, the BHCA and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

• the bank holding company has registered securities under Section 12 of the Exchange Act; or

• no other person owns a greater percentage of that class of voting securities immediately after the transaction.

Our common stock is registered under Section 12 of the Exchange Act. The regulations provide a procedure for challenging rebuttable presumptions of control.

The BHCA generally prohibits a bank holding company from engaging in activities other than banking; managing or controlling banks or other permissible subsidiaries and acquiring or retaining direct or indirect control of any company engaged in any activities other than activities closely related to banking or managing or controlling banks. In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

Under the BHCA, a bank holding company may file an election with the Federal Reserve to be treated as a financial holding company and engage in an expanded list of financial activities. The election must be accompanied by a certification that all of the company’s insured depository institution subsidiaries are “well capitalized” and “well managed.” Additionally, the Community Reinvestment Act of 1977 rating of each subsidiary bank must be satisfactory or better. If, after becoming a financial holding company and undertaking activities not permissible for a bank holding company, the company fails to continue to meet any of the prerequisites for financial holding company status, the company must enter into an agreement with the Federal Reserve to comply with all applicable capital and management requirements. If the company does not return to compliance within 180 days, the Federal Reserve may order the company to divest its subsidiary banks or the company may discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company. We have not filed an election to become a financial holding company.

We are required to act as a source of financial strength for BNC and to commit resources to support it. This support may be required at times when we might not be inclined to provide it. In addition, any capital loans made by us to BNC will be repaid only after its deposits and various other obligations are repaid in full.

Bank Merger Act

Section 18(c) of the Federal Deposit Insurance Act, popularly known as the “Bank Merger Act,” requires the prior written approval of the FDIC before any bank may (i) merge or consolidate with, (ii) purchase or otherwise acquire the assets of, or (iii) assume the deposit liabilities of, another bank if the resulting institution is to be a state nonmember bank.

The Bank Merger Act prohibits the FDIC from approving any proposed merger transaction that would result in a monopoly, or would further a combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States. Similarly, the Bank Merger Act prohibits the FDIC from approving a proposed merger transaction whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade. An exception may be made in the case of a merger transaction whose effect would be to substantially lessen competition, tend to create a monopoly, or otherwise restrain trade, if the FDIC finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.

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In every proposed merger transaction, the FDIC must also consider the financial and managerial resources and future prospects of the existing and proposed institutions, the convenience and needs of the community to be served, and the effectiveness of each insured depository institution involved in the proposed merger transaction in combating money-laundering activities, including in overseas branches.

State Law

BNC is subject to extensive supervision and regulation by the NCOCB. The NCOCB oversees state laws that set specific requirements for bank capital and that regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The NCOCB supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and banks are required to make regular reports to the NCOCB describing in detail their resources, assets, liabilities, and financial condition. Among other things, the NCOCB regulates mergers and consolidations of state-chartered banks, capital requirements for banks, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

The NCOCB has extensive enforcement authority over North Carolina banks. Such authority includes the ability to issue cease and desist orders and to seek civil money penalties. The NCOCB may also take possession of a North Carolina bank in various circumstances, including for a violation of its charter or of applicable laws, operating in an unsafe and unsound manner, or as a result of an impairment of its capital, and may appoint a receiver.

On October 1, 2012, the North Carolina Banking Law Modernization Act became effective and many of the state banking laws to which BNC is subject were amended, including laws impacting capital requirements, authorized activities, permissible investments, and numerous operational functions. It is not possible to predict fully the future effects that this legislation may have on the business and earnings of BNC.

BNC is also subject to numerous state and federal statutes and regulations that affect its businesses, activities and operations and are supervised and examined by state and federal bank regulatory agencies. The FDIC and the NCOCB regularly examine the operations of each bank and are given the authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions.

Payment of Dividends and Other Restrictions

We are a legal entity separate and distinct from BNC. While there are various legal and regulatory limitations under federal and state law on the extent to which banks can pay dividends or otherwise supply funds to holding companies, the principal source of cash revenues for us is dividends from BNC. The relevant federal and state regulatory agencies also have authority to prohibit a state bank or bank holding company, which would include us and BNC, from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of a bank, be deemed to constitute an unsafe or unsound practice in conducting its business.

Insured depository institutions, such as BNC, are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if one or more of the holding company’s bank subsidiaries are classified as undercapitalized.

A bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve.

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Capital Adequacy

We must comply with the Federal Reserve’s established capital adequacy standards, and BNC is required to comply with the capital adequacy standards established by the FDIC. The Federal Reserve has promulgated two basic measures of capital adequacy for bank holding companies: a risk-based measure and a leverage measure. A bank holding company must satisfy all applicable capital standards to be considered in compliance.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, account for off-balance-sheet exposure and minimize disincentives for holding liquid assets.

Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. At least half of total capital must be comprised of Tier 1 Capital, which is common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remainder may consist of Tier 2 Capital, which is subordinated debt, other preferred stock and a limited amount of loan loss reserves. At December 31, 2013, BNC's total risk-based capital ratio and Tier 1 risk-based capital ratio were 12.66% and 11.41%, respectively. Neither the Company nor BNC has been advised by any federal banking agency of any additional specific minimum capital ratio requirement applicable to it.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3% for bank holding companies that meet specified criteria. All other bank holding companies generally are required to maintain a minimum leverage ratio of 4%.  BNC's ratio at December 31, 2013 was 8.96%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indications of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised us of any additional specific minimum leverage ratio or tangible Tier 1 Capital leverage ratio applicable to us.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements.

The Federal Deposit Insurance Act (the “FDI Act”) requires the federal regulatory agencies to take “prompt corrective action” if a depository institution does not meet minimum capital requirements. The FDI Act establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

The federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels applicable to FDIC-insured banks. The relevant capital measures are the Total Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and the leverage ratio. Under the regulations, a FDIC-insured bank will be:

• “well capitalized” if it has a Total Risk-Based Capital ratio of 10% or greater, a Tier 1 Risk-Based Capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by the appropriate regulatory authority to meet and maintain a specific capital level for any capital measure;

• “adequately capitalized” if it has a Total Risk-Based Capital ratio of 8% or greater, a Tier 1 Risk-Based Capital ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not “well capitalized;”

• “undercapitalized” if it has a Total Risk-Based Capital ratio of less than 8%, a Tier 1 Risk-Based Capital ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances);

• “significantly undercapitalized” if it has a Total Risk-Based Capital ratio of less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3% or a leverage ratio of less than 3%; and

• “critically undercapitalized” if its tangible equity is equal to or less than 2% of average quarterly tangible assets.

An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2013, BNC had capital levels that qualify as “well capitalized” under such regulations.

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The FDI Act generally prohibits an FDIC-insured bank from making a capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be “undercapitalized.”  “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of: (i) an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized”; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” insured banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and the cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. A bank that is not “well capitalized” is also subject to certain limitations relating to brokered deposits.

The regulatory capital framework under which the Company and BNC operates is expected to change in significant respects as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010, and other regulations, including the separate regulatory capital requirements put forth by the Basel Committee on Banking Supervision, commonly known as “Basel II.” The Company and BNC are currently governed by a set of capital rules that the Federal Reserve and the FDIC have had in place since 1988, with some subsequent amendments and revisions.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.

The major provisions of the new rule applicable to us are:

• The new rule implements higher minimum capital requirements, includes a new common equity tier 1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity tier 1 capital, additional tier 1 capital, or tier 2 capital. These enhancements will both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The new minimum capital to risk-weighted assets ("RWA") requirements are a common equity tier 1 capital ratio of 4.5% and a tier 1 capital ratio of 6.0%, which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (tier 1 capital to total assets) is 4.0%. The new rule maintains the general structure of the current PCA framework while incorporating these increased minimum requirements.

• The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets ("MSAs"), deferred tax assets ("DTAs"), and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity tier 1 capital.

• Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements will begin on January 1, 2016. A banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the PCA well-capitalized thresholds.

• The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

On July 9, 2013, the FDIC issued an “interim final rule” applicable to BNC that is identical in substance to the final rules issued by the Federal Reserve described above. BNC is required to comply with the interim final rule on January 1, 2015.

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Compliance by the Company and BNC with these new capital requirements will likely affect operations. However, the extent of that impact cannot be known until there is greater clarity regarding the specific requirements applicable to them. While the Dodd-Frank Act was enacted in 2010, many of its provisions will require additional implementing rules before becoming effective, and the proposed federal banking agency regulations implementing the Basel III standards, while recently promulgated, have not been implemented.

Acquisitions

As an active acquirer, we must comply with numerous laws related to our acquisition activity. Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. Further, the Bank Merger Act requires approval from the FDIC prior to the Bank merging with or acquiring the deposits of another bank. Current federal law authorizes interstate acquisitions of banks and bank holding companies and interstate banking without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states has opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years, and to certain deposit market-share limitations.

Branching

With appropriate regulatory approvals, North Carolina commercial banks are authorized to establish branches both in North Carolina and in other states. As a result of the Dodd-Frank Act, federal law allows de novo interstate branching and branching through mergers. A bank that establishes a branch in another state may conduct any activity at that branch office that is permitted by the law of that state to the extent that the activity is permitted either for a state bank chartered by that state or for a branch in the state of an out-of-state national bank.

FDIC Insurance Assessments

The FDIC insures the deposits of BNC up to prescribed limits for each depositor. Effective November 21, 2008 and until December 31, 2010, the FDIC expanded deposit insurance limits for certain accounts under the Temporary Liquidity Guarantee Program (the “TLGP”). Provided an institution did not opt out of the TLGP, the FDIC would fully guarantee funds deposited in non-interest bearing transaction accounts, including interest on lawyer trust accounts (“IOLTA” accounts) and negotiable order of withdrawal accounts (“NOW” accounts), with rates no higher than 0.50% through June 30, 2010 and no higher than 0.25% after June 30, 2010, if the institution committed to maintain the interest rate at or below that rate. In conjunction with the increased deposit insurance coverage, the amount of FDIC assessments paid by each Deposit Insurance Fund (“DIF”) member institution also increased. The Dodd-Frank Act provided temporary, unlimited deposit insurance for all non-interest bearing transaction accounts until December 31, 2012. In January 2011, the FDIC issued final rules implementing this provision of the Dodd-Frank Act by including IOLTAs within the definition of non-interest bearing transaction accounts. Under the FDIC’s final rules, all funds held in IOLTA accounts, together with all other non-interest bearing transaction account deposits, were fully insured, without limit, from December 31, 2010 through December 31, 2012.

The assessment paid by each DIF member institution is based on its relative risks of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Our insurance assessments during 2013 and 2012 were $2.8 million and $2.2 million, respectively.

An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The FDIC may terminate insurance of deposits upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

The Dodd-Frank Act expands the base for FDIC insurance assessments, requiring that assessments be based on the average consolidated total assets less tangible equity capital of a financial institution. On February 7, 2011, the FDIC approved a final rule to implement the foregoing provision of the Dodd-Frank Act. Among other things, the final rule revises the assessment rate schedule to provide assessments ranging from 5 to 35 basis points, with the initial assessment rates subject to adjustments which could increase or decrease the total base assessment rates. The FDIC has three possible adjustments to an institution’s initial base assessment rate: (1) a decrease of up to five basis points (or 50% of the initial base assessment rate) for long-term unsecured debt, including senior unsecured debt (other than debt guaranteed under the TLGP) and subordinated debt; (2) an increase for holding long-term unsecured or subordinated debt issued by other insured depository institutions known as the Depository Institution Debt Adjustment (the “DIDA”); and (3) for institutions not well rated and well capitalized, an increase not to exceed 10 basis points for brokered deposits in excess of 10% of domestic deposits.

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Each of these changes may increase the rate of FDIC insurance assessments to maintain or replenish the FDIC's DIF. This could, in turn, raise BNC’s future deposit insurance assessment costs. On the other hand, the law changes the deposit insurance assessment base so that it will generally be equal to consolidated assets less tangible equity. This change of the assessment base from an emphasis on deposits to an emphasis on assets is generally considered likely to cause larger banking organizations to pay a disproportionately higher portion of future deposit insurance assessments, which may, correspondingly, lower the level of deposit insurance assessments that smaller community banks such as BNC may otherwise have to pay in the future. While it is likely that the new law will increase BNC’s future deposit insurance assessment costs, the specific amount by which the new law’s combined changes will affect BNC’s deposit insurance assessment costs is hard to predict, particularly because the new law gives the FDIC enhanced discretion to set assessment rate levels.

The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of the Financing Corporation (the “FICO”). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and ranged from was 0.66 basis points throughout 2012 to 0.62 basis points for 2013 per $100 of assessable deposits throughout 2012. These assessments will continue until the debt matures in 2017 through 2019.

Community Reinvestment Act

The Community Reinvestment Act requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low and moderate-income borrowers in their local communities. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions are examined using a performance-based lending, investment and service test. Small institutions are examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.

The Community Reinvestment Act regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s Community Reinvestment Act performance and to review the institution’s Community Reinvestment Act public file. Each lending institution must maintain for public inspection a file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs. The Community Reinvestment Act requires public disclosure of a financial institution’s written Community Reinvestment Act evaluations. This promotes enforcement of Community Reinvestment Act requirements by providing the public with the status of a particular institution’s community reinvestment record.

The Gramm-Leach-Bliley Act made various changes to the Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual Community Reinvestment Act reports must be made available to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the Gramm-Leach-Bliley Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory Community Reinvestment Act rating in its latest Community Reinvestment Act examination. BNC received a “Satisfactory” rating in its last CRA examination which was conducted during June 2011.

Consumer Protection Laws

BNC is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Act and state law counterparts.

Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

Additional Legislative and Regulatory Matters

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. The USA PATRIOT Act also requires the Secretary of the Treasury

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to prescribe by regulation minimum standards that financial institutions must follow to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) mandates for public companies a variety of reforms intended to address corporate and accounting fraud and provides for the establishment of the Public Company Accounting Oversight Board (the “PCAOB”), which enforces auditing, quality control and independence standards for firms that audit SEC-reporting companies. Sarbanes-Oxley imposes higher standards for auditor independence and restricts the provision of consulting services by auditing firms to companies they audit and requires that certain audit partners be rotated periodically. It also requires chief executive officers and chief financial officers, or their equivalents, to certify the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement, and increases the oversight and authority of audit committees of publicly traded companies.

Fiscal and Monetary Policy

Banking is a business which depends on interest rate differentials for success. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings. Thus, the earnings and growth of the Company and BNC will be subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve and the reserve requirements on deposits. The nature and timing of any changes in such policies and their effect on the Company and BNC cannot be predicted.

Current and future legislation and the policies established by federal and state regulatory authorities will affect the future operations of us and BNC. Banking legislation and regulations may limit our growth and the return to investors by restricting certain activities.

In addition, capital requirements could be changed and have the effect of restricting our activities or the activities of BNC or requiring additional capital to be maintained. We cannot predict with certainty what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our business and the business of BNC.

Federal Home Loan Bank System

We have a correspondent relationship with the Federal Home Loan Bank ("FHLB") of Atlanta, which is one of 12 regional FHLBs that administer the home financing credit function of savings companies. Each FHLB serves as a reserve or central bank for its members within its assigned region. FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system and make loans to members (i.e., advances) in accordance with policies and procedures, established by the Board of Directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing.

FHLB provides certain services to us such as processing checks and other items, buying and selling federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items and furnishing limited management information and advice. As compensation for these services, we maintain certain balances with FHLB in interest-bearing accounts.

Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings companies and to contribute to low and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low and moderate-income housing projects.

Title 6 of the Gramm-Leach-Bliley Act, entitled the Federal Home Loan Bank System Modernization Act of 1999 (the “FHLB Modernization Act”), amended the Federal Home Loan Bank Act to allow voluntary membership and modernized the capital structure and governance of the FHLBs. The capital structure established under the FHLB Modernization Act sets forth leverage and risk-based capital requirements based on permanence of capital. It also requires some minimum investment in the stock of the FHLBs of all member entities. Capital includes retained earnings and two forms of stock: Class A stock redeemable within six months upon written notice and Class B stock redeemable within five years upon written notice. The FHLB Modernization Act also reduced the period of time in which a member exiting the FHLB system must stay out of the system.

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Real Estate Lending Evaluations

The federal regulators have adopted uniform standards for evaluations of loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan to value ratio limitations on real estate loans. BNC's loan policies establish limits on loan to value ratios that are equal to or less than those established in such regulations.

Commercial Real Estate Concentrations

Our lending operations may be subject to enhanced scrutiny by federal banking regulators based on our concentration of commercial real estate loans. On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans, and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

• total reported loans for construction, land development and other land (“C&D”) represent 100% or more of the institution’s total capital; or

• total CRE loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s CRe loan portfolio has increased by 50% or more.

As of December 31, 2013, and excluding covered assets, BNC's C&D concentration as a percentage of BNC’s capital totaled 84.4% and BNC’s CRE concentration, net of owner-occupied loans, as a percentage of capital totaled 347.4%. Including loans subject to loss-share agreements with the FDIC, BNC’s C&D concentration as a percentage of capital totaled 87.8% and its CRE concentration, net of owner-occupied loans, as a percentage of capital totaled 360.3%.

Limitations on Incentive Compensation

In October 2009, the Federal Reserve issued proposed guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermine the safety and soundness of the organization. In connection with the proposed guidance, the Federal Reserve announced that it would review our incentive compensation arrangements as part of the regular, risk-focused supervisory process.

In June 2010, the Federal Reserve issued the incentive compensation guidance in final form and was joined by the FDIC, and the Office of the Comptroller of the Currency. The final guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide employees incentives that appropriately balance risk and reward and, thus, do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

The Federal Reserve’s monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of these policies on our business and earnings and on the business and earnings of BNC cannot be predicted.

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Evolving Legislation and Regulatory Action

In 2009, many emergency government programs enacted in 2008 in response to the financial crisis and the recession slowed or wound down, and global regulatory and legislative focus has generally moved to a second phase of broader regulatory reform and a restructuring of the entire financial regulatory system. The Dodd-Frank Act was signed into law in 2010 and implements many new changes in the way financial and banking operations are regulated in the United States, including through the creation of a new resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and numerous other provisions intended to strengthen the financial services sector. The Dodd-Frank Act provides for the creation of the Financial Stability Oversight Council (the “FSOC”), which is charged with overseeing and coordinating the efforts of the primary U.S. financial regulatory agencies (including the Federal Reserve, the FDIC and the SEC) in establishing regulations to address systemic financial stability concerns. The Dodd-Frank Act also provides for the creation of the Consumer Financial Protection Bureau (the “CFPB”), a new consumer financial services regulator. The CFPB is authorized to prevent unfair, deceptive and abusive practices and ensure that consumers have access to markets for consumer financial products and services and that such markets are fair, transparent and competitive.

New laws or regulations or changes to existing laws and regulations, including changes in interpretation or enforcement, could materially adversely affect our financial condition or results of operations. Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years. As a result, the overall financial impact on the Company and BNC cannot be anticipated at this time.

Annual Disclosure Statement

This Annual Report on Form 10-K also serves as the annual disclosure statement of BNC pursuant to Part 350 of the FDIC’s rules and regulations. This statement has not been reviewed or confirmed for accuracy or relevance by the FDIC.

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ITEM 1A.    RISK FACTORS

Risks Related To Our Company, Our Business, and Our Industry

A return to recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

Following a national home price peak in mid-2006, falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in early 2007, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail.

Although the general economic environment has shown some improvement, there can be no assurance that improvement will continue. A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high unemployment levels may result in a variety of consequences, including the following:

• increases in loan delinquencies;

• increases in nonperforming and classified assets;

• decreases in demand for our products and services; and

• decreases in the value of collateral securing our loans, especially real estate, which could result in lower recovery amounts on these loans, as well as reduce customers’ borrowing power and our ability to originate future loans.

Legislation and regulatory proposals in response to turmoil in the financial markets may materially adversely affect our business and results of operations.

The banking industry is heavily regulated. We are subject to examinations, supervision and comprehensive regulation by various federal and state agencies. Our compliance with these regulations is costly and restricts certain of our activities. Banking regulations are primarily intended to protect the federal deposit insurance fund and depositors, not shareholders. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies and leasing companies. Changes in the laws, regulations and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Federal economic and monetary policies may also affect our ability to attract deposits and other funding sources, make loans and investments and achieve satisfactory interest spreads.

The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, including new or revised regulation of such things as systemic risk, capital adequacy, deposit insurance assessments and consumer financial protection. In addition, the federal banking regulators have issued joint guidance on incentive compensation, and the Treasury and the federal banking regulators have issued statements calling for higher capital and liquidity requirements for banking organizations. Complying with these and other new legislative or regulatory requirements, and any programs established thereunder, could have a material adverse impact on our results of operations, our financial condition and our ability to fill positions with the most qualified candidates available.

Our revenues are highly correlated to market interest rates.

Our assets and liabilities are primarily monetary in nature, and as a result, we are subject to significant risks tied to changes in interest rates. Our ability to operate profitably is largely dependent upon net interest income. In 2013, net interest income made up 86% of our recurring revenue. Unexpected movement in interest rates, that may or may not change the slope of the current yield curve, could cause our net interest margins to decrease, subsequently decreasing net interest income. In addition, such changes could materially adversely affect the valuation of our assets and liabilities.

As with most financial institutions, our results of operations are affected by changes in interest rates and our ability to manage this risk. The difference between interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities may be affected by changes in market interest rates, changes in relationships between interest rate indices, and changes in the relationships between long-term and short-term market interest rates. In addition, the mix of assets and liabilities could change as varying levels of market interest rates might present our customer base with more attractive options.

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Certain changes in interest rates, inflation, deflation or the financial markets could affect demand for our products and our ability to deliver products efficiently.

Loan originations, and potentially loan revenues, could be materially adversely impacted by sharply rising interest rates. Conversely, sharply falling rates could increase prepayments within our securities portfolio lowering interest earnings from those investments. An unanticipated increase in inflation could cause our operating costs related to salaries and benefits, technology and supplies to increase at a faster pace than revenues.

The fair market value of our securities portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.

Our concentration of real estate loans subjects the Company to risks that could materially adversely affect our results of operations and financial condition.

The deterioration in residential and commercial construction and development and acquisition portfolios may lead to increased nonperforming assets in our loan portfolio and increased provision for loan losses, which could have a material adverse effect on our capital, financial condition and results of operations.

While recent economic data suggests that overall economic conditions are improving, such improvement may be slower in our market areas and if market conditions in the residential construction and development and land acquisition real estate markets remain poor or further deteriorate, they may lead to additional valuation adjustments on our loans and real estate owned in these markets. Furthermore, a sustained weakened economy could result in a continuation of the decreased demand for residential housing, which, in turn, could adversely affect the development and construction efforts of residential real estate developers, adversely affect the ability of those developers to repay their loans and decrease the value of the property used as collateral, resulting in higher levels of non-performing loans. Any further increase in our non-performing assets and related increases in our provision for loan losses could negatively affect our business and have a material adverse effect on our capital, financial condition and results of operations.

Because we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, which could result in reduced net income.

Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to:

• general or local economic conditions;

• environmental cleanup liability;

• neighborhood values;

• real estate tax rates;

• operating expenses of the foreclosed properties;

• ability to obtain and maintain adequate occupancy of the properties;

• zoning laws, governmental rules, regulations and fiscal policies; and

• natural disasters.

Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment, or we may be required to dispose of the real property at a loss.

Our allowance for loan losses may not be adequate to cover losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition and results of operations.

We, as lenders, are exposed to the risk that our customers will be unable to repay their loans in accordance with their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of

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making loans and could have a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio will relate principally to the creditworthiness of business entities and the value of the real estate serving as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within our local markets.

We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for estimated loan losses based on a number of factors. If our assumptions or judgments prove to be incorrect, the allowance for loan losses may not be sufficient to cover actual loan losses. We may have to increase our allowance in the future in response to the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our loan portfolio. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings and other sources, could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could negatively impact our access to liquidity sources include a decrease in the level of our business activity as a result of an economic downturn in the markets in which our loans are concentrated, adverse regulatory action against us, or our inability to attract and retain deposits. Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of recent turmoil faced by banking organizations and the unstable credit markets.

Our business is highly correlated to local economic conditions in a geographically concentrated part of the United States.

Unlike larger organizations that are more geographically diversified, our banking offices are primarily concentrated in select markets in North and South Carolina. As a result of this geographic concentration, our financial results depend largely upon economic conditions in these market areas. Deterioration in economic conditions in the markets we serve could result in one or more of the following:

• an increase in loan delinquencies;

• an increase in problem assets and foreclosures;

• a decrease in the demand for our products and services; and

• a decrease in the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with problem loans and collateral coverage.

We rely on dividends from BNC for most of our revenue.

We are a separate and distinct legal entity from BNC. We receive substantially all of our revenue from dividends from BNC. These dividends are the principal source of funds to pay dividends on common stock and interest and principal on our debt. Various federal and state laws and regulations limit the amount of dividends that BNC may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event BNC is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our common stock and our business, financial condition and results of operations may be materially adversely affected.

We are subject to regulation by various federal and state entities.

We are subject to the regulations of the SEC, the Federal Reserve, the FDIC and the NCOCB. New regulations issued by these agencies may adversely affect our ability to carry on our business activities. We are subject to various federal and state laws and certain changes in these laws and regulations may adversely affect our operations. Noncompliance with certain of these regulations may impact our business plans, including our ability to branch, offer certain products or execute existing or planned business strategies.

We are also subject to the accounting rules and regulations of the SEC and the Financial Accounting Standards Board. Changes in accounting rules could materially adversely affect the reported financial statements or our results of operations and may also require extraordinary efforts or additional costs to implement. Any of these laws or regulations may be modified or changed from time to time, and we cannot be assured that such modifications or changes will not adversely affect us.

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We are subject to industry competition which may have an impact upon our success.

Our profitability depends on our ability to compete successfully. We operate in a highly competitive financial services environment. Certain competitors are larger and may have more resources than we do. We face competition in our regional market areas from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and other financial intermediaries that offer similar services. Some of our nonbank competitors are not subject to the same extensive regulations that govern us or our bank subsidiary and may have greater flexibility in competing for business.

Another competitive factor is that the financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success may depend, in part, on our ability to use technology competitively to provide products and services that offer convenience to customers and create additional efficiencies in our operations.

Consumers may decide not to use local banks to complete their financial transactions.

Technology and other changes are allowing parties to complete, through alternative methods, financial transactions that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as local bank deposits in brokerage accounts, mutual funds with an internet-only bank, or with virtually any bank in the country through on-line banking. Consumers can also complete transactions such as purchasing goods and services, paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower-cost deposits as a source of funds could have an adverse effect on our financial condition, results of operations and liquidity.

Our recent results may not be indicative of our future results.

We may not be able to grow our business at the same rate of growth achieved in recent years or even grow our business at all. Additionally, we may not have the benefit of several factors that have been favorable to our business in past years, such as an interest rate environment where changes in rates occur at a relatively orderly and modest pace, the ability to find suitable expansion opportunities, including traditional or FDIC assisted acquisitions, or otherwise to capitalize on opportunities presented by economic turbulence, or other factors and conditions. Numerous factors, such as weakening or deteriorating economic conditions, regulatory and legislative considerations, and competition may impede or restrict our ability to expand our market presence and could adversely impact our future operating results.

We depend on key personnel for our success.

Our operating results and ability to adequately manage our growth and minimize loan losses is highly dependent on the services, managerial abilities and performance of our current executive officers and other key personnel. We have an experienced management team that the board of directors believes is capable of managing and growing the Company. Losses of or changes in our current executive officers or other key personnel and their responsibilities may disrupt our business and could adversely affect our financial condition, results of operations and liquidity. Additionally, our ability to retain our current executive officers and other key personnel may be further impacted by existing and proposed legislation and regulations affecting the financial services industry. There can be no assurance that we will be successful in retaining our current executive officers or other key personnel.

Changes in the policies of monetary authorities and other government action could materially adversely affect our profitability.

The results of our operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist attacks and the current military operations and other instances of unrest in the Middle East, we cannot predict with certainty possible future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the U.S. government and other governments in responding to such terrorist attacks or events in the Middle East may result in currency fluctuations, exchange controls, market disruption and other adverse effects.

We may need to rely on the financial markets to provide needed capital.

Our common stock is listed and traded on the NASDAQ Capital Market. Although we anticipate that our capital resources will be adequate for the foreseeable future to meet our capital requirements, at times we may depend on the liquidity of the NASDAQ market to raise equity capital. If the market should fail to operate, or if conditions in the capital markets are adverse, we may be constrained in raising capital. Downgrades in the opinions of the analysts that follow us may cause our stock price to fall and significantly limit our

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ability to access the markets for additional capital requirements. Should these risks materialize, our ability to further expand our operations through internal growth or acquisition may be limited.

We may invest or spend the proceeds of stock offerings in ways with which you may not agree and in ways that may not earn a profit.

We may choose to use the proceeds of future stock offerings for general corporate purposes, including for possible acquisition opportunities that may become available, such as future FDIC-assisted transactions. It is not known whether suitable acquisition opportunities may become available or whether we will be able to successfully complete any such acquisitions. We may use the proceeds of an offering only to focus on sustaining our organic, or internal, growth or for other purposes. In addition, we may use all or a portion of the proceeds of an offering to support our capital. You may not agree with the ways we decide to use the proceeds of any stock offerings, and our use of the proceeds may not yield any profits.

We face risks related to our operational, technological and organizational infrastructure.

Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure while we expand. Similar to other large corporations, in our case, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons and exposure to external events. We are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our technology systems which we use both to interface with our customers and to manage our internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing customers and attract new customers depends in part on the functionality of our technology systems. Additionally, our ability to run our business in compliance with applicable laws and regulations is dependent on these infrastructures.

We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. In some instances, we may build and maintain these capabilities ourselves. We also outsource some of these functions to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into our existing businesses.

Financial services companies depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

Reputational risk and social factors may impact our results.

Our ability to originate and maintain accounts is highly dependent upon customer and other external perceptions of our business practices and our financial health. Adverse perceptions regarding our business practices or our financial health could damage our reputation in both the customer and funding markets, leading to difficulties in generating and maintaining accounts as well as in financing them. Adverse developments with respect to the consumer or other external perceptions regarding the practices of our competitors, or our industry as a whole, may also adversely impact our reputation. In addition, adverse reputational impacts on third parties with whom we have important relationships may also adversely impact our reputation. Adverse impacts on our reputation, or the reputation of our industry, may also result in greater regulatory or legislative scrutiny, which may lead to laws, regulations or regulatory actions that may change or constrain the manner in which we engage with our customers and the products we offer. Adverse reputational impacts or events may also increase our litigation risk. We carefully monitor internal and external developments for areas of potential reputational risk and have established governance structures to assist in evaluating such risks in our business practices and decisions.

We may experience interruptions or breaches in our information system security.

We rely heavily on communications and information systems to conduct our business. In addition to our own systems we also rely on external vendors to provide certain services and are therefore exposed to their information security risks. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there can be no assurance that any failure or interruption of our systems, or our external vendors systems, will not occur, or, if they do occur that they will be adequately addressed. The volume of business conducted through electronic devices continues to grow and our computer systems and network infrastructure, as well as the systems of external vendors and customers, present security risks and could be susceptible to hacking and identify theft. A breach in security of our systems, including a breach

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resulting from our newer online capabilities such as mobile banking, increases the potential for fraud losses. The occurrence of any failure, interruption or security breach of our information systems could result in damage to our reputation, result in loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material effect on our financial condition and results of operations.

A failure in or breach of our operational or security systems or infrastructure, or those of external vendors and other service providers, including as a result of cyber-attacks, could disrupt our business, result in disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our customers, which may result in financial losses to us or our customers, privacy breaches against our customers or damage to our reputation. Such fraudulent activity may take various forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest activities. In recent years, there has been a rise in electronic fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber-criminals targeting commercial bank accounts.

In addition, our operations rely on secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take numerous protective measures to maintain the confidentiality, integrity and availability of our and our customers’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve and become increasingly sophisticated. As a result, our computer systems, software and networks and those of our customers may be vulnerable to unauthorized access, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service, computer viruses or other malicious codes, cyber-attacks and other events that could have an adverse security impact and result in significant losses by us and/or our customers. These threats may originate externally from third parties, such as cyber-criminal and other hackers, third party vendors providing processing or infrastructure-support services, or internally from within our organization. Despite the defensive measures we take to manage our internal technological and operational infrastructure, given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they are discovered and rectified.

We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. These parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure. In addition, we may be at risk of an operation failure with respect to our customers' systems. Our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of the threats, the outsourcing of some of our business operations and the continued uncertain global economic environment. As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information system vulnerabilities.

Our hedging strategies may not be successful in mitigating our exposure to interest rate risk.

We use derivative financial instruments, primarily consisting of interest rate swaps, caps floors, financial forward and futures contracts to limit our exposure to interest rate risk. No hedging strategy can completely protect us; the derivative financial instruments we elect may not have the effect of reducing our interest rate risks. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could actually increase our risks and losses. In addition, hedging strategies involve transaction and other costs. We cannot be assured that our hedging strategies and the derivatives that we use will adequately offset the risks of interest rate volatility or that our hedging transactions will not result in or magnify losses.

The FDIC has imposed a special assessment on all FDIC-insured institutions, and future special assessments could materially adversely affect our earnings in future periods.

In May 2009, the FDIC announced that it had voted to levy a special assessment on insured institutions in order to facilitate the rebuilding of the Deposit Insurance Fund. During 2009, we were required to pay a special assessment totaling $743,000 and also to prepay the assessments that would normally have been paid during 2010 through 2012. There is no longer any prepaid balance at December 31, 2013. The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any future assessments. Any such future assessments will decrease our earnings.

Risks Related to Our Growth Strategy

We may not be able to implement aspects of our growth strategy.

Our growth strategy contemplates the future expansion of our business and operations both organically and by acquisitions, such as through the establishment or acquisition of banks and banking offices in our market area and other markets in North and South Carolina. Implementing these aspects of our growth strategy depends, in part, on our ability to successfully identify acquisition opportunities and

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strategic partners that will complement our operating philosophy and to successfully integrate their operations with ours, as well as to generate loans and deposits within acceptable risk and expense tolerances. To successfully acquire or establish banks or banking offices, we must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships and high caliber banking personnel to make these new banking offices profitable. In addition, we may not be able to identify suitable opportunities for further growth and expansion or, if we do, we may not be able to successfully integrate these new operations into our business.

As consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. We will compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than we do and may be able to pay more for an acquisition than we are able or willing to pay.

We can offer no assurance that we will have opportunities to acquire other financial institutions or acquire or establish any new branches or loan production offices, or that we will be able to negotiate, finance and complete any opportunities available to us.

If we are unable to effectively implement our growth strategies, our business, results of operations and stock price may be materially and adversely affected.

Future expansion involves risks.

Our acquisition of other financial institutions or parts of those institutions involves a number of risks, including the risk that:

• we may incur substantial costs in identifying and evaluating potential acquisitions and merger partners, or in evaluating new markets, hiring experienced local managers, and opening new offices;

• our estimates and judgments used to evaluate credit, operations, management and market risks relating to target institutions may not be accurate;

• the institutions we acquire may have distressed assets and there can be no assurance that we will be able to realize the value we predict from those assets or that we will make sufficient provisions or have sufficient capital for future losses;

• we may be required to take write-downs or write-offs, restructurings and impairment, or other charges related to the institutions we acquire that could have a significant negative effect on our financial condition and results of operations;

• there may be substantial lag-time between completing an acquisition and generating sufficient assets and deposits to support costs of the expansion;

• our management’s attention in negotiating a transaction and integrating the operations and personnel of the combining businesses may be diverted from our existing business and we may not be able to successfully integrate such operations and personnel;

• our announcement of additional transactions prior to the completion of the merger could result in a delay in obtaining regulatory or shareholder approval for the merger, which could have the effect of limiting our ability to fully realize the expected financial benefits from the transaction;

• we may not be able to obtain regulatory approval for an acquisition;

• we may enter new markets where we lack local experience or that introduce new risks to our operations, or that otherwise result in adverse effects on our results of operations;

• we may introduce new products and services we are not equipped to manage or that introduce new risks to its operation, or that otherwise result in adverse effects on our results of operations;

• we may incur intangible assets in connection with an acquisition, or the intangible assets we incur may become impaired, which could result in adverse short-term effects on our results of operations;

• we may assume liabilities in connection with an acquisition, including unrecorded liabilities that are not discovered at the time of the transaction, and the repayment of those liabilities may have an adverse effect on our results of operations, financial condition and stock price; or

• we may lose key employees and customers.

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We cannot assure you that we will be able to successfully integrate any banking offices that we acquire into our operations or retain customers of those offices. If any of these risks occur in connection with our expansion efforts, it may have a material and adverse effect on our results of operations and financial condition.

We may not be able to maintain and manage our organic growth, which may adversely affect our results of operations and financial condition.

We have grown rapidly since our acquisition of Beach First National Bank ("Beach First") in April 2010, and our business strategy contemplates significant acceleration in such growth, both organically and through acquisitions. We can provide no assurance that we will continue to be successful in increasing the volume of loans and deposits or in introducing new products and services at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks associated with our historical or modified organic growth strategy. We may be unable to continue to increase our volume of loans and deposits or to introduce new products and services at acceptable risk levels for a variety of reasons, including an inability to maintain capital and liquidity sufficient to support continued growth. If we are successful in continuing our growth, we cannot assure you that further growth would offer the same levels of potential profitability or that we would be successful in controlling costs and maintaining asset quality. Accordingly, an inability to maintain growth, or an inability to effectively manage growth, could adversely affect out results of operations, financial condition and stock price.

New bank office facilities and other facilities may not be profitable.

We may not be able to organically expand into new markets that are profitable for our franchise. The costs to start up new bank branches and loan production offices in new markets, other than through acquisitions, and the additional costs to operate these facilities would increase our non-interest expense and may decrease our earnings. It may be difficult to adequately and profitably manage our growth through the establishment of bank branches and loan production offices in new markets. In addition, we can provide no assurance that our expansion into any such new markets will successfully attract enough new business to offset the expenses of their operation. If we are not able to do so, our earnings and stock price may be negatively impacted.

Acquisition of assets and assumption of liabilities may expose us to intangible asset risk, which could impact our results of operations and financial condition.

In connection with any acquisitions, as required by U.S. generally accepted accounting principles, or GAAP, we will record assets acquired and liabilities assumed at their fair value and, as such, acquisitions may result in our recording of intangible assets, including core deposit intangibles and goodwill. We will perform a goodwill impairment assessment at least annually. Impairment testing is a two-step process that first compares the fair value of goodwill with its carrying amount, and the second step, if necessary, measures impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Adverse conditions in the business climate, including a significant decline in future operating cash flows, a significant change in our stock price or market capitalization, or a deviation from our expected growth rate and performance may trigger impairment losses, which could be materially adverse to our results of operations, financial condition and stock price.

The success of our growth strategy depends on our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand.

Our growth strategy contemplates that we will expand our business and operations to other markets, particularly in the Carolinas. We intend to primarily target market areas that we believe possess attractive demographic, economic or competitive characteristics. To expand into new markets successfully, we must identify and retain experienced key management members with local expertise and relationships in these markets. Competition for qualified personnel in the markets in which we may expand may be intense, and there may be a limited number of qualified persons with knowledge of and experience in the commercial banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from other banks or may be unable to do so at a reasonable cost. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit and retain talented personnel to manage new offices effectively would limit our growth and could materially adversely affect our business, financial condition, results of operations and stock price.

We may need additional access to capital, which we may be unable to obtain on attractive terms or at all.

We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments for future growth or to fund losses or additional provision for loan losses in the future. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when

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needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our stock price negatively affected.

Risks Related to FDIC-Assisted Transactions

Changes in national and local economic conditions could lead to higher loan charge-offs in connection with past FDIC-assisted transactions, all of which may not be supported by loss-share agreements with the FDIC.

Although loan portfolios acquired in past FDIC-assisted transactions have initially been accounted for at fair value, we do not yet know whether the loans we acquired will become impaired, and impairment may result in additional charge-offs to the portfolio. The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may increase the level of charge-offs that we make to our loan portfolio, and, consequently, reduce our net income, and may also increase the level of charge-offs on the loan portfolios that we have acquired through such acquisitions and correspondingly reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition even if other favorable events occur.

Although we have entered into loss-share agreements with the FDIC which provide that a significant portion of losses related to specified loan portfolios that we have acquired in connection with the FDIC-assisted transactions will be borne by the FDIC, we are not protected for all losses resulting from charge-offs with respect to those specified loan portfolios. Additionally, the loss-share agreements have limited terms; therefore, any charge-off of related losses that we experience after the term of the loss-share agreements will not be reimbursable by the FDIC and will negatively impact our net income. The loss-share agreements also impose standard requirements on us which must be satisfied in order to retain loss-share protections.

Failure to comply with the terms of loss-sharing arrangements with the FDIC may result in significant losses.

Loss-share agreements also impose standard requirements on us which must be satisfied in order to retain loss-share protections. Any failure to comply with the terms of any loss-share agreements BNC has with the FDIC, or to properly service the loans and foreclosed assets covered by loss-share agreements, may cause individual loans, large pools of loans or other covered assets to lose eligibility for reimbursement to the Company from the FDIC. This could result in material losses that are currently not anticipated and could adversely affect the Company’s financial condition, results of operations or liquidity.

Risks Related to Our Common Stock

The price of our common stock is volatile and may decline.

The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect our stock price are:

• actual or anticipated quarterly fluctuations in our operating results and financial condition;

• changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other financial institutions;

• failure to meet analysts’ revenue or earnings estimates;

• speculation in the press or investment community;

• strategic actions by us or our competitors, such as acquisitions or restructurings;

• actions by institutional shareholders;

• fluctuations in the stock price and operating results of our competitors;

• general market conditions and, in particular, developments related to market conditions for the financial services industry;

• proposed or adopted regulatory changes or developments;

• anticipated or pending investigations, proceedings or litigation that involve or affect us; or

• domestic and international economic factors unrelated to our performance.

A significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.

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Securities issued by us, including our common stock, are not FDIC insured.

Securities issued by us, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC, the DIF or any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.

We have subordinated debentures outstanding which rank senior to our common stock.

We have issued and have outstanding $23.7 million in subordinated debentures in connection with the issuance of trust preferred securities. These debentures rank senior to our common stock.

We may issue additional debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.

In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by all or up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive a distribution of our available assets before distributions to the holders of our common stock. Because our decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate with certainty the amount, timing or nature of our future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.

Sales of a significant number of shares of our common stock in the public markets, or the perception of such sales, could depress the market price of our common stock.

Sales of a substantial number of shares of our common stock in the public markets and the availability of those shares for sale could adversely affect the market price of our common stock. In addition, future issuances of equity securities, including pursuant to outstanding options, could dilute the interests of our existing stockholders and could cause the market price of our common stock to decline. We may issue such additional equity or convertible securities to raise additional capital. Depending on the amount offered and the levels at which we offer the stock, issuances of common or preferred stock could be substantially dilutive to shareholders of our common stock. Moreover, to the extent that we issue restricted stock, phantom shares, stock appreciation rights, options or warrants to purchase our common stock in the future and those stock appreciation rights, options or warrants are exercised or as shares of the restricted stock vest, our shareholders may experience further dilution. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro-rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders. We cannot predict with certainty the effect that future sales of our common stock would have on the market price of our common stock.

We may reduce or eliminate dividends on our common stock.

Although we have historically paid a quarterly cash dividend to the holders of our common stock, holders of our common stock are not entitled to receive dividends. Downturns in the domestic and global economies could cause our Board of Directors to consider, among other things, reducing or eliminating dividends paid on our common stock. This could adversely affect the market price of our common stock. Furthermore, as a bank holding company, our ability to pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends before declaring or paying any dividends. Dividends also may be limited as a result of safety and soundness considerations.

Our articles of incorporation, as amended, amended and restated bylaws, and certain banking laws may have an anti-takeover effect.

Provisions of our articles of incorporation and bylaws, as amended, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions may prohibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

We lease our corporate headquarters, located in High Point, North Carolina. BNC owns its main office and operations center, located in Thomasville, North Carolina. BNC operates 39 branch offices throughout North and South Carolina, of which 24 are owned and 15 are leased at market rates from third parties.

The total net book value of our premises and equipment on December 31, 2013 was $76.1 million. All properties are considered by our management to be in good condition and adequately covered by insurance. See Note 8 of the “Notes to Consolidated Financial Statements” to the accompanying Consolidated Financial Statements contained in Item 8 for information on premises and equipment.

ITEM 3. LEGAL PROCEEDINGS

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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Capital Market under the symbol “BNCN”. The high and low closing sale prices, which represent actual transactions as quoted on the NASDAQ Capital Market, of the Company’s common stock for each quarterly period in 2013 and 2012 are presented below.  The per share dividends declared by the Company in each quarterly period in 2013 and 2012 for its voting and non-voting common stock are also presented below.

		Market Price
		High	Low	Cash Dividends Declared per Share
2013	1st Quarter	$10.10	$7.85	$0.05
	2nd Quarter	11.47	9.56	0.05
	3rd Quarter	14.35	11.26	0.05
	4th Quarter	17.34	11.67	0.05
2012	1st Quarter	$8.00	$6.80	$0.05
	2nd Quarter	8.41	6.72	0.05
	3rd Quarter	8.50	7.41	0.05
	4th Quarter	8.87	7.34	0.05

As of March 10, 2014, we had approximately 2,653 shareholders of record not including persons or entities whose stock is held in nominee or “street” name and by various banks and brokerage firms.

The Company’s ability to pay dividends on its common stock is principally dependent on BNC’s ability to pay dividends to the Company, which is subject to various regulatory restrictions and limitations. See “Item 1. Business – Supervision and Regulation – Payment of Dividends and Other Restrictions” above for regulatory restrictions which limit the ability of BNC to pay dividends. The Company expects to continue to pay comparable dividends on its common stock for the foreseeable future.

We made no purchases, nor did any of our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended), of our common stock during the three months ended December 31, 2013.

The information required to be disclosed under Item 201(d) and (e) of Regulation S-K is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

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Performance Graph

The following graph compares our cumulative shareholder return on our common stock with a NASDAQ index and with a southeastern bank index. The graph was prepared by SNL Financial, LLC using data as of December 31, 2013.

BNC Bancorp

Index	12/31/08	12/31/09	12/31/10	12/31/11	12/31/12	12/31/13
BNC Bancorp	100.00	103.90	126.05	104.25	118.20	257.49
NASDAQ Composite	100.00	145.36	171.74	170.38	200.63	281.22
S&P 500	100.00	126.46	145.51	148.59	172.37	228.19
SNL Bank Index	100.00	98.97	110.90	85.88	115.90	159.12
SNL Southeast Bank Index	100.00	100.41	97.49	57.04	94.75	128.40

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ITEM 6.     SELECTED FINANCIAL DATA

Table 1

Selected Financial Data

(dollars in thousands, except per share and non-financial information, shares in thousands)

	As of/For the Year Ended December 31,
	2013		2012			2011			2010			2009
Operating Data:
Total interest income	$	138,670	$	113,515		$	103,343		$	95,010		$	79,082
Total interest expense	30,063		32,891			32,920			34,747			32,867
Net interest income	108,607		80,624			70,423			60,263			46,215
Provision for loan losses	12,188		22,737			18,214			26,382			15,750
Net interest income after provision for loan losses	96,419		57,887			52,209			33,881			30,465
Non-interest income	22,806		33,138			20,802			28,813			8,686
Non-interest expense	97,933		82,272			67,864			55,172			32,899
Income before income tax expense (benefit)	21,292		8,753			5,147			7,522			6,252
Income tax expense (benefit)	4,045		(1,700		)	(1,783		)	(204		)	(285		)
Net income	17,247		10,453			6,930			7,726			6,537
Less preferred stock dividends and discount accretion	1,060		2,404			2,404			2,196			1,984
Net income available to common shareholders	$	16,187	$	8,049		$	4,526		$	5,530		$	4,553
Per Common Share Data:
Basic earnings per share	$	0.61	$	0.48		$	0.45		$	0.62		$	0.62
Diluted earnings per share	0.61		0.48			0.45			0.61			0.62
Cash dividends declared	0.20		0.20			0.20			0.20			0.20
Book value	9.94		9.51			12.80			11.63			13.20
Tangible common book value (1)	8.66		8.20			9.60			8.49			9.43
Weighted average shares outstanding:
Basic	26,683		17,595			10,878			9,262			7,340
Diluted	26,714		17,599			10,894			9,337			7,348
Year-end common shares outstanding	27,303		24,650			9,101			9,053			7,342
Selected Year-End Balance Sheet Data:
Total assets	$	3,229,576	$	3,083,788		$	2,454,930		$	2,149,932		$	1,634,185
Investment securities available-for-sale	270,417		341,539			282,174			352,824			360,459
Investment securities held-to-maturity	247,378		114,805			97,036			6,000			6,000
Portfolio loans	2,276,517		2,035,258			1,709,483			1,508,180			1,079,179
Allowance for loan losses	32,875		40,292			31,008			24,813			17,309
Goodwill	28,384		27,111			26,129			26,129			26,129
Deposits	2,706,730		2,656,309			2,118,187			1,828,070			1,349,878
Short-term borrowings	125,592		32,382			70,211			60,207			50,283
Long-term debt	101,509		88,173			93,713			97,713			100,713
Shareholders' equity	271,330		282,244			163,855			152,224			126,206

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Selected Average Balances:
Total assets	$	3,009,367		$	2,544,718		$	2,208,525		$	2,027,261		$	1,617,744
Investment securities	483,984			353,040			339,067			352,099			430,684
Total loans	2,139,281			1,813,899			1,561,257			1,359,107			1,026,635
Total interest-earning assets	2,696,475			2,244,423			1,936,069			1,799,324			1,496,230
Interest-bearing deposits	2,236,046			2,002,595			1,770,106			1,613,886			1,257,333
Total interest-bearing liabilities	2,429,817			2,126,818			1,914,179			1,765,391			1,418,935
Shareholders' equity	269,123			212,955			156,968			149,959			123,641
Selected Performance Ratios:
Return on average assets (2)	0.54		%	0.32		%	0.20		%	0.27		%	0.28		%
Return on average common equity (3)	6.28		%	5.11		%	4.12		%	4.98		%	4.81		%
Return on average tangible common equity (4)	7.50		%	6.57		%	5.88		%	7.89		%	7.30		%
Net interest margin (5)	4.29		%	3.85		%	3.93		%	3.65		%	3.39		%
Average equity to average assets	8.94		%	8.37		%	7.11		%	7.40		%	7.64		%
Efficiency ratio (6)	70.67		%	68.85		%	70.09		%	58.38		%	55.36		%
Dividend payout ratio	32.79		%	41.67		%	44.44		%	32.26		%	32.26		%
Asset Quality Ratios:
Allowance for loan losses to period-end portfolio loans (7)	1.44		%	1.98		%	1.81		%	1.65		%	1.60		%
Allowance for loan losses to nonperforming loans (8)	80.46		%	58.04		%	33.44		%	25.96		%	90.86		%
Nonperforming assets to total assets (9)	2.74		%	3.93		%	6.57		%	6.29		%	2.04		%
Net loan charge-offs, with covered portion, to average portfolio loans (10)	0.57		%	1.09		%	1.14		%	1.39		%	1.13		%
Capital Ratios: (11)
Total risk-based capital	12.66		%	13.91		%	11.51		%	13.01		%	12.79		%
Tier 1 risk-based capital	11.41		%	12.77		%	9.99		%	11.19		%	10.87		%
Leverage ratio	8.96		%	9.71		%	7.38		%	7.42		%	8.32		%
Other Data:
Number of full service banking offices	39			35			30			23			17
Number of limited service offices	—			—			1			1			1
Number of full time employee equivalents	620			541			442			358			249

(1) Tangible common book value per share is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. See Table 1A for a reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

(2) Calculated by dividing net income available to common shareholders by average assets.

(3) Calculated by dividing net income available to common shareholders by average common equity.

(4) Average tangible common equity is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. See Table 1A for a reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

(5) Calculated by dividing tax equivalent net interest income by average interest-earning assets. The tax equivalent adjustment was $7.2 million, $5.7 million, $5.6 million, $5.4 million, and $4.5 million for the years ended December 31, 2013, 2012, 2011, 2010, and 2009, respectively.

(6) Calculated by dividing non-interest expense by the sum of the tax equivalent net interest income and non-interest income.

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(7) Includes loans covered under loss-share agreements of $187.7 million, $248.9 million, $320.0 million and $309.3 million at December 31, 2013, 2012, 2011 and 2010, respectively.

(8) Nonperforming loans consist of nonaccrual loans and accruing loans greater than 90 days past due. Includes nonperforming loans covered under loss-share agreements of $23.7 million, $47.0 million, $73.3 million and $69.3 million at December 31, 2013, 2012, 2011 and 2010, respectively.

(9) Nonperforming assets consist of nonperforming loans and other real estate owned. Includes nonperforming loans and other real estate owned covered under loss-share agreements of $42.5 million, $70.1 million, $120.9 million and $85.1 million at December 31, 2013, 2012, 2011 and 2010, respectively.

(10) Net loan charge-offs include $11.0 million, $14.5 million and $3.8 million of covered loans that are reimbursed 80% by the FDIC for the years ended December 31, 2013, 2012 and 2011, respectively.

(11) Capital ratios are for BNC.

Table 1A

Reconciliation of Non-GAAP Financial Measures

(dollars in thousands, except per share data, shares in thousands)

	As of/For the Year Ended December 31,
	2013			2012			2011			2010			2009
Tangible Common Book Value per Share:
Shareholders' equity (GAAP)	$	271,330		$	282,244		$	163,855		$	152,224		$	126,206
Less: Preferred stock (GAAP)	—			47,878			47,398			46,918			29,304
Intangible assets (GAAP)	34,966			32,193			29,115			28,445			27,699
Tangible common shareholders' equity (non-GAAP)	236,364			202,173			87,342			76,861			69,203
Common shares outstanding	27,303			24,650			9,101			9,053			7,342
Tangible common book value per share (non-GAAP)	$	8.66		$	8.20		$	9.60		$	8.49		$	9.43
Return on Average Tangible Common Equity:
Net income available to common shareholders (GAAP)	$	16,187		$	8,049		$	4,526		$	5,530		$	4,553
Plus: Amortization of intangibles, net of tax (GAAP)	723			348			256			229			302
Tangible net income available to common shareholders (non-GAAP)	16,910			8,397			4,782			5,759			4,855
Average common shareholders' equity (non-GAAP)	257,678			157,471			109,810			101,104			94,352
Less: Average intangible assets (non-GAAP)	32,361			29,581			28,433			28,072			27,822
Average tangible common shareholders' equity (non-GAAP)	225,317			127,890			81,377			73,032			66,530
Return on average tangible common equity (non-GAAP)	7.50		%	6.57		%	5.88		%	7.89		%	7.30		%

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is management’s analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Company. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report.

The detailed financial discussion that follows focuses on 2013 results compared to 2012. Discussion of 2012 results compared to 2011 is predominantly in section “2012 Compared to 2011.”

Overview and Executive Summary

BNC Bancorp was formed in 2002 to serve as a one-bank holding company for Bank of North Carolina, a full service commercial bank, incorporated under the laws of the State of North Carolina. Our primary sources of revenue are interest and fee income from our lending and investing activities, primarily consisting of making business loans for small to medium-sized businesses, and, to a lesser extent, from our investment portfolio. We provide a wide range of banking services tailored to the particular banking needs of the communities we serve. We are principally engaged in the business of attracting deposits from the general public and using those deposits, together with other funding from our lines of credit, to make primarily consumer and commercial loans. We target business professionals and small to mid-size business customers with credit relationships in the $250,000 to $25 million range through our 39 branches located in North and South Carolina.

Net income for the year ended December 31, 2013 was $17.2 million, an increase of 65.0% compared to net income of $10.5 million for the year ended December 31, 2012. Income available to common shareholders was $16.2 million, or $0.61 per diluted share, for 2013, an increase of 101.1% compared to the $8.0 million, or $0.48 per diluted share, reported for the year ended December 31, 2012. Included in the financial results for the year ended December 31, 2013 is $5.8 million of transaction-related expenses included in non-interest expense. Included in the financial results for the year ended December 31, 2012 are $12.7 million and $5.2 million, respectively, of bargain purchase gains on acquisitions and transaction-related expenses.

Two important and commonly used measures of bank profitability are return on average assets (net income as a percentage of average total assets) and return on average common shareholders’ equity (net income available to common shareholders as a percentage of average common shareholders’ equity). Our return on average assets was 0.54% and 0.32% for the years ended December 31, 2013 and 2012, respectively. Our return on average common shareholders’ equity was 6.28% and 5.11% for the years ended December 31, 2013 and 2012, respectively.

Total assets at December 31, 2013 were $3.23 billion, an increase of 4.7% compared to total assets of $3.08 billion at December 31, 2012. The increase was due to continued growth in our footprint, along with the acquisition of Randolph Bank & Trust ("Randolph") during 2013. Some highlights for 2013 are as follows:

• net income available to common shareholders of $16.2 million, an increase of 101.1% compared to 2012;

• diluted earnings per share of $0.61, compared to $0.48 per diluted share for 2012;

• fully taxable-equivalent net interest margin increased to 4.29%, compared to 3.85% for 2012;

• nonaccrual loans not covered by loss-share decreased 23.7% during fiscal year 2013;

• nonperforming assets decreased 27.1% during fiscal year 2013;

• Richard D. Callicutt II was named President and Chief Executive Officer, upon the planned retirement of founding President and CEO, W. Swope Montgomery, Jr.;

• completed acquisition of Randolph, increasing our presence in Piedmont Triad area of North Carolina by approximately $250 million;

• announced merger agreements with both South Street Financial Corporation, the parent company of Home Savings Bank, FSB in Albemarle, North Carolina ("South Street"), and Community First Financial Group, Inc. ("Community First"), the parent company of Harrington Bank, FSB in Chapel Hill, North Carolina; and

• redeemed all Series A Preferred Stock with the proceeds from a non-dilutive term loan.

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Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. The more critical accounting and reporting policies include accounting for the allowance for credit losses, valuation of goodwill and intangible assets, and valuation of assets acquired and liabilities assumed in business combinations. Accordingly, our significant accounting policies and effects of new accounting pronouncements are discussed in detail in Note 1 “Significant Accounting Policies” to the accompanying Consolidated Financial Statements contained in Item 8.

Allowance for Loan Losses

We establish an allowance for loan losses that represents management’s best estimate of probable credit losses inherent in the portfolio at the balance sheet date. Estimates for loan losses are determined by management’s ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the appropriateness of the allowance for loan losses, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require additions to the allowance for loan losses or may require that certain loan balances be charged off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. See Note 1, “Significant Accounting Policies” and Note 6, “Loans and Allowance for Loan Losses” to the accompanying Consolidated Financial Statements contained in Item 8.

Valuation of Goodwill and Intangible Assets

Business acquisitions are accounted for using the acquisition method of accounting. Under the acquisition method, we are required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received, which is also subjective. The Company reviews identified intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in which case an impairment charge would be recorded.

Goodwill is subject to impairment testing on at least an annual basis. In addition, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our annual goodwill impairment testing is performed as of June 30 each year.

The first step in testing for impairment is to determine the fair value of each reporting unit. The Company engaged an independent valuation firm to assist in the computation of the fair value estimates of each reporting unit as part of its impairment assessment. We utilized both income and market approaches to determine the fair value for the reporting units. The income approach was based on discounted cash flows derived from assumptions of balance sheet and income statement activity. An internal forecast was developed by considering several long-term key business drivers, such as anticipated loan and deposit growth, net interest margins, and asset quality. Long-term growth rates were estimated to assist in determining the terminal values. The discount rate was estimated based on the Capital Asset Pricing Model, which considered the risk-free interest rate (20-year Constant Maturity Treasury Bonds), market-risk premium, equity-risk premium, and an industry-specific risk factor. For the market approach, assets, earnings, tangible common equity and tangible franchise premium multiples of comparable acquired companies were selected and applied to the reporting unit’s applicable metrics. In addition, historic control premiums were applied to the Company’s market value. The results of the income and market approaches were averaged to arrive at the final calculation of fair value. We determined the estimated fair value exceeded the carrying value (including goodwill) for the banking operations reporting unit.

The second step of impairment testing is necessary only if the carrying amount of either reporting unit exceeds its fair value, suggesting goodwill impairment. In such a case, we would estimate a hypothetical purchase price for the reporting unit (representing the unit’s fair value) and then compare that hypothetical purchase price with the fair value of the unit’s net assets (excluding goodwill). Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. An impairment loss would be recognized as a charge to earnings if the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill.

34

Subsequent to the 2012 annual impairment test, we updated our reporting structure in a manner that changed the composition of our reporting units. This change resulted in the Company recognizing two reporting units, which are our mortgage origination business and our banking operations unit, which contains all other activities performed by the Company. Goodwill was reassigned to the reporting units using a relative fair value allocation approach; other assets and liabilities, including applicable corporate assets, were allocated to the extent they are related to the operation of the respective reporting units. As a result, all goodwill was reallocated to the banking operations reporting unit. As a result of this change in reporting units, we performed an interim goodwill impairment analysis as of December 31, 2012 and determined the estimated fair value exceeded the carrying value (including goodwill) for the banking operations reporting unit.

There were no impairment charges recorded in 2013, 2012, or 2011, respectively. We believe the estimates and assumptions used in the goodwill impairment analysis for our reporting unit are reasonable. However, if actual results and market conditions differ from the assumptions or estimates used, the fair value of each reporting unit could change in the future.

Valuation of Loans Acquired in Business Combinations

Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. Purchased loans acquired in a business combination, including loans covered by FDIC loss share agreements, are accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated credit quality.

At the time such purchased loans are acquired, management individually evaluates substantially all loans acquired in the transaction. This evaluation allows management to determine the estimated fair value of the purchased loans (not considering any FDIC loss-sharing agreements) and includes no carryover of any previously recorded allowance for loan losses. In determining the estimated fair value of purchased loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received. To the extent that any purchased loan acquired in an FDIC-assisted acquisition is not specifically reviewed, management applies a loss estimate to that loan based on the average expected loss rates for the purchased loans that were individually reviewed in that purchased loan portfolio.

As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the Day 1 Fair Values.

In determining the Day 1 Fair Values of purchased loans, including covered loans, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans). The non-accretable difference is the difference between the contractually required payments and the cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income. Any such increase or decrease in expected cash flows will result in a corresponding decrease or increase, respectively, of the FDIC loss-share receivable for the portion of such reduced or additional loss expected to be collected from the FDIC.

The accretable yield on purchased loans, including covered loans, is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the purchased loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.

In connection with the Company’s FDIC-assisted acquisitions, the Company has recorded an FDIC indemnification asset to reflect the indemnification provided by the FDIC. Currently, the expected losses on covered assets for each of the Company’s loss-share agreements would result in expected recovery of approximately 80% of incurred losses. Since the indemnified items are covered loans and covered foreclosed assets, which are measured at Day 1 Fair Values, the FDIC loss-share receivable is also measured and recorded at Day 1 Fair Values, and is calculated by discounting the cash flows expected to be received from the FDIC. See Note 1, “Significant Accounting Policies” and Note 6, “Loans and Allowance for Loan Losses” to the accompanying Consolidated Financial Statements contained in Item 8.

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Analysis of Results of Operations

Net Interest Income

Fully taxable-equivalent (“FTE”) net interest income for the year ended December 31, 2013 was $115.8 million, an increase of 34.1% from $86.4 million for the year ended December 31, 2012. FTE net interest margin was 4.29% for the year ended December 31, 2013, an increase of 44 basis points from 3.85% for the year ended December 31, 2012.

Average interest-earning assets were $2.70 billion for the year ended December 31, 2013, an increase of 20.1% from $2.24 billion for the year ended December 31, 2012. The increase in average interest-earning assets from 2012 is primarily due to the full year impact of interest-earning assets acquired from Carolina Federal, KeySource and First Trust during 2012, interest-earning assets acquired from Randolph during the fourth quarter of 2013, along with continued loan growth in our markets and an increase in our investment securities portfolio.

The Company’s average yield on interest-earning assets was 5.41% for the year ended December 31, 2013, an increase of 10 basis points compared to 5.31% for the comparable period of 2012. The increase from 2012 was primarily due to an increase in loan accretion from the acquired loan portfolio, as well as the addition of higher yielding loans acquired from Carolina Federal, KeySource, First Trust and Randolph. Loan accretion during the year ended December 31, 2013 totaled $14.4 million, an increase of 116.7% from loan accretion of $6.7 million for the year ended December 31, 2012. These increases were offset by lower yields earned on investment securities due to the replacement of matured and called investments with lower yielding securities.

Average interest-bearing liabilities were $2.43 billion for the year ended December 31, 2013, an increase of 14.2% from $2.13 billion for the year ended December 31, 2012. The increase in average interest-bearing liabilities from 2012 is primarily due to the full year impact of the acquisitions of Carolina Federal, KeySource and First Trust during 2012, increased borrowings during fiscal year 2013 and the acquisition of Randolph, offset by the Company’s use of excess liquidity to primarily repay wholesale and non-core deposits as they matured.

The Company’s average cost of interest-bearing liabilities was 1.24% for the year ended December 31, 2013, a decrease of 31 basis points from 1.55% for the year ended December 31, 2012. This decrease was primarily due to the Company’s decision to reduce exposure to higher cost deposit products and aggressively reduce deposit rates over the past three quarters, as well as reductions in interest rates paid on borrowings. These rate decreases were slightly offset by an increase in cash flow hedging expense, which totaled $9.9 million for the year ended December 31, 2013, compared to $7.9 million for the year ended December 31, 2012.

The following tables set forth the major components of net interest income and the related annualized yields and rates for the years ended December 31, 2013, 2012 and 2011, as well as the variances between the periods caused by changes in interest rates versus changes in volumes (dollars in thousands):

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Table 2

Average Balance and Net Interest Income (FTE)

	2013						2012						2011
	Average balance		Interest		Average Rate		Average balance		Interest		Average rate		Average balance		Interest		Average rate
Interest-earning assets:
Loans and leases (1)	$	2,104,965	$	120,546	5.73	%	$	1,789,125	$	97,917	5.47	%	$	1,556,937	$	87,424	5.62	%
Loans held for sale	34,316		1,158		3.37	%	24,774		751		3.03	%	4,320		167		3.87	%
Investment securities, taxable	133,251		4,366		3.28	%	115,741		4,808		4.15	%	119,797		5,688		4.75	%
Investment securities, tax-exempt (2)	350,733		19,368		5.52	%	237,299		15,475		6.52	%	219,270		15,541		7.09	%
Interest-earning balances and other	73,210		398		0.54	%	77,484		290		0.37	%	35,745		118		0.33	%
Total interest-earning assets	2,696,475		145,836		5.41	%	2,244,423		119,241		5.31	%	1,936,069		108,938		5.63	%
Other assets	312,892						300,295						272,456
Total assets	$	3,009,367					$	2,544,718					$	2,208,525
Interest-bearing liabilities:
Demand deposits	$	1,111,328	$	15,071	1.36	%	$	941,070	$	14,242	1.51	%	$	814,518	$	11,557	1.42	%
Savings deposits	86,630		212		0.24	%	56,881		266		0.47	%	36,564		162		0.44	%
Time deposits	1,038,088		10,898		1.05	%	1,004,644		15,093		1.50	%	919,024		17,836		1.94	%
Borrowings	193,771		3,883		2.00	%	124,223		3,290		2.65	%	144,073		3,365		2.34	%
Total interest-bearing liabilities	2,429,817		30,064		1.24	%	2,126,818		32,891		1.55	%	1,914,179		32,920		1.72	%
Non-interest-bearing deposits	290,765						188,569						125,969
Other liabilities	19,662						16,376						11,409
Shareholders' equity	269,123						212,955						156,968
Total liabilities and shareholder's equity	$	3,009,367					$	2,544,718					$	2,208,525
Net interest income and
interest rate spread			$	115,772	4.17	%			$	86,350	3.76	%			$	76,018	3.91	%
Net interest margin					4.29	%					3.85	%					3.93	%

(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 using a blended income tax rate of 38.55%. The taxable-equivalent adjustment was $7.2 million, $5.7 million and $5.6 million for the year ended December 31, 2013, 2012 and 2011, respectively.

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Table 3

Volume and Rate Variance Analysis

	2013 vs. 2012									2012 vs. 2011
	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans and leases	$	17,686		$	4,943		$	22,629		$	12,873		$	(2,380	)	$	10,493
Loans held for sale	306			101			407			705			(121		)	584
Investment securities, taxable	651			(1,093		)	(442		)	(181		)	(699		)	(880		)
Investment securities, tax-exempt (1)	6,831			(2,938		)	3,893			1,227			(1,293		)	(66		)
Interest-earning balances and other	(20		)	128			108			147			25			172
Total interest income	25,454			1,141			26,595			14,771			(4,468		)	10,303
Interest expense:
Deposits:
Demand deposits	2,443			(1,614		)	829			1,855			830			2,685
Savings deposits	106			(160		)	(54		)	93			11			104
Time deposits	427			(4,622		)	(4,195		)	1,474			(4,217		)	(2,743		)
Borrowings	1,618			(1,025		)	593			(495		)	420			(75		)
Total interest expense	4,594			(7,421		)	(2,827		)	2,927			(2,956		)	(29		)
Net interest income increase (decrease)	$	20,860		$	8,562		$	29,422		$	11,844		$	(1,512	)	$	10,332

(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 $12.2 million for fiscal year 2013, a decrease of 46.4% from $22.7 million recorded during fiscal year 2012. Of the $12.2 million in provision expense, $11.6 million related to non-covered loans. During the year ended December 31, 2013, the Company recorded a gross provision of $1.7 million for loss-share loans, of which $1.1 million was recorded through an FDIC indemnification asset and the remaining $0.6 million was recorded through the Company’s provision expense. During the year ended December 31, 2012, the Company recorded a gross provision of $22.7 million for loss-share loans, of which $17.7 million was recorded through an FDIC indemnification asset and the remaining $5.0 million was recorded through the Company’s provision expense. 

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. See additional discussion under section “Analysis of Allowance for Loan Losses.”

Non-Interest Income

Non-interest income was $22.8 million for the year ended December 31, 2013, a decrease of 31.2% compared to $33.1 million for fiscal year 2012. The following table presents the components of non-interest income for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

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Table 4

Non-Interest Income

	2013			2012		2011
Mortgage fees	$	8,979		$	6,169	$	2,230
Service charges	4,314			3,149		3,190
Earnings on bank-owned life insurance	2,318			1,771		1,688
Gain (loss) on sale of investment securities, net	(42		)	3,026		1,202
Bargain purchase gain on acquisition	—			12,706		7,800
Other	7,237			6,317		4,692
Total non-interest income	$	22,806		$	33,138	$	20,802

Included in non-interest income for 2013 was $0.7 million of income related to the subsequent settlement of a liability assumed in an acquisition and $0.5 million of income from an insurance settlement. Included in non-interest income for 2012 was $12.7 million of bargain purchase gain from the acquisitions of Carolina Federal and First Trust, and $3.0 million of gains on sale of securities. Excluding these sources of income, non-interest income was $21.7 million for 2013, an increase of 24.4% from $17.4 million in 2012. The increase was primarily due to increased volume of mortgage originations, as the Company continued to expand commissioned originators across key target markets, as well as an increase in service charge income due to an increased volume of transactions, primarily due to our recent acquisitions.

Non-Interest Expense

Non-interest expense was $97.9 million for fiscal year 2013, an increase of 19.0% compared to $82.3 million for fiscal year 2012. The following table presents the components of non-interest expense for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

Table 5

Non-Interest Expense

	2013		2012		2011
Salaries and employee benefits	$	52,994	$	42,200	$	31,810
Occupancy	6,547		4,965		3,859
Furniture and equipment	5,546		4,241		2,761
Data processing and supplies	3,275		2,773		2,291
Advertising and business development	2,020		1,761		1,733
Insurance, professional and other services	8,392		6,685		4,166
FDIC insurance assessments	2,766		2,166		2,433
Loan, foreclosure and other real estate owned	8,949		10,944		14,072
Other	7,444		6,537		4,739
Total non-interest expense	$	97,933	$	82,272	$	67,864

Included in non-interest expense for 2013 and 2012 were transaction-related expenses totaling $5.8 million and $5.2 million, respectively. These costs included professional fees, contract cancellations, personnel costs, and data processing and system conversion expenses related to our recent acquisitions. Excluding transaction-related expenses, non-interest expense for the year ended December 31, 2013 was $92.2 million, an increase of 19.6% from $77.1 million for the year ended December 31, 2012. The increase from 2012 was primarily due to the full year impact of the additional employees and facilities purchased in connection with the acquisitions of Carolina Federal, KeySource and First Trust during 2012, as well as the acquisition of Randolph during the fourth quarter of 2013. The Company also experienced an increase in compensation expense related to an increased number of restricted stock grants, severance payments incurred as a result of our acquisition of Randolph, and additional incentive and bonus programs that were established during fiscal year 2013. The Company also experienced an increase in depreciation expense from 2012, primarily due to the property, plant and equipment additions made as part of our recent acquisitions. The additional expenses were partially offset by a reduction in valuation charges recorded on other real estate owned ("OREO") and reduced loan, foreclosure and collection expenses.

We strive to maintain levels of non-interest expense that management believes are appropriate given the nature of our operations and the investments in personnel and facilities that have been necessary to generate growth. One of the keys to the momentum we have experienced has been the continuous investment in the core banking franchise, both in people and locations. As we strive to maintain momentum in

39

our growth and strategy, we will incur costs associated with investments in people, facilities and technology that are anticipated to benefit the shareholders as these investments reach their potential.

Income Taxes

We generate significant amounts of non-taxable income from tax-exempt investment securities and from investments in bank-owned life insurance. Accordingly, the level of such income in relation to income before income taxes significantly affects our effective tax rate.

Our income tax expense (benefit) was $4.0 million and $(1.7) million for 2013 and 2012, respectively, and our income before taxes increased $12.5 million for 2013, when compared to 2012. The tax expense associated with this increase was offset by increases in our tax-exempt investment securities income, additional income from our increased investment in bank-owned life insurance, and tax benefits derived from our acquisitions. Our effective tax rates for the years ended December 31, 2013 and 2012 were 19.0% and (19.4%), respectively. Refer to Note 17 “Income Taxes” in the accompanying Consolidated Financial Statements contained in Item 8 for further information regarding our income taxes.

Analysis of Financial Condition

Investment Securities

The investment securities portfolio is intended to provide us with adequate liquidity, flexibility in asset/liability management, a source of stable income, and is structured with minimum credit exposure. Investment securities were $517.8 million at December 31, 2013, an increase of 13.5% from total investment securities of $456.3 million at December 31, 2012. 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 CMOs 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.

The following table presents the composition of our available-for-sale and held-to-maturity securities portfolio at December 31, 2013, 2012 and 2011 (dollars in thousands):

Table 6

Composition of Investment Securities Portfolio

	2013		2012		2011
Investment securities available-for-sale (at fair value):
U.S. Government agencies	$	15,061	$	16,395	$	23,201
State and municipals	191,263		223,886		160,556
Corporate debt securities	8,889		—		—
Other debt securities	4,380		—		—
Equity securities	922		—		—
Residential government-sponsored mortgage-backed securities	42,014		86,890		81,436
Other government-sponsored mortgage-backed securities	7,888		14,368		16,981
Total investment securities available-for-sale	270,417		341,539		282,174
Investment securities held-to-maturity (at amortized cost):
State and municipals	221,378		108,805		91,036
Corporate debt securities	16,000		6,000		6,000
Other debt securities	10,000		—		—
Total investment securities held-to-maturity	247,378		114,805		97,036
Total investment securities	$	517,795	$	456,344	$	379,210

The Company purchased $146.5 million of investment securities during the year ended December 31, 2013, which was offset by $69.5 million of sales, maturities and payments received during the same period. Net unrealized losses in our available-for-sale investment securities portfolio were $3.1 million as of December 31, 2013, as compared to a net unrealized gain of $14.4 million as of December 31, 2012. The decrease in gross unrealized gains was primarily attributable to changes in market interest rates related to our state and municipal securities portfolio, relative to when the investments were purchased. Our decision to transfer $86.5 million of available-for-sale state and municipal debt securities to the held-to-maturity category during the second quarter of 2013, reflecting our intent to hold those securities to maturity, reduced the impact of these interest rate changes.

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At December 31, 2013, the Company’s investment securities portfolio included 343 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 the Company’s investment in the obligations of state and political subdivisions at December 31, 2013 (dollars in thousands):

Table 7

Obligations of State and Political Subdivisions

		Amortized Cost		Fair Value
General obligation bonds:
	Texas	$	127,087	$	123,959
	Washington	29,664		28,551
	Ohio	19,553		19,454
	North Carolina	16,566		15,860
	California	16,401		16,445
	Pennsylvania	15,848		15,760
	Other (22 states)	69,869		68,223
Total general obligation bonds:		294,988		288,252
Revenue bonds:
	North Carolina	40,561		38,519
	Indiana	14,756		14,438
	South Carolina	12,540		11,669
	Florida	11,589		11,141
	Other (13 states)	41,168		38,832
Total revenue bonds:		120,614		114,599
Total obligations of state and political subdivisions		$	415,602	$	402,851

The largest exposure we have in general obligation bonds was 66 bonds issued by various school districts in Texas with a total amortized cost basis of $89.3 million and total fair value of $87.2 million at December 31, 2013. Of this total, $68.6 million in amortized cost and $66.7 million in fair value are guaranteed by the Permanent School Fund of the State of Texas.

The revenue sources related to the Company’s investment in revenue bonds at December 31, 2013 are summarized in the following table (dollars in thousands):

Table 8

Revenue Bonds by Source

	Amortized Cost		Fair Value
Water and sewer	$	24,909	$	23,747
College and university	21,386		20,368
Health, hospitality and nursing home	20,522		19,480
Power and electricity	12,852		11,785
Lease (abatement)	7,065		7,228
Other	33,880		31,991
Total revenue bonds	$	120,614	$	114,599

The largest single exposures we had in revenue bonds at December 31, 2013 were three bonds issued by the South Carolina Public Service Authority to be repaid by future pledged power and utility revenue, and seven bonds issued by the North Carolina Medical Care Commission

41

to be repaid by future pledged revenues generated from a leading academic healthcare system. The total amortized cost for these 10 securities was $19.1 million and the total fair value was $17.5 million at December 31, 2013.

Currently, all of the Company’s investments in state and political subdivisions are investment grade with all having a credit rating of either AA- or higher from Standard & Poors or A1 or higher by 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 review of the credit rating, as provided by one or more nationally recognized credit ratings agencies, capacity to pay, market and economic data, soundness of budgetary position, and sources, strength, and stability of tax or enterprise revenue, as well as any other factors as are available and relevant to the security or issuer. While the Company does 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. The Company will also 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 the nationally recognized credit rating agency's analysis describing the downgrade.

The Company's evaluation of its investment in state and political subdivisions at December 31, 2013 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized credit rating agency.

The following table presents the composition of our available-for-sale and held-to-maturity securities portfolio at December 31, 2013 with ranges of maturities and average yields disclosed (dollars in thousands):

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Table 9

Investment Securities Portfolio by Expected Maturities

	Available-for-Sale (1)				Held-to-Maturity
	Fair Value		Weighted Average Yield		Amortized Cost		Weighted Average Yield
U.S. Government agencies:
Due after one year through five years	$	478	1.51	%	$	—	—
Due after five through ten years	1,828		2.58	%	—		—
Due after ten years	12,755		3.05	%	—		—
	15,061		2.95	%	—		—
State and municipals - Tax Exempt: (2)
Due within one year	2,308		7.22	%	542		5.70	%
Due after one year through five years	102		6.69	%	2,847		3.11	%
Due after five through ten years	1,708		4.63	%	7,511		3.97	%
Due after ten years	187,145		5.00	%	184,865		4.81	%
	191,263		5.03	%	195,765		4.76	%
State and municipals - Taxable
Due after five through ten years	—		—		507		2.48	%
Due after ten years	—		—		25,106		3.26	%
	—		—		25,613		3.25	%
Corporate debt securities:
Due after one year through five years	1,027		2.33	%	11,000		5.23	%
Due after five through ten years	7,862		1.26	%	5,000		7.63	%
	8,889		1.38	%	16,000		5.98	%
Other debt securities:
Due after five through ten years	—		—		10,000		2.77	%
Due after ten years	4,380		1.24	%	—		—
	4,380		1.24	%	10,000		2.77	%
Mortgage-backed securities: (3)
Due after one year through five years	105		6.23	%	—		—
Due after five through ten years	5,113		4.14	%	—		—
Due after ten years	44,684		3.76	%	—		—
	49,902		3.80	%	—		—
Equity securities	922		—		—		—
Total investment securities	$	270,417	4.48	%	$	247,378	4.61	%

(1) Yields for available-for-sale securities are calculated based on the amortized cost of the securities.

(2) Yields on tax-exempt investment securities are calculated on a taxable-equivalent basis using a blended income tax rate of 38.55%.

(3) For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. 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 prepayment penalties.

Loans

Total portfolio loans increased by 11.9% from December 31, 2012 to $2.28 billion as of December 31, 2013. Our non-covered loan portfolio increased by 16.9% to $2.09 billion as of December 31, 2013, as compared to $1.79 billion at December 31, 2012. The increase

43

has primarily been due to the loans acquired from Randolph, as well as organic growth in commercial real estate, commercial construction and residential mortgage loans, as the economic outlook in the Company’s markets continues to improve.

Our covered loan portfolio decreased by 24.6% from December 31, 2012 to $187.7 million at December 31, 2013, reflecting normal repayments, charge-offs and foreclosures. The covered loan portfolio will continue to decline over the terms of the loss-share agreements. Covered loans include all loans covered under loss-share agreements from FDIC-assisted acquisitions and, as such, have significant loss protection.

The following table presents the composition of our loan portfolio at December 31, 2013, 2012, 2011, 2010 and 2009 (dollars in thousands):

Table 10

Loan Portfolio Composition

	2013				2012				2011				2010				2009
	Amount		% of Total Loans		Amount		% of Total Loans		Amount		% of Total Loans		Amount		% of Total Loans		Amount		% of Total Loans
Non-covered (1):
Commercial real estate	$	1,236,204	54.3	%	$	1,034,686	50.8	%	$	722,826	42.3	%	$	557,546	37.0	%	$	449,344	41.6	%
Commercial construction	226,229		9.9	%	183,747		9.0	%	175,710		10.3	%	170,052		11.3	%	183,563		17.0	%
Commercial and industrial	163,020		7.2	%	150,870		7.4	%	124,479		7.3	%	111,650		7.4	%	113,705		10.5	%
Leases	16,137		0.7	%	13,209		0.7	%	12,806		0.7	%	10,983		0.7	%	12,219		1.1	%
Residential construction	32,418		1.4	%	34,514		1.7	%	25,740		1.5	%	29,944		2.0	%	50,172		4.7	%
Residential mortgage	402,899		17.7	%	359,260		17.7	%	317,949		18.6	%	308,566		20.4	%	257,518		23.9	%
Consumer and other	11,949		0.5	%	10,042		0.5	%	9,940		0.6	%	10,097		0.7	%	12,658		1.2	%
Total non-covered	2,088,856		91.7	%	1,786,328		87.8	%	1,389,450		81.3	%	1,198,838		79.5	%	1,079,179		100.0	%
Covered:
Commercial real estate	96,452		4.2	%	114,757		5.6	%	135,242		7.9	%	120,053		8.0	%	—		0.0	%
Commercial construction	18,331		0.8	%	33,447		1.6	%	51,426		3.0	%	62,879		4.2	%	—		0.0	%
Commercial and industrial	5,919		0.3	%	10,898		0.5	%	16,402		1.0	%	24,903		1.6	%	—		0.0	%
Residential construction	16		0.0	%	215		0.1	%	3,992		0.2	%	2,402		0.1	%	—		0.0	%
Residential mortgage	65,024		2.9	%	87,015		4.3	%	109,058		6.4	%	94,701		6.3	%	—		0.0	%
Consumer and other	1,919		0.1	%	2,598		0.1	%	3,913		0.2	%	4,404		0.3	%	—		0.0	%
Total covered	187,661		8.3	%	248,930		12.2	%	320,033		18.7	%	309,342		20.5	%	—		0.0	%
Total portfolio loans	$	2,276,517	100.0	%	$	2,035,258	100.0	%	$	1,709,483	100.0	%	$	1,508,180	100.0	%	$	1,079,179	100.0	%

(1) Amount includes $384.0 million, $347.2 million and $31.7 million of acquired, noncovered loans as of December 31, 2013, 2012 and 2011, respectively.

The following table presents the scheduled maturities of the Company's portfolio loans at December 31, 2013 (dollars in thousands):

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Table 11

Loan Portfolio by Contractual Maturities

	Due within one year		Due after one year but within five years		Due after five years		Total
By loan type:
Commercial real estate	$	265,612	$	789,983	$	277,061	$	1,332,656
Commercial construction	71,613		144,442		28,505		244,560
Commercial and industrial	91,173		74,375		3,391		168,939
Leases	1,829		14,308		—		16,137
Residential construction	30,264		1,549		621		32,434
Residential mortgage	78,647		156,225		233,051		467,923
Consumer and other	6,874		4,834		2,160		13,868
Total portfolio loans	$	546,012	$	1,185,716	$	544,789	$	2,276,517
By interest rate type:
Fixed interest rate	$	263,673	$	878,341	$	329,679	$	1,471,693
Variable interest rate	282,339		307,375		215,110		804,824
Total portfolio loans	$	546,012	$	1,185,716	$	544,789	$	2,276,517

During the year ended December 31, 2013, excluding loans acquired from Randolph, there were increases in our non-covered commercial construction and commercial real estate portfolios of 18.3% and 13.5%, respectively. Increases in our commercial real estate portfolio have been primarily in commercial retail centers (both anchored and shadow-anchored), hotels and multi-family properties. Our commercial real estate portfolio has increased during 2013 as a result of our further penetration into the major metropolitan areas, particularly Raleigh and Charlotte, as well as expanding our customer base to include larger commercial real estate investors that have access to multiple sources of funding. We will continue our efforts to diversify and replace Acquisition, Development and Construction (“ADC”) exposures and replace these exposures with high quality income producing commercial real estate.

Our loan policies and procedures establish the basic guidelines governing our lending operations. Generally, the guidelines address the types of loans that we seek, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower's total outstanding indebtedness to us, including the indebtedness of any guarantor. The policies are reviewed and approved at least annually by our Board of Directors. We supplement our own supervision of the loan underwriting and approval process with periodic loan audits by internal loan examiners and outside professionals experienced in loan review work.

Real Estate Loans

Real estate loans are made for purchasing and refinancing 1-4 family, multi-family and commercial properties. Commercial real estate loans totaled $1.33 billion and $1.15 billion at December 31, 2013 and 2012, respectively, with $96.5 million and $114.8 million, respectively, covered under loss-share agreements. Including loans covered under loss-share agreements, commercial real estate comprises 58.5% of the loan portfolio as of December 31, 2013, an increase from 56.5% as of December 31, 2012. This lending involves loans secured principally by commercial buildings for office, retail centers and, by a lesser extent, storage and warehouse space. Generally in underwriting commercial real estate loans, we require the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may be in greater amount and involve a greater degree of risk as payments on such loans are often dependent on successful operation or management of the properties.

We offer fixed and adjustable rate options and provide customers access to long-term conventional real estate loans through our mortgage loan department which makes secondary market conforming loans that are originated with a commitment from a correspondent financial institution to purchase the loan within 30 days of closing. Residential real estate loans amounted to $467.9 million and $446.3 million at December 31, 2013 and 2012, respectively. Our residential mortgage loans are generally secured by properties located within our market area. At December 31, 2013 and 2012, residential real estate loans covered under loss-share agreements totaled $65.0 million and $87.0 million, respectively. Including loans covered under loss-share agreements, residential real estate comprises 20.6% of the loan portfolio as of December 31, 2013, a decrease from 21.9% as of December 31, 2012.

Many of the residential mortgage loans that we make are originated for the account of third parties. Such loans are classified as loans held for sale in the financial statements. At December 31, 2013 and 2012, loans held for sale amounted to $30.9 million and $57.4 million,

45

respectively. We receive fees for each such loan originated, with such fees aggregating $9.0 million for the year ended December 31, 2013 and $6.2 million for the year ended December 31, 2012. We will continue to be an active originator of residential loans for the account of third parties. We do not originate sub-prime mortgages, unless through a correspondent who has full underwriting authority. In these cases, since we are not involved in the credit decision, there is limited exposure to defaults and buy back provisions.

Real Estate Construction Loans

Real estate loans are made for constructing 1-4 family and multi-family residential properties, the acquisition and development of land for the purpose of providing residential and commercial lots for sale, and the construction of commercial properties. During the construction period we primarily offer a variable rate option, typically with an interest rate floor. Once construction has been completed, we provide customers with variable and fixed rate options for the term financing phase based on the needs of the customer. At December 31, 2013 and 2012, the real estate construction loan portfolio was $277.0 million and $251.9 million, respectively, with $18.3 million and $33.7 million, respectively, of loans covered under loss-share agreements. Including loans covered under loss-share agreements, real estate construction comprises 12.2% of the loan portfolio as of December 31, 2013, a decrease from 12.4% as of December 31, 2012. Activity related to real estate construction loans not covered under loss-share agreements included the following activity for the year ended December 31, 2013 (amounts in millions):

	Balance at December 31, 2012		Acquired		Net Change			Balance at December 31, 2013
Commercial construction	$	83.2	$	0.3	$	47.2		$	130.7
Acquisition and development	15.4		0.0		(7.7		)	7.7
Residential construction	29.7		2.6		0.1			32.4
1-4 family buildable lots	31.0		0.6		(10.1		)	21.5
Commercial buildable lots	17.2		0.0		(5.4		)	11.8
Land held for development	24.5		7.9		0.0			32.4
Raw/Agricultural land	17.3		0.0		4.8			22.1

Management closely monitors residential real estate, specifically our ADC loans, since these loans are generally considered most vulnerable to economic downturns. We attempt to mitigate this risk by employing experienced real estate lenders, providing real estate underwriting standards within the Credit Policy Manual, performing ongoing credit reviews and, engaging vendors to provide real estate updates and trends for communities in which we have credit exposure. Most residential construction loans to homebuilders require full personal guarantees from the principals of the borrowing entity and maturities are typically limited to 12 months. Further, commercial residential construction loans are typically structured with limits to the number of speculative construction starts per community, as well as monitoring of absorption rates and sales trends on an ongoing basis. Trends within our real estate portfolio have followed the general trends within our markets. During 2013, we have seen continued improvement in average time houses are on the market for sale and continued improvement in the levels of housing inventory available for sale. We have also seen signs of stabilization in average home prices in our market.

Commercial Loans

Commercial business lending is a major focus of our lending activities. At December 31, 2013, our commercial and industrial loan portfolio equaled $168.9 million, or 7.4% of total portfolio loans, as compared with $161.8 million, or 7.9% of total portfolio loans, at December 31, 2012. At December 31, 2013, commercial and industrial loans covered under loss-share agreements totaled $5.9 million, as compared with $10.9 million at December 31, 2012. Commercial and industrial loans and leases include both secured and unsecured loans for working capital, expansion, and other business purposes. Short-term working capital loans generally are secured by accounts receivable, inventory and/or equipment. We also make term commercial loans secured by real estate, which are categorized as real estate loans. Lending decisions are based on an evaluation of the financial strength, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, we require personal guarantees and secondary sources of repayment.

Consumer and Other Loans

Consumer and other loans include home equity lines of credit, automobile loans, boat and recreational vehicle financing and miscellaneous secured and unsecured personal loans. Consumer loans generally can carry significantly greater risks than other loans, even if secured, because the collateral often consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. We attempt to manage the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss. Consumer and other loans amounted to $13.9 million, or less

46

than 1% of the total loan portfolio as of December 31, 2013, and $12.6 million, or less than 1% of the total loan portfolio, at December 31, 2012.

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. Credit Administration, through the loan review process, validates the accuracy of the initial risk grade assessment. 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. Management continues to monitor underwriting guidelines and procedures and rewrite loan policies, along with enhancing the internal loan review function, to continue to address the changing risk of our loan portfolio.

Nonperforming Assets

Our nonperforming assets, which consist of loans past due 90 days or more, real estate acquired in the settlement of loans and loans in nonaccrual status, decreased to $88.5 million, or 2.74% of total assets, at December 31, 2013 from $121.3 million, or 3.93% of total assets, at December 31, 2012. Included in nonperforming assets are $42.5 million and $70.1 million covered under loss-share agreements at December 31, 2013 and 2012, respectively. Excluding assets covered by loss-share agreements, nonperforming assets decreased from $51.3 million, or 1.82% of assets not covered under loss-share agreements at December 31, 2012, to $45.9 million, or 1.52% of assets not covered under loss-share agreements, at December 31, 2013.

The following table summarizes total nonperforming assets for the past five years (dollars in thousands):

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Table 12

Nonperforming Assets

	December 31,
	2013			2012			2011			2010			2009
Nonaccrual loans:
Not covered by loss-share agreements	$	17,114		$	22,442		$	19,443		$	26,224		$	19,050
Covered by loss-share agreements	23,745			46,981			67,854			64,753			—
90 days or more past due:
Not covered by loss-share agreements	—			—			—			44			—
Covered by loss-share agreements	—			—			5,425			4,554			—
Other real estate owned:
Not covered by loss-share agreements	28,833			28,811			20,927			23,912			14,325
Covered by loss-share agreements	18,773			23,102			47,577			15,825			—
Total nonperforming assets	$	88,465		$	121,336		$	161,226		$	135,312		$	33,375
Total nonperforming assets not covered by loss-share agreements	$	45,947		$	51,253		$	40,370		$	50,180		$	33,375
Total nonperforming assets to total assets	2.74		%	3.93		%	6.57		%	6.29		%	2.04		%
Total nonperforming assets to total assets (not covered by loss share)	1.52		%	1.82		%	1.93		%	2.75		%	N/A
Total nonperforming loans to total portfolio loans	1.79		%	3.41		%	5.42		%	6.34		%	1.77		%
Total nonperforming loans to total portfolio loans (not covered by loss share)	0.82		%	1.26		%	1.40		%	2.19		%	N/A
Troubled debt restructurings not included in above	$	16,770		$	35,889		$	41,515		$	5,107		$	4,168

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 December 31, 2013, we had $40.9 million in nonaccrual loans, a decrease of 41.1% from $69.4 million at December 31, 2012. The amounts of nonaccrual loans covered under loss-share agreement were $23.7 million and $47.0 million at December 31, 2013 and 2012, respectively. During 2013, $45.6 million of loans were placed in nonaccrual status, which was offset by $27.1 million moved to OREO, $14.8 million in payments and $11.1 million returned to accrual status. The amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as nonaccrual was $5.3 million, $6.9 million and $6.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. There were no loans 90 days past due and still accruing interest at December 31, 2013 and 2012, respectively.

At December 31, 2013 and 2012, there were $47.6 million and $51.9 million, respectively, in assets classified as OREO, with $18.8 million and $23.1 million, respectively, covered under loss-share agreements. The carrying values of other real estate owned represent the lower of the carrying amount or fair value less costs to sell. The Company sold $32.8 million of OREO properties during the year ended December 31, 2013, which was offset by $31.3 million of additions to OREO. These additions include $4.2 million of OREO acquired from Randolph. For the year ended December 31, 2013, the Company recorded valuation adjustments of $4.2 million, a decrease from valuation adjustments of $7.1 million for the year ended December 31, 2012.

The following is a summary of OREO at December 31, 2013 and 2012 (dollars in thousands):

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Table 13

Other Real Estate Owned

	2013		2012
Covered under loss-share agreements:
Residential 1-4 family properties	$	8,578	$	7,897
Multifamily properties	22		303
Commercial properties	4,035		5,226
Construction, land development and other land	6,138		9,676
	18,773		23,102
Not covered under loss-share agreements:
Residential 1-4 family properties	2,202		2,185
Multifamily properties	—		—
Commercial properties	7,584		7,882
Construction, land development and other land	19,047		18,744
	28,833		28,811
Total other real estate owned	$	47,606	$	51,913

Troubled debt restructurings ("TDRs") are modified loans in which a concession is provided to a borrower experiencing financial difficulties. TDRs can be classified as either accrual or nonaccrual loans. 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. TDRs were $18.8 million as of December 31, 2013, of which $2.9 million was covered under loss-share. Of the $18.8 million of TDRs, $16.8 million are performing under the terms of the restructured agreements, as compared to $44.9 million of TDRs as of December 31, 2012, of which $35.9 million were performing under the terms of the restructured agreements. The decrease in performing TDRs from December 31, 2012 was primarily due to a significant amount of restructurings that are no longer required to be reported as TDRs due to contractual performance over the passage of time. For additional information on nonaccruals, past dues and TDRs, see Note 6 to the accompanying Consolidated Financial Statements.

Analysis of Allowance for Loan Losses

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management increases allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off. The allowance is reduced by loans charged off. Management evaluates the adequacy of the allowance at least monthly. In addition, on a monthly basis our Board of Directors reviews the loan portfolio, conducts an evaluation of credit quality and reviews the computation of the loan loss allowance. In evaluating the adequacy of the allowance, management considers the 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 deriving from our history of operations. In addition to our history, management also considers the loss experience and allowance levels of other similar banks and the historical experience encountered by our management and senior lending officers prior to joining us. In addition, regulatory agencies, as an integral part of their examination process, periodically review allowance for loan losses and may require us to make additions for estimated losses based upon judgments different from those of management. No regulatory agency asked for a change in our allowance for loan losses during 2013 or 2012.

Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers, reviewed by Credit Administration, and a sample of these grades are tested by an independent third-party credit review specialist. The testing program includes an evaluation of a sample of new loans, large loans, loans that are identified as having potential credit weaknesses, loans past due 90 days or more and still accruing, and nonaccrual loans. We strive to maintain the loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs our market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. Generally, we do engage in significant lease financing, highly leveraged transactions or loans to customers domiciled outside the United States.

Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower's ability to repay, the borrower's payment history and the current

49

delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management's judgment and historical experience.

Acquired loans are recorded at fair value as of the loan's acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date, recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in additional allowance for loan losses.

A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. The Company calculates a specific reserve for each loan that has been deemed impaired, which include commercial loans 90 days or more past due, commercial nonaccrual loans above $250,000, and commercial and retail restructurings above $250,000. The amount of the reserve is based on the present value of expected cash flows discounted at the loan’s effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell.

Originated commercial and consumer loans not subject to a specific reserve calculation are aggregated by type and the probable loss estimates become the basis for the allowance amount. The loss estimates are based on trends of historical losses, delinquency patterns and various other credit risk indicators. During 2012 and 2011, the economic slowdown, both domestically and globally, caused significant weakness in the local economies, which has weakened many borrowers’ financial condition. During 2013, we noted improvement in our markets, particularly in the large metropolitan areas. Based upon the generally favorable trends in economic conditions and reduced loss experience, we reduced the loss estimates used to establish the allowance for commercial real estate and commercial and residential real estate construction loans. We have increased the loss estimates on residential mortgage and consumer loans due to continued elevated levels of losses for these portfolios.

The allowance for loan losses was $32.9 million at December 31, 2013, a decrease of 18.4% from $40.3 million at December 31, 2012. Loan loss reserves to total portfolio loans were 1.44% and 1.98% at December 31, 2013 and December 31, 2012, respectively. The decrease in the allowance for loan losses was primarily driven by a decrease in the reserve required for the covered loan portfolio, which decreased from $15.3 million of reserve at December 31, 2012 to $5.9 million at December 31, 2013.

The reserve for loans not covered under loss-share agreements increased by 7.7% from $25.0 million at December 31, 2012 to $27.0 million at December 31, 2013. This increase in reserve is primarily due to the additional volume of loans acquired from Randolph, as well as organic growth from our continued penetration into key metropolitan markets.

The following table shows the allocation of the allowance for loan losses at the dates indicated (dollars in thousands). The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the categories of loans shown.

Table 14

Allocation of the Allowance for Loan Losses

	December 31,
	2013				2012				2011				2010				2009
			% of total				% of total				% of total				% of total				% of total
	Amount		loans (1)		Amount		loans (1)		Amount		loans (1)		Amount		loans (1)		Amount		loans (1)
Real estate loans	$	22,482	68.4	%	$	26,159	78.4	%	$	14,847	75.2	%	$	15,839	71.7	%	$	11,355	65.6	%
Real estate construction loans	6,951		21.1	%	10,399		12.4	%	11,656		15.0	%	5,207		17.6	%	3,739		21.6	%
Commercial and industrial loans	3,137		9.5	%	3,579		7.9	%	4,338		8.2	%	3,525		9.0	%	1,817		10.5	%
Consumer and other loans	249		0.8	%	137		0.7	%	149		0.8	%	209		1.0	%	208		1.2	%
Leases	56		0.2	%	18		0.6	%	18		0.8	%	33		0.7	%	190		1.1	%
	$	32,875	100.0	%	$	40,292	100.0	%	$	31,008	100.0	%	$	24,813	100.0	%	$	17,309	100.0	%

(1) Allowance for loan losses category as a percentage of total loans by category

Net loan charge-offs for the year ended December 31, 2013 were $20.7 million, which included $11.0 million on loans covered under loss-share agreements and $9.7 million on loans not covered under loss-share agreements. The Company’s share of the covered net loan charge-offs for the year ended December 31, 2013 was $2.2 million, with the remainder being reimbursed by the FDIC. Combined with the $9.7 million of non-covered net charge-offs, the Company incurred $11.9 million in net charge-off losses, or 0.57% of average loans,

50

during the year ended December 31, 2013, compared to $19.5 million in net charge-off losses, or 1.09% of average loans, for the year ended December 31, 2012.

The following table presents information related to the allowance for loan losses for the last five years (dollars in thousands):

Table 15

Analysis of Allowance for Loan Losses

	For the Years Ended December 31,
	2013			2012			2011			2010			2009
Beginning balance	$	40,292		$	31,008		$	24,813		$	17,309		$	13,210
Provision for credit losses:
Non-covered loans	11,636			17,755			16,037			26,382			15,750
Covered loans	552			4,982			2,177			—			—
Change in FDIC indemnification asset	1,084			17,711			8,708			—			—
Net charge-offs on loans covered under loss-share	(10,975		)	(14,538		)	(3,774		)	—			—
Charge-offs on loans not covered under loss-share:
Commercial real estate	(2,814		)	(6,338		)	(4,827		)	(5,038		)	(3,171		)
Commercial construction	(5,607		)	(4,396		)	(7,090		)	(4,330		)	(5,046		)
Commercial and industrial	(1,731		)	(2,597		)	(1,217		)	(5,342		)	(941		)
Leases	—			—			—			(9		)	(60		)
Residential construction	—			(179		)	(943		)	(725		)	(1,183		)
Residential mortgage	(3,510		)	(4,285		)	(4,052		)	(3,624		)	(1,262		)
Consumer and other	(238		)	(126		)	(60		)	(263		)	(204		)
Total charge-offs	(13,900		)	(17,921		)	(18,189		)	(19,331		)	(11,867		)
Recoveries on loans not covered under loss-share:
Commercial real estate	502			715			158			43			4
Commercial construction	2,043			331			300			37			—
Commercial and industrial	1,327			92			555			135			133
Leases	—			—			15			—			—
Residential construction	25			24			14			26			32
Residential mortgage	273			124			176			201			20
Consumer and other	16			9			18			11			27
Total recoveries	4,186			1,295			1,236			453			216
Net charge-offs on loans not covered under loss-share	(9,714		)	(16,626		)	(16,953		)	(18,878		)	(11,651		)
Ending balance	$	32,875		$	40,292		$	31,008		$	24,813		$	17,309
Ratios:
Ratio of allowance for loan losses to total portfolio loans	1.44		%	1.98		%	1.81		%	1.65		%	1.60		%
Ratio of allowance for loan losses to total portfolio loans (non-covered)	1.29		%	1.40		%	1.89		%	1.65		%	1.60		%
Net charge-offs of portfolio loans to total average loans	0.98		%	1.74		%	1.33		%	1.39		%	1.13		%
Net charge-offs of portfolio loans to total average loans (non-covered)	0.52		%	1.11		%	1.34		%	1.39		%	1.13		%

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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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 December 31, 2013 were $2.71 billion, an increase of 1.9% from total deposits of $2.66 billion as of December 31, 2012. This increase was primarily due to deposits acquired from Randolph, offset by the Company’s decision to utilize excess liquidity and the acquired securities portfolios to repay higher cost deposits as they matured, as well as aggressively reducing time deposit rates. Wholesale deposits were 32.8% of total deposits at December 31, 2013, an increase compared to 30.5% as of December 31, 2012. Transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $127.2 million, or 8.5%, over the past twelve months. At December 31, 2013, time deposits were 40.0% of total deposits, compared to 43.7% at December 31, 2012.

The following is our average deposits for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

Table 16

Average Deposits

	2013				2012				2011
	Average amount		Average interest rate		Average amount		Average interest rate		Average amount		Average interest rate
Demand deposits	$	1,111,328	1.36	%	$	941,070	1.51	%	$	814,518	1.42	%
Savings deposits	86,630		0.24	%	56,881		0.47	%	36,564		0.44	%
Time deposits	1,038,088		1.05	%	1,004,644		1.50	%	919,024		1.94	%
Total interest-bearing deposits	2,236,046		1.17	%	2,002,595		1.48	%	1,770,106		1.67	%
Noninterest-bearing deposits	290,765		—	%	188,569		—	%	125,969		—	%
Total deposits	$	2,526,811	1.04	%	$	2,191,164	1.35	%	$	1,896,075	1.56	%

The following is our maturities of time deposits of $100,000 or more as of December 31, 2013 (dollars in thousands):

Table 17

Maturities of Time Deposits of $100,000 or More

	3 months or less		Over 3 months to 6 months		Over 6 months to 12 months		Over 12 months		Total
Time deposits of $100,000 or more	$	253,692	$	180,361	$	167,766	$	209,392	$	811,211

Time deposits of $100,000 or more represented 30.0% and 29.8%, respectively, of our total deposits at December 31, 2013 and 2012.

Borrowings

Short-term borrowings at December 31, 2013 were $125.6 million, an increase of 287.8% from $32.4 million at December 31, 2012. Short-term borrowings consist of FHLB term advances with remaining maturities of less than one year, federal funds purchased from correspondent banks, securities sold under repurchase agreements and an unsecured revolving line of credit. The increase in short-term borrowings was primarily due to an increase in overnight FHLB advances that were used to repay higher cost deposits as they matured. The Company intends to reduce the level of overnight funding during the first quarter of 2014.

As an additional source of short-term borrowings, we utilize securities sold under agreements to repurchase, with balances outstanding of $27.2 million and $30.3 million at December 31, 2013 and 2012, respectively. 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 agency sponsored mortgage-backed securities or securities issued by local governmental municipalities.

At December 31, 2013, long-term debt outstanding totaled $103.7 million, an increase of 17.6% compared to $88.2 million outstanding at December 31, 2012. The increase is primarily due the Company entering into a $30.0 million term loan in 2013 to redeem $31.3 million of its Series A preferred stock.

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BNC uses advances from the FHLB under a line of credit equal to 30% of BNC’s total assets, subject to qualifying collateral being pledged. Outstanding advances totaled $148.4 million and $62.0 million at December 31, 2013 and 2012, respectively. These advances are secured by a blanket-floating lien on qualifying first mortgage loans, equity lines of credit, certain commercial real estate loans, and certain government agency sponsored mortgage-backed securities pledged to the FHLB. At December 31, 2013, we had $232.6 million additional borrowing capacity that was secured. A more detailed analysis of FHLB advances is presented in Note 12 and Note 13 to the accompanying Consolidated Financial Statements in Item 8 of Part II of this Form 10-K.

BNC also has the ability to borrow funds from the Federal Reserve of Richmond utilizing the discount window and the borrower-in-custody of collateral arrangement. As of December 31, 2013, we had approximately $152.5 million in borrowing capacity available under these arrangements with no outstanding balances for 2013 or 2012. In addition, BNC may purchase federal funds through unsecured federal funds guidance lines of credit totaling $55.0 million as of December 31, 2013. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate.

Capital Resources

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. As of December 31, 2013, 2012 and 2011, we exceeded all regulatory capital requirements to be considered “well capitalized” as such terms are defined in applicable regulations. Our capital adequacy ratios at December 31, 2013, 2012 and 2011 are set forth below:

Table 18

Capital Adequacy Ratios

	"Well Capitalized" minimum		2013		2012		2011
BNC Bancorp:
Total capital (to risk weighted assets)	10.00	%	11.57	%	13.80	%	11.19	%
Tier 1 capital (to risk weighted assets)	6.00	%	10.33	%	12.67	%	9.65	%
Tier 1 capital (to average assets)	5.00	%	8.12	%	9.65	%	7.13	%
Bank of North Carolina:
Total capital (to risk weighted assets)	10.00	%	12.66	%	13.91	%	11.51	%
Tier 1 capital (to risk weighted assets)	6.00	%	11.41	%	12.77	%	9.99	%
Tier 1 capital (to average assets)	5.00	%	8.96	%	9.71	%	7.38	%

Asset/Liability Management

Interest rate risk is defined as the exposure of net interest income and fair value of financial instruments to movements in interest rates. The Company’s results of operations are largely dependent on its net interest income and its ability to manage interest rate risk. Net interest income is susceptible to interest rate risk when interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. An increase in market rates would have a negative effect on net interest income if interest-bearing liabilities reprice faster than interest-earning assets. Conversely, if interest-earning assets reprice more quickly than interest-bearing liabilities, an increase in market rates could improve net interest income. The Company monitors its position of rate-sensitive assets and liabilities on a regular basis in order to stabilize net interest income and preserve capital in several different scenarios of interest rate movements. The goal is to control exposure to changing rates within the guidelines set by management and the Board of Directors, while maintaining an acceptable balance between the level of risk and current earnings. The Company maintains and complies with an asset/liability management policy that provides these guidelines for controlling exposure to interest rate risk.

The Company uses simulation analysis to calculate the income effect and economic value of assets, liabilities, and equity at current and forecasted rate environments, as well as hypothetical increases or decreases in interest rates at one percent intervals. The model uses estimated cash flows based on embedded options, prepayments, early withdrawals, and weighted average contractual rates and maturities. To calculate economic value, the model also uses discount rates that are equal to the current market rate of similar financial instruments. The economic values of longer-term fixed-rate instruments are generally more sensitive to changes in interest rates, whereas the values

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of adjustable- or variable-rate instruments are valued based on next contractual interest rate repricing and are generally less sensitive to interest rate movements, subject to rate caps and floors.

The model results are also driven by key assumptions, which are based on historical data as well as anticipated future needs of the Company. These assumptions include prepayments on loan and loan-backed assets, cash flows and maturities of other investment securities, and loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. However, the model is consistently monitored through back-testing, which compares the results of the net interest income forecasts with actual financial results of previous periods, in order to ensure modeling assumptions remain relevant.

The Company utilizes a third-party vendor to perform its interest rate risk analysis on at least a quarterly basis, and has more recently added internal modeling capabilities in order to increase model utilization for both regulatory and strategic purposes.

The following table presents a summary of the Company’s interest rate risk as measured by estimated changes in net interest income in various interest rate environments. This particular analysis assumes instantaneous and parallel rate shocks, which are measured in 100 basis point increments from base case. Other analyses are performed on an ongoing basis that may include gradual or rapid changes in interest rates, yield curve twists, and changes in assumptions about customer behavior in various rate scenarios.

Table 19

Net Interest Income at Risk

Change in interest rates (basis points)	Estimated change in net interest income at December 31, 2013
-100	-0.36%
+100	-3.30%
+200	-4.58%
+300	-5.33%
+400	-6.22%

In addition to measuring interest rate risk in the short-term (as measured by net interest income volatility), the Company also examines changes in economic value of equity, which is a measure of long-term interest rate risk currently embedded in the balance sheet. This analysis takes into account all cash flows over the estimated remaining life of all balance sheet positions and is measured at a point in time. As with the net interest income simulation model, net economic value analysis is based on key assumptions about the timing and variability of balance sheet cash flows. The following table represents a summary of the Company’s interest rate risk as measured by estimated changes in economic value of equity in parallel rate shocks of 100 basis point increments.

Table 20

Economic Value of Equity

Change in interest rates (basis points)	Estimated change in economic value of equity at December 31, 2013
-100	-2.73%
+100	-2.12%
+200	-4.88%
+300	-11.85%
+400	-17.38%

The Company’s interest rate risk management strategy involves the use of interest rate derivatives. Interest rate swaps are used to hedge the repricing characteristics of certain liabilities as to mitigate adverse effects on net interest margin and cash flows from changes in interest rates. The interest rate swaps are designated as cash flow hedges, with changes in market value classified through Accumulated Other Comprehensive Income. These derivative instruments add stability to interest expense, modify the duration of specific liabilities, and manage the Company’s exposure to interest rate movements.

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Additionally, the Company executes derivative instruments in the form of interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those derivatives are immediately hedged by offsetting derivative contracts, such that the Company minimizes net interest rate risk exposure resulting from such transactions.

The Company’s policy limits the potential exposure of net interest income and economic value of equity to a certain percentage change from the base case for each 100 basis point shock in interest rates. While the policy limits exist to establish the maximum amount of risk that management and the Board of Directors will tolerate, management also adheres to a set of internal “target” limits that are significantly lower than those in the policy. These internal limits act as a buffer to help management maintain a comfortable level of risk, while ensuring that changes in simulation results do not approach official policy limits. As of December 31, 2013, both net interest income and economic value of equity simulation results were within both target and policy limits.

Liquidity

Liquidity management involves the ability to meet and ensure the cash flow requirements of our depositors and borrowers, as well as our various needs, including operating, strategic and capital. In addition, our principal source of liquidity is dividends from BNC and an unsecured revolving line of credit with another financial institution. Liquidity is required at the parent holding company level for the purpose of paying dividends declared for its common and preferred shareholders, servicing debt, as well as general corporate expenses. Our Asset/Liability Committee meets on a regular basis to consider our operating needs, reviewing internal analysis of our liquidity, knowledge of current economic and market trends and forecasts of future conditions.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities, interest-earning deposits in other banks and occasional sales of various assets. These funds are used to make loans and to fund continuing operations. At December 31, 2013, liquid assets totaled $626.2 million, or 19.4% of total assets, compared to $690.4 million, or 22.4% of assets at December 31, 2012.

The liability portion of the balance sheet provides liquidity primarily through various interest-bearing and non-interest-bearing deposit accounts. We may purchase federal funds through unsecured federal funds guidance lines of credit totaling $55.0 million, with no outstanding balance at December 31, 2013. In addition, we have credit availability with the Federal Reserve and FHLB of approximately $588.5 million, with $148.4 million outstanding at December 31, 2013.

Total net cash outflows totaled $125.7 million during 2013, a decrease of $303.9 million from net cash inflows of $178.2 million during 2012. For 2011, net cash inflows totaled $25.7 million. Cash flows provided by operations were $162.9 million in 2013, an increase from $39.5 million provided by operations in 2012. Cash flows used in investing activities were $142.9 million in 2013, a decrease from $149.3 million provided by investing activities during 2012. The decrease was primarily driven by a higher level of investment securities purchased in 2013, as well as a higher level of loan production in 2013. Cash inflows from investing activities for 2012 also included $113.5 million of cash received from acquisitions, as compared to $14.2 million received from acquisitions in 2013. Cash flows used in financing activities were $145.7 million in 2013, a decrease compared to cash flows used in financing activities in 2012 of $10.6 million. The cash flows used in financing activities during 2013 were primarily driven by the repayment of higher cost deposits during 2013 and the redemption of our Series A preferred stock. The net cash outflows from financing activities during 2012 included $68.3 million received from the issuance of convertible preferred stock. The Consolidated Statement of Cash Flows in the accompanying Consolidated Financial Statements provides a detailed analysis of cash from operating, investing and financing activities for each of the years ended December 31, 2013, 2012 and 2011.

Management anticipates that we will rely primarily upon customer deposits, loan repayments, wholesale funding sources and current earnings to provide liquidity, fund loans and to purchase investment securities. Investment securities will be primarily issued by the federal government and its agencies, municipal securities and government agency sponsored mortgage-backed securities. See “Deposits” and “Borrowings” in this Item 7 for an overview of our deposit activities and borrowings.

In the normal course of business, we will have various outstanding contractual obligations that will require future cash outflows. In addition there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. Table 21 in this Item 7, “Contractual Obligations and Other Commitments”, summarizes our contractual obligations and commitments as of December 31, 2013.

Market Risk

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of our loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. We do not maintain a

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trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of BNC’s asset/liability management function. See “Asset/Liability Management” section of this Item 7.

Off-Balance Sheet Risk – Contractual Obligations and Commitments

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 18 to the accompanying Consolidated Financial Statements in Item 8 of Part II of this Form 10-K.

In addition, we have entered into certain contractual obligations and other commitments, including leasing arrangements, to support our ongoing activities and commitments related to funding of our operations through deposits or borrowings. See Note 8, Note 11, Note 12 and Note 13, respectively, in Item 8 of Part II of this Form 10-K for further details on leases, deposits and borrowings.

The required payments under such commitments at December 31, 2013 are shown in the following table (dollars in thousands):

Table 21

Contractual Obligations and Other Commitments

	Total		Less than one year		One to three years		Three to five years		After five years
Contractual obligations:
Short-term borrowings	$	125,592	$	125,592	$	—	$	—	$	—
Long-term debt	103,688		—		6,100		53,875		43,713
Time deposits	1,082,799		819,571		203,309		52,337		7,582
Operating leases	16,668		2,776		4,622		3,849		5,421
Total contractual obligations	$	1,328,747	$	947,939	$	214,031	$	110,061	$	56,716
Commitments:
Lines of credit and loan commitments	$	377,021	$	152,403	$	38,246	$	70,619	$	115,753
Letters of credit	7,926		6,782		1,144		—		—
Unfunded commitments for unconsolidated investments	7,450		7,450		—		—		—
Total commitments	$	392,397	$	166,635	$	39,390	$	70,619	$	115,753

Derivative Financial Instruments

A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or reference rate. These instruments primarily consist of interest rate swaps, caps, floors, financial forward and futures contracts and options written or purchased. Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risk. Credit risk arises when amounts receivable from a counterparty exceed amounts payable. We control our risk of loss on derivative contracts by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit.

During 2009, we entered into a five-year interest rate cap. The interest rate cap assists in minimizing the exposure of risk of rising interest rates. This derivative contract, with a notional amount of $250 million, was executed to offset the effects of interest rate changes on an unsecured $250 million variable rate money market funding arrangement. Under this cash flow hedge relationship, the cap’s objective is to offset the effect of interest rate changes, whenever funding rates are higher than the strike rate of the cap.

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

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The Company utilizes derivative financial instruments, including 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 December 31, 2013 and 2012, the Company had notional amounts of $31.2 million and $18.0 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.

Although off-balance sheet derivative financial instruments do not expose us to credit risk equal to the notional amount, such agreements generate credit risk to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. We minimize such risk by evaluating the creditworthiness of the counterparties and consistently monitoring these agreements. The counterparties to these agreements are primarily large commercial banks and investment banks. Where appropriate, master netting agreements are arranged or collateral is obtained in the form of rights to securities. At December 31, 2013 and 2012, our derivatives reflected a $1.4 million gain and a $6.3 million loss, net of tax, in accumulated other comprehensive income, respectively.

Other risks associated with interest-sensitive derivatives include the effect on fixed rate positions during periods of changing interest rates. Indexed amortizing swaps' notional amounts and maturities change based on certain interest rate indices. Generally, as rates fall the notional amounts decline more rapidly, and as rates increase notional amounts decline more slowly. As of December 31, 2013, we had no indexed amortizing swaps outstanding. Under unusual circumstances, financial derivatives also increase liquidity risk, which could result from an environment of rising interest rates in which derivatives produce negative cash flows while being offset by increased cash flows from variable rate loans. We consider such risk to be insignificant due to the relatively small derivative positions we hold. A discussion of derivatives is presented in Note 9 to the accompanying Consolidated Financial Statements, which are presented under Item 8 of Part II in this Form 10-K.

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Quarterly Financial Information

The following table sets forth, for the periods indicated, certain of our consolidated quarterly financial information. This information is derived from our unaudited financial statements, which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with the accompanying Consolidated Financial Statements in Item 8 of Part II of this Form 10-K. The results for any quarter are not necessarily indicative of results for any future period.

Table 22

Quarterly Financial Information

(dollars in thousands, except share and per share data)

	Year Ended December 31, 2013												Year Ended December 31, 2012
	Fourth quarter			Third quarter			Second quarter			First quarter			Fourth quarter			Third quarter			Second quarter			First quarter
Operating Data:
Total interest income	$	37,836		$	34,008		$	33,675		$	33,151		$	32,224		$	27,814		$	26,298		$	27,179
Total interest expense	7,964			7,372			7,364			7,363			8,119			8,063			8,142			8,567
Net interest income	29,872			26,636			26,311			25,788			24,105			19,751			18,156			18,612
Provision for loan losses	2,435			3,350			2,288			4,115			5,520			3,708			8,330			5,179
Net interest income after provision for loan losses	27,437			23,286			24,023			21,673			18,585			16,043			9,826			13,433
Non-interest income	5,178			5,824			5,602			6,202			10,394			5,253			11,682			5,809
Non-interest expense	28,628			22,430			23,759			23,116			24,871			20,399			19,177			17,825
Income before income tax expense (benefit)	3,987			6,680			5,866			4,759			4,108			897			2,331			1,417
Income tax expense (benefit)	716			1,650			1,199			480			(940		)	(492		)	40			(308		)
Net income	3,271			5,030			4,667			4,279			5,048			1,389			2,291			1,725
Less preferred stock dividends and discount accretion	—			—			531			529			601			601			601			601
Net income available to common shareholders	$	3,271		$	5,030		$	4,136		$	3,750		$	4,447		$	788		$	1,690		$	1,124
Per Share Data:
Basic earnings per share	0.12			0.19			0.16			0.14			0.19			0.04			0.13			0.11
Diluted earnings per share	0.12			0.19			0.16			0.14			0.19			0.04			0.13			0.11
Cash dividends declared	0.05			0.05			0.05			0.05			0.05			0.05			0.05			0.05
Balance Sheet Data:
Loans not covered by loss-share	$	2,088,856		$	1,898,243		$	1,829,659		$	1,793,358		$	1,786,328		$	1,631,004		$	1,475,708		$	1,417,529
Loans covered by loss-share	187,661			201,799			219,282			237,791			248,930			269,388			284,579			307,097
Allowance for loan losses	(32,875		)	(32,358		)	(32,859		)	(38,148		)	(40,292		)	(34,823		)	(40,856		)	(36,722		)
Net loans	2,243,642			2,067,684			2,016,082			1,993,001			1,994,966			1,865,569			1,719,431			1,687,904
Investment securities	517,795			500,449			466,079			476,982			456,344			360,678			334,382			342,739
Total assets	3,229,576			2,968,709			2,929,636			2,929,191			3,083,788			2,711,173			2,442,815			2,408,890
Deposits:
Non-interest bearing	324,532			299,670			275,984			267,458			275,605			207,928			180,238			162,857
Interest bearing demand and savings	1,299,399			1,172,512			1,152,779			1,171,484			1,221,089			1,067,855			960,597			956,784
Time deposits	1,082,799			963,679			999,552			1,069,207			1,159,615			1,033,304			948,658			996,831
Total deposits	2,706,730			2,435,861			2,428,315			2,508,149			2,656,309			2,309,087			2,089,493			2,116,472
Total borrowings	227,101			256,554			227,697			117,774			120,555			136,895			106,184			117,844
Shareholders' equity	271,330			257,793			254,445			284,055			282,244			252,180			237,539			165,363

Fourth Quarter Results

Net income for the quarter ended December 31, 2013 was $3.3 million, a decrease of 35.2% compared to net income of $5.0 million for the quarter ended December 31, 2012. Net income available to common shareholders for the quarter ended December 31, 2013 was $3.3 million, or $0.12 per diluted share, a decrease of 26.4% compared to net income available to common shareholders of $4.4 million, or $0.19 per diluted share, for the fourth quarter of 2012. The financial results for the quarter ended December 31, 2013 include the impact of the acquisition of Randolph, which was completed on October 1, 2013, while the results for the quarter ended December 31, 2012 include $5.0 million of pre-tax bargain purchase gain the Company recorded on the acquisition of First Trust.

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FTE net interest income for the fourth quarter of 2013 was $31.8 million, an increase of 24.1% from $25.6 million for the fourth quarter of 2012. FTE net interest margin was 4.39% for the fourth quarter of 2013, an increase of 30 basis points from 4.09% for the fourth quarter of 2012.

Average interest-earning assets were $2.88 billion for the fourth quarter of 2013, an increase of 15.4% from $2.50 billion for the fourth quarter of 2012. The increase in average interest-earning assets from 2012 is primarily due to the full year impact of interest-earning assets acquired from Carolina Federal, KeySource and First Trust during 2012, interest-earning assets acquired from Randolph during the fourth quarter of 2013, along with continued loan growth in our markets and an increase in our investment securities portfolio.

The Company’s average yield on interest-earning assets was 5.48% for the fourth quarter of 2013, an increase of 10 basis points from 5.38% for the fourth quarter of 2012. The increase from the fourth quarter of 2012 was primarily due to higher loan accretion from the acquired loan portfolio, as well as the addition of higher yielding loans acquired from First Trust and Randolph. Loan accretion during the fourth quarter of 2013 totaled $4.2 million, an increase of 36.4% from $3.1 million of accretion recorded in the fourth quarter of 2012.

Average interest-bearing liabilities were $2.56 billion for the fourth quarter of 2013, an increase of 11.6% from $2.30 billion for the fourth quarter of 2012. The increase in average interest-bearing liabilities from 2012 is primarily due to the full year impact of the acquisitions of Carolina Federal, KeySource and First Trust during 2012, increased borrowings during fiscal year 2013 and the acquisition of Randolph, offset by the Company’s use of excess liquidity to primarily repay wholesale and non-core deposits as they matured.

The Company’s average cost of interest-bearing liabilities was 1.23% for the fourth quarter of 2013, a decrease of 18 basis points from 1.41% for the fourth quarter of 2012. The decrease was due to the Company’s continued effort to reduce exposure to higher cost deposit products, as well as lower interest rates paid on borrowings, which was offset by continued increases in cash flow hedging expense. For the fourth quarter of 2013, cash flow hedging expenses totaled $2.7 million, compared to $2.1 million for the fourth quarter of 2012.

Non-interest income was $5.2 million for the fourth quarter of 2013, a decrease of 50.2% from $10.4 million for the fourth quarter of 2012. Adjusted non-interest income was $5.2 million for the fourth quarter of 2013, an increase of 8.3% from $4.8 million for the fourth quarter of 2012. Adjusted non-interest income excludes bargain purchase gain on acquisition, acquisition-related gains (includes income related to the subsequent settlement of a liability assumed in an acquisition) and gain (loss) on sale of securities.

Non-interest expense was $28.6 million for the fourth quarter of 2013, an increase of 15.1% from $24.9 million for the fourth quarter of 2012. Excluding transaction-related costs, adjusted non-interest expense for the fourth quarter of 2013 was $24.7 million, an increase of 5.5% from $23.5 million for the fourth quarter of 2012. Transaction-related costs include legal and professional fees, personnel costs, data processing expenses, and other miscellaneous expenses directly attributable to the transaction. The decrease from the fourth quarter of 2012 was primarily due to a reduction in valuation charges recorded on OREO and reduced loan, foreclosure and collection expenses.

During the fourth quarter of 2013, the Company recorded a provision for loan losses of $2.4 million, a decrease of 55.9% from $5.5 million recorded during the fourth quarter of 2012. The Company recorded $2.5 million of provision for loan losses on non-covered loans during the fourth quarter of 2013 and a provision reversal of $(0.1) million on loans covered under loss-share.

Net loan charge-offs for the fourth quarter of 2013 were $0.4 million, which included $0.5 million on loans not covered under loss-share agreements and net recoveries of $0.1 million on loans covered under loss-share agreements. The Company incurred $0.5 million in net charge-off losses, which represented 0.08% of average loans for the fourth quarter of 2013, compared to net charge-off losses of $3.8 million, or 0.78% of average loans, for the fourth quarter of 2012. The decrease in net charge-off losses during the fourth quarter of 2013 was due to an increased level of recoveries of previously charged-off loans, both covered under loss-share agreements and not covered.

2012 Compared to 2011

Net income for the year ended December 31, 2012 was $10.5 million, an increase of $3.5 million, or 50.8%, compared to net income of $6.9 million for the year ended December 31, 2011. Income available to common shareholders was $8.0 million, or $0.48 per diluted share, for 2012, an increase of $3.5 million, or 77.8%, compared to the $4.5 million, or $0.45 per diluted share, reported for the year ended December 31, 2011. Included in the financial results for the years ended December 31, 2012 and 2011 are $12.7 million and $7.8 million, respectively, of acquisition gains and $5.2 million and $1.1 million, respectively, of merger and transactional costs. The Company has also seen significant growth in mortgage originations, which have led to a $3.9 million increase in mortgage origination fees from 2011. The Company has also experienced a significant increase in non-interest expense of $14.4 million, primarily due to additional headcount and costs associated with the strategic acquisitions made in 2012.

59

Net Interest Income

FTE net interest income was $86.4 million for the year ended December 31, 2012, an increase of $13.6% from the $76.0 million earned in 2011. The increase in net interest income was primarily due to a 14.9% increase in the average balance of portfolio loans, primarily from organic loan growth and our acquisitions of Carolina Federal, KeySource and, to a lesser extent, First Trust during 2012. The increase is also due to a 4.1% increase in average investment securities during 2012, which was due to acquisitions of investment securities due to our enhanced liquidity position in 2012. We also experienced a $41.7 million increase in average interest-earning bank balances, which was due to a significantly higher liquidity position we maintained as a result of the proceeds from our capital raise, as well as cash received from our strategic acquisitions.

Included in interest income from loans was the impact of the purchase accounting adjustments that favorably affected net interest income in 2012. The accretion of yield and fair value discounts on the acquired loan portfolios totaled $6.7 million for the year ended December 31, 2012, which is consistent with the amount recognized in 2011. Factors affecting the amount of accretion include unscheduled loan payments, changes in estimated cash flows and impairment, and additional loans from acquisitions that will increase accretion. The average yield on interest earning assets decreased by 32 basis points during the year ended December 31, 2012 from 5.63% to 5.31%. The average yield on portfolio loans and investment securities decreased 15 basis points and 51 basis points, respectively, from 2011 to 2012. The decrease is due to the origination and repricing of loans at lower interest rates, as well as the replacement of investment securities at lower interest rates.

Total interest expense was $32.9 million for the year ended December 31, 2012, which is unchanged compared to the year ended December 31, 2011. Average total interest-bearing liabilities increased $212.6 million during 2012 as compared to 2011, while the average rate on interest-bearing liabilities decreased by 17 basis points from 1.72% to 1.55% during 2012. The increase in interest-bearing liabilities was primarily from organic deposit growth and acquisitions of Carolina Federal, KeySource, First Trust and, to a lesser extent, the branches from BHR. Interest expense for 2012 was impacted by increased hedging costs related to our interest rate cap, offset by decreased funding costs.

Average borrowings decreased13.8% to $124.2 million during the year ended December 31, 2012. The decrease was primarily due to the paydown of short-term advances from the FHLB, as well as the maturity of a revolving line of credit during 2012. The paydown was made as a result of our enhanced liquidity position during 2012.

The net interest margin for 2012 was 3.85%, compared to 3.93% in 2011. This decrease was due to decreased interest rates and mix of interest-earning assets from continued downward pressure on market interest rates, partially offset by an improvement in cost of funds. As noted earlier, the cost of funds would have declined more dramatically except for higher hedging costs experienced in 2012 as compared to 2011.

Provision for Loan Losses

We recorded a provision for loan losses of $22.7 million for 2012, compared to a provision for loan losses of $18.2 million for 2011. Of the $22.7 million in provision expense for 2012, $17.8 million related to originated non-covered loans, an increase of $1.8 million from provision related to originated non-covered loans of $16.0 million for 2011. The gross covered loan provision totaled $22.7 million for 2012, with $17.7 million recorded through an FDIC indemnification asset and the remaining $5.0 million included in provision for loan losses. This is an increase from gross covered loan provision of $10.9 million for 2011, with $8.7 million recorded through an FDIC indemnification asset and the remaining $2.2 million included in provision for loan losses.

Non-Interest Income

Non-interest income was $33.1 million for 2012, an increase of 59.3% compared to $20.8 million for 2011. Included in non-interest income for 2012 was $12.7 million of acquisition gain from the acquisitions of Carolina Federal and First Trust, $3.0 million of gains on sale of securities, and $2.5 million of income associated with FDIC receivable and related loss-share receipts. Excluding these non-recurring sources of income, non-interest income was $14.9 million for 2012, an increase of 45.6% from $10.3 million in 2011. This increase is due to the increased volume of mortgage originations and SBA loan premiums during 2012. Mortgage fees generated in 2012 increased 176.6% to $6.2 million, compared to mortgage fees of $2.2 million in 2011.

Non-Interest Expense

Non-interest expense was $82.3 million for 2012, an increase of 21.2% compared to $67.9 million for 2011. Included in non-interest expense for 2012 and 2011 were merger and transactional costs totaling $5.2 million and $1.1 million, respectively. These costs included professional fees, contract cancellations, personnel costs, and data processing and system conversion expenses.

60

These increases were due to the addition of full-time equivalent employees and facilities, as well as transaction-related expenses noted above, incurred as a result of the acquisitions that have been made since the fourth quarter of 2011. The personnel additions are expected to contribute to our long-term focus on driving both top line and fee income growth. These increases were slightly offset by a $2.4 million reduction in valuation adjustments for OREO during full year 2012 as compared to 2011.

Income Taxes

Our income tax benefit was $1.7 million and $1.8 million for 2012 and 2011, respectively, and our income before taxes increased $3.6 million for 2012, when compared to 2011. The tax expense associated with this increase was offset by increases in our tax-exempt investment securities income, additional income from our increased investment in bank-owned life insurance, and tax benefits derived from our acquisitions. Our effective tax rates for the years ended December 31, 2012 and 2011 were (19.4%) and (34.6%), respectively.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A discussion regarding our management of market risk is included in “Interest Rate and Market Risk” in this report in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

61

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (1992). Management concluded that our internal control over financial reporting was effective as of December 31, 2013, based on the evaluation under the framework in Internal Control – Integrated Framework (1992).

Our independent registered public accounting firm which audited the financial statements included in this Annual Report has issued an attestation report on our internal control over financial reporting, which is contained in this Annual Report.

/s/ Richard D. Callicutt II	/s/ David B. Spencer
Richard D. Callicutt II	David B. Spencer
President and Chief Executive Officer	Senior Executive Vice President
	and Chief Financial Officer

62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of BNC Bancorp

We have audited the accompanying consolidated balance sheets of BNC Bancorp and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BNC Bancorp and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, BNC Bancorp and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Cherry Bekaert LLP

Raleigh, North Carolina

March 13, 2014

63

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2013 and 2012

(Dollars in thousands, except per share data)

	December 31, 2013			December 31, 2012
Assets
Cash and due from banks	$	35,474		$	42,989
Interest-earning deposits in other banks	72,916			191,082
Investment securities available-for-sale, at fair value	270,417			341,539
Investment securities held-to-maturity, at amortized cost (fair value of $236,507 and $118,235 at December 31, 2013 and 2012, respectively)	247,378			114,805
Federal Home Loan Bank stock, at cost	10,720			7,604
Loans held for sale	30,899			57,414
Loans:
Covered under loss-share agreements	187,661			248,930
Not covered under loss-share agreements	2,088,856			1,786,328
Less allowance for loan losses	(32,875		)	(40,292		)
Net loans	2,243,642			1,994,966
Accrued interest receivable	12,955			11,363
Premises and equipment, net	76,126			66,615
Other real estate owned:
Covered under loss-share agreements	18,773			23,102
Not covered under loss-share agreements	28,833			28,811
FDIC indemnification asset	16,886			53,519
Investment in bank-owned life insurance	78,439			70,756
Goodwill and other intangible assets, net	34,966			32,193
Other assets	51,152			47,030
Total assets	$	3,229,576		$	3,083,788
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand	$	324,532		$	275,605
Interest-bearing demand	1,299,399			1,221,089
Time deposits	1,082,799			1,159,615
Total deposits	2,706,730			2,656,309
Short-term borrowings	125,592			32,382
Long-term debt	101,509			88,173
Accrued expenses and other liabilities	24,415			24,680
Total liabilities	2,958,246			2,801,544
Shareholders' Equity:
Preferred stock, no par value, authorized 20,000,000 shares;
Series A, Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation value per share, 0 and 31,260 shares issued and outstanding at December 31, 2013 and 2012, respectively	—			30,717
Series B, Mandatorily Convertible Non-Voting Preferred Stock, $10 stated value, 0 and 1,804,566 shares issued and outstanding at December 31, 2013 and 2012, respectively	—			17,161
Common stock, no par value; authorized 60,000,000 shares; 21,310,832 and 20,462,667 shares issued and outstanding at December 31, 2013 and 2012, respectively	168,616			157,541
Common stock, non-voting, no par value; authorized 20,000,000 shares; 5,992,213 and 4,187,647 shares issued and outstanding at December 31, 2013 and 2012, respectively	57,849			40,688
Retained earnings	41,559			30,708
Stock in directors rabbi trust	(3,143		)	(3,090		)
Directors deferred fees obligation	3,143			3,090
Accumulated other comprehensive income	3,306			5,429
Total shareholders' equity	271,330			282,244
Total liabilities and shareholders' equity	$	3,229,576		$	3,083,788

See accompanying notes to Consolidated Financial Statements.

64

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2013, 2012, and 2011

(Dollars in thousands, except per share data)

	2013			2012			2011
Interest Income:
Loans, including fees	$	121,704		$	98,668		$	87,591
Investment securities:
Taxable	4,366			4,808			5,688
Tax-exempt	12,202			9,749			9,946
Interest-earning balances and other	398			290			118
Total interest income	138,670			113,515			103,343
Interest Expense:
Demand deposits	15,282			14,508			11,719
Time deposits	10,898			15,093			17,836
Short-term borrowings	433			338			489
Long-term debt	3,450			2,952			2,876
Total interest expense	30,063			32,891			32,920
Net Interest Income	108,607			80,624			70,423
Provision for loan losses, net	12,188			22,737			18,214
Net interest income after provision for loan losses	96,419			57,887			52,209
Non-Interest Income:
Mortgage fees	8,979			6,169			2,230
Service charges	4,314			3,149			3,190
Earnings on bank-owned life insurance	2,318			1,771			1,688
Gain (loss) on sale of investment securities, net	(42		)	3,026			1,202
Bargain purchase gain on acquisition	—			12,706			7,800
Other	7,237			6,317			4,692
Total non-interest income	22,806			33,138			20,802
Non-Interest Expense:
Salaries and employee benefits	52,994			42,200			31,810
Occupancy	6,547			4,965			3,859
Furniture and equipment	5,546			4,241			2,761
Data processing and supplies	3,275			2,773			2,291
Advertising and business development	2,020			1,761			1,733
Insurance, professional and other services	8,392			6,685			4,166
FDIC insurance assessments	2,766			2,166			2,433
Loan, foreclosure and other real estate owned expenses	8,949			10,944			14,072
Other	7,444			6,537			4,739
Total non-interest expense	97,933			82,272			67,864
Income before income tax expense (benefit)	21,292			8,753			5,147
Income tax expense (benefit)	4,045			(1,700		)	(1,783		)
Net Income	17,247			10,453			6,930
Less preferred stock dividends and discount accretion	1,060			2,404			2,404
Net Income Available to Common Shareholders	$	16,187		$	8,049		$	4,526
Basic earnings per common share	$	0.61		$	0.48		$	0.45
Diluted earnings per common share	$	0.61		$	0.48		$	0.45
Dividends declared and paid per common share	$	0.20		$	0.20		$	0.20

See accompanying notes to Consolidated Financial Statements.

65

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2013, 2012, and 2011

(Dollars in thousands)

	2013			2012			2011
Net income	$	17,247		$	10,453		$	6,930
Other comprehensive income (loss):
Investment securities:
Unrealized holding gain (loss) on investments securities available-for-sale	(15,586		)	3,408			14,210
Tax effect	5,961			(1,314		)	(5,478		)
Reclassification of (gains) losses recognized in net income	42			(3,026		)	(1,202		)
Tax effect	(16		)	1,167			463
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity	(623		)	(538		)	(45		)
Tax effect	334			207			18
Net of tax amount	(9,888		)	(96		)	7,966
Cash flow hedging activities:
Unrealized holding gains (losses)	2,704			(593		)	(5,376		)
Tax effect	(1,042		)	229			2,072
Reclassification of losses recognized in net income	9,863			7,940			5,118
Tax effect	(3,760		)	(3,061		)	(1,972		)
Net of tax amount	7,765			4,515			(158		)
Total other comprehensive income (loss)	(2,123		)	4,419			7,808
Total comprehensive income	$	15,124		$	14,872		$	14,738

See accompanying notes to Consolidated Financial Statements.

66

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2013, 2012, and 2011

(Dollars in thousands, except per share data)

	Common stock					Non-voting common stock			Common stock warrants			Preferred stock Series A			Preferred stock Series B			Preferred stock Series B-1			Preferred stock Series C			Retained earnings			Stock in directors rabbi trust			Directors deferred fees obligation		Accumulated other comprehensive income (loss)			Total
	Shares		Amount			Shares	Amount
Balance, December 31, 2010	9,053,360		$	86,791		—	$	—	$	2,412		$	29,757		$	17,161		$	—		$	—		$	22,901		$	(1,729	)	$	1,729	$	(6,798	)	$	152,224
Net income	—		—			—	—		—			—			—			—			—			6,930			—			—		—			6,930
Directors deferred fees	—		—			—	—		—			—			—			—			—			—			(776		)	776		—			—
Other comprehensive income, net of tax	—		—			—	—		—			—			—			—			—			—			—			—		7,808			7,808
Common stock issued pursuant to:
Exercise of stock options	6,838		52			—	—		—			—			—			—			—			—			—			—		—			52
Stock-based compensation	13,242		373			—	—		—			—			—			—			—			—			—			—		—			373
Dividend reinvestment plan	27,450		205			—	—		—			—			—			—			—			—			—			—		—			205
Cash dividends:
Common stock, $0.20 per share	—		—			—	—		—			—			—			—			—			(1,813		)	—			—		—			(1,813		)
Preferred stock, net of accretion	—		—			—	—		—			480			—			—			—			(2,404		)	—			—		—			(1,924		)
Balance, December 31, 2011	9,100,890		87,421			—	—		2,412			30,237			17,161			—			—			25,614			(2,505		)	2,505		1,010			163,855
Net income	—		—			—	—		—			—			—			—			—			10,453			—			—		—			10,453
Directors deferred fees	—		—			—	—		—			—			—			—			—			—			(585		)	585		—			—
Other comprehensive income, net of tax	—		—			—	—		—			—			—			—			—			—			—			—		4,419			4,419
Preferred stock issued, net	—		—			—	—		—			—			—			40,688			27,620			—			—			—		—			68,308
Common stock issued pursuant to:
Exercise of stock options	48,092		286			—	—		—			—			—			—			—			—			—			—		—			286
Income tax benefit	—		17			—	—		—			—			—			—			—			—			—			—		—			17
Shares traded to exercise options	(19,189	)	(148		)	—	—		—			—			—			—			—			—			—			—		—			(148		)
Stock-based compensation	48,098		529			—	—		—			—			—			—			—			—			—			—		—			529
Dividend reinvestment plan	29,443		225			—	—		—			—			—			—			—			—			—			—		—			225
Acquisition of KeySource	1,810,267		13,942			—	—		—			—			—			—			—			—			—			—		—			13,942
Acquisition of First Trust	3,276,101		26,177			—	—		—			—			—			—			—			—			—			—		—			26,177
Conversion of preferred stock	6,168,965		27,620			4,187,647	40,688		—			—			—			(40,688		)	(27,620		)	—			—			—		—			—
Redemption of common stock warrant	—		1,472			—	—		(2,412		)	—			—			—			—			—			—			—		—			(940		)
Cash dividends:
Common stock, $0.20 per share	—		—			—	—		—			—			—			—			—			(2,955		)	—			—		—			(2,955		)
Preferred stock, net of accretion	—		—			—	—		—			480			—			—			—			(2,404		)	—			—		—			(1,924		)
Balance, December 31, 2012	20,462,667		157,541			4,187,647	40,688		—			30,717			17,161			—			—			30,708			(3,090		)	3,090		5,429			282,244
Net income	—		—			—	—		—			—			—			—			—			17,247			—			—		—			17,247
Directors deferred fees	—		—			—	—		—			—			—			—			—			—			(53		)	53		—			—
Other comprehensive loss, net of tax	—		—			—	—		—			—			—			—			—			—			—			—		(2,123		)	(2,123		)
Redemption of preferred stock	—		—			—	—		—			(31,260		)	—			—			—			—			—			—		—			(31,260		)
Common stock issued pursuant to:
Stock-based compensation	98,334		1,173			—	—		—			—			—			—			—			—			—			—		—			1,173
Dividend reinvestment plan	23,197		260			—	—		—			—			—			—			—			—			—			—		—			260
Conversion of preferred stock	—		—			1,804,566	17,161		—			—			(17,161		)	—			—			—			—			—		—			—
Acquisition of Randolph	726,634		9,642			—	—		—			—			—			—			—			—			—			—		—			9,642
Cash dividends:
Common stock, $0.20 per share	—		—			—	—		—			—			—			—			—			(5,336		)	—			—		—			(5,336		)
Preferred stock, net of accretion	—		—			—	—		—			543			—			—			—			(1,060		)	—			—		—			(517		)
Balance, December 31, 2013	21,310,832		$	168,616		5,992,213	$	57,849	$	—		$	—		$	—		$	—		$	—		$	41,559		$	(3,143	)	$	3,143	$	3,306		$	271,330

See accompanying notes to Consolidated Financial Statements.

67

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2013, 2012, and 2011

(Dollars in thousands)

	2013			2012			2011
Operating activities
Net income	$	17,247		$	10,453		$	6,930
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	12,188			22,737			18,214
Depreciation and amortization	4,615			2,987			2,309
Amortization of premiums, net	4,483			1,436			502
Amortization of intangible assets	1,176			567			416
Deferred income tax provision (benefit)	3,805			(1,910		)	(3,106		)
Accretion of fair value purchase accounting adjustments	(16,396		)	(8,515		)	(7,461		)
Bargain purchase gain on acquisition	—			(12,706		)	(7,800		)
Cash flow hedge expense	9,863			7,940			5,118
Stock-based compensation	1,173			529			373
Deferred compensation	333			605			1,187
Earnings on bank-owned life insurance	(2,318		)	(1,771		)	(1,688		)
Net loss (gain) on sale of investment securities available-for-sale	42			(3,026		)	(1,202		)
Loss on sale of premises and equipment	109			183			—
Losses on other real estate owned	3,173			6,503			9,655
Gain on sale of loans (mortgage fees)	(8,979		)	(6,169		)	(2,230		)
Origination of loans held for sale	(334,325		)	(274,925		)	(91,255		)
Proceeds from sales of loans held for sale	352,130			233,276			91,942
(Increase) decrease in accrued interest receivable	(792		)	1,048			755
Payments received from FDIC under loss-share agreements	34,576			60,216			21,541
(Increase) decrease in other assets	86,326			(477		)	(396		)
(Decrease) increase in accrued expenses and other liabilities	(5,516		)	553			(4,197		)
Other operating activities, net	—			—			64
Net cash provided by operating activities	162,913			39,534			39,671
Investing activities
Purchases of investment securities available-for-sale	(97,101		)	(92,713		)	(80,815		)
Purchases of investment securities held-to-maturity	(49,387		)	(18,693		)	(5,323		)
Proceeds from sales of investment securities available-for-sale	18,414			117,381			50,717
Proceeds from maturities and payments of investment securities available-for-sale	49,787			46,386			32,510
Proceeds from maturities and payments of investment securities held-to-maturity	1,313			—			—
(Purchase) redemption of Federal Home Loan Bank stock	(2,486		)	2,850			463
Net increase in loans	(99,199		)	(44,335		)	(157,659		)
Purchases of premises and equipment	(8,591		)	(12,221		)	(10,550		)
Proceeds from disposal of premises and equipment	47			283			19
Investment in bank-owned life insurance	(502		)	(12,081		)	—
Investment in other real estate owned	(2,190		)	(2,339		)	(1,035		)
Proceeds from sales of other real estate owned	32,805			51,353			30,433
Net cash received from acquisitions	14,207			113,466			38,648
Net cash provided by (used in) by investing activities	(142,883		)	149,337			(102,592		)

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Financing activities
Net increase (decrease) in deposits	(208,854		)	(15,386		)	86,139
Net increase (decrease) in short-term borrowings	76,210			(46,508		)	6,004
Net increase (decrease) in long-term-debt	23,786			(11,587		)	—
Preferred stock (redeemed) issued , net	(31,260		)	68,308			—
Common stock issued from exercise of stock options	—			138			52
Common stock issued pursuant to dividend reinvestment plan	260			225			205
Redemption of common stock warrant	—			(940		)	—
Cash dividends paid, net of accretion	(5,853		)	(4,879		)	(3,737		)
Net cash provided by (used in) financing activities	(145,711		)	(10,629		)	88,663
Net increase (decrease) in cash and cash equivalents	(125,681		)	178,242			25,742
Cash and cash equivalents, beginning of period	234,071			55,829			30,087
Cash and cash equivalents, end of period	$	108,390		$	234,071		$	55,829
Supplemental Statement of Cash Flows Disclosure
Interest paid	$	30,786		$	32,113		33,095
Income taxes paid	1,692			1,549			1,101
Summary of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	27,105		$	38,569		41,028
Transfer of loans held for sale to loans	19,682			—			—
FDIC indemnification asset increase for losses, net	4,051			31,793			8,721
Transfer of investment securities from available-for-sale to held-to-maturity	86,526			—			85,780

See accompanying notes to Consolidated Financial Statements.

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BNC BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

NOTE 1 – BASIS OF PRESENTATION

Organization

BNC Bancorp (the “Parent Company”) is a bank holding company for Bank of North Carolina (“BNC”), a wholly owned subsidiary, headquartered in High Point, North Carolina. The Parent Company also maintains four wholly-owned special-purpose subsidiary trusts that issue trust preferred securities. The information in the consolidated financial statements relates primarily to BNC. BNC is a full service commercial bank providing commercial banking services tailored to the particular banking needs of the communities it serves in North and South Carolina. BNC’s primary source of revenue is derived from loans to customers, who are predominantly individuals and small to medium size businesses in BNC’s market areas.

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

Basis of Presentation

The accompanying consolidated financial statements include the accounts and transactions of the Parent Company and BNC, collectively referred to herein as the “Company”. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

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

Reclassifications

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

Business Combinations

The Company accounts for its business combinations using the acquisition method of accounting. This method requires the use of fair values in determining the carrying values of the purchased assets and assumed liabilities, which are recorded at fair value at acquisition date, and identifiable intangible assets are recorded at fair value. Costs directly related to the business combinations are recorded as expenses as they are incurred. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values become available.

Cash and Cash Equivalents

For the purpose of presentation in the statements of cash flows, cash and cash equivalents include cash and due from banks and interest-earning deposits in other banks.

Federal regulations require financial institutions to set aside a specified amount as a reserve against transaction accounts and time deposits. At December 31, 2013 and 2012, the Company’s reserve requirement was $8.4 million and $24.8 million, respectively.

Investment Securities

Investment securities are classified into one of three categories on the date of purchase and accounted for as follows: (1) debt securities that the Company has the positive intent and the ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of taxes, reported as other comprehensive income.

Premiums are amortized and discounts accreted using the interest method over the remaining terms of the related securities. Dividend and interest income are recognized when earned. Sales of investment securities are recorded at trade date, with realized gains and losses on sales determined using the specific identification method and included in non-interest income.

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Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security.

Our investment securities portfolio includes residential mortgage-backed securities and collateralized mortgage obligations. As the underlying collateral of each of these securities is comprised of a large number of similar residential mortgage loans for which prepayments are probable and the timing and amount of such prepayments can be reasonably estimated, we consider estimates of future principal prepayments of these underlying residential mortgage loans in the calculation of the constant effective yield used to apply the interest method for income recognition.

The Company evaluates each investment security in a loss position for other-than-temporary impairment (“OTTI”). The Company considers such factors as the length of time and the extent to which the market value has been below amortized cost, long term expectations and recent experience regarding principal and interest payments, intent to sell and whether it is more likely than not that the Company would be required to sell those securities before the anticipated recovery of the amortized cost basis. The credit component of an OTTI loss is recognized in earnings and the non-credit component is recognized in accumulated other comprehensive income in situations where the Company does not intend to sell the security and it is more-likely-than-not that the Company will not be required to sell the security prior to recovery.

Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank of Atlanta (the "FHLB"), the Company is required to maintain an investment in the stock of the FHLB based upon the amount of outstanding FHLB borrowings. This stock does not have a readily determinable fair value and is carried at cost.

Loans and Leases

Originated Loans and Leases

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balances, adjusted for any charge-offs, unearned discounts, and unamortized fees and costs on originated loans. Interest income on loans is accrued and credited to income based upon the principal amount outstanding. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the loans using methods that approximate the interest method.

The Company classifies all loans and leases past due when the payment of principal and/or interest based upon contractual terms is greater than 30 days delinquent. When commercial loans are placed on nonaccrual status as described below, a charge-off is recorded, as applicable, to decrease the carrying value of such loans to the estimated fair value of the collateral securing the loan. Consumer loans are placed on nonaccrual status at a specified delinquency date consistent with regulatory guidelines. As such, consumer loans are subject to collateral valuation and charge-off, as applicable, when they are moved to nonaccrual status. The accrual of interest income for commercial loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, while the accrual of interest income for consumer loans is discontinued when loans reach specific delinquency levels.

Acquired Loans

Acquired loans are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Loans acquired in FDIC-assisted transactions and covered under loss-share agreements are referred to as “covered loans.”

Acquired loans are evaluated upon acquisition and classified as either purchased impaired or purchased non-impaired. Purchased impaired loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. For purchased impaired loans, expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows after the acquisition date are recognized immediately through the provision for loan losses. For purchased non-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the economic life of the loans using a method that approximates the interest method.

Covered loans acquired will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss-share agreements. The covered loans are reported in loans exclusive of the expected reimbursement from the FDIC. Covered loans are initially recorded at fair value at the acquisition date. The covered loans are and will be subject to the Company’s internal and external credit

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review and monitoring. Prospective losses incurred on covered loans are eligible for partial reimbursement by the FDIC. Subsequent decreases in the amount expected to be collected result in a provision for loan losses, an increase in the allowance for loan losses, and a proportional increase to the FDIC indemnification asset for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously-recorded provision for loan losses and related allowance for loan losses and decreases to the FDIC indemnification asset, or accretion of certain fair value amounts into interest income in future periods if no provision for loan losses had been recorded.

Loans Held for Sale

The Company originates certain single family, residential first mortgage loans for sale on a presold basis and these loans are classified as loans held for sale. Loans held for sale are carried at the lower of cost or estimated fair value in the aggregate as determined by outstanding commitments from investors. Upon closing, these loans, together with their servicing rights, are sold to other financial institutions under prearranged terms on a best-efforts basis. Gains or losses on loan sales are recognized at the time of sale and are determined by the difference between net sales proceeds and the principal balance of the loans sold, adjusted for net deferred loan fees or costs. Loan origination and commitment fees, net of certain direct loan origination costs, are deferred as an adjustment to the carrying value of the loan until it is sold. The commitments to sell loans and the commitments to originate loans held for sale at a set interest rate, if originated, are considered derivatives under GAAP. The impact of the estimated fair value adjustment was not significant to the consolidated financial statements.

Nonperforming Loans

The Company considers a loan impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent.

The Company uses several factors in determining if a loan is impaired. Internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment status and the borrowers' financial data, cash flows, operating income or loss, and other factors. These discounted cash flow analyses incorporate adjustments to future cash flows that reflect management’s best estimate based on a combination of historical experience and management judgment.

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. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than ninety (90) days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt.

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance (generally, a minimum of six months) by the borrower in accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When future collection of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Restructurings

Modifications to a borrower’s debt agreement are considered troubled debt restructurings (“TDRs”) if a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be considered. TDRs are undertaken in order to improve the likelihood of recovery on the loan and may take the form of modifications made with the stated interest rate lower than the current market rate for new debt with similar risk, modifications to the terms and conditions of the loan that fall outside of normal underwriting policies and procedures, or a combination of these modifications. Modifications of covered and other acquired loans that are part of a pool accounted for as a single asset are not considered TDRs. TDRs can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower.

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Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectability of principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, historical loan losses, review of specific loans for impairment, and current economic conditions and trends that may affect the borrowers' ability to pay. Accrual of interest is discontinued on loans when management believes, after considering economic and business conditions and collection efforts and the value of the underlying collateral, that the borrowers' financial condition is such that collection is doubtful.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review BNC’s allowance for loan losses. Such agencies may require BNC to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Accounting standards require the presentation of certain disclosure information at the portfolio segment level, which represents the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. The Company concluded that its loan and lease portfolio comprises two portfolio segments; originated loans (which include purchased non-credit impaired loans) and purchased credit impaired loans. Originated loans include both commercial loans, which include commercial real estate, commercial construction, commercial and industrial and leases, and retail loans, which include residential construction, residential mortgage and consumer and other loans. The following provides a description of the Company’s accounting policies and methodologies related to each of its portfolio segments:

Originated Loans

All commercial and retail loans that are originated by the Company are assigned risk grades based on an assessment of conditions that affect the borrower’s ability to meet contractual obligations under the loan agreement. This process includes reviewing borrowers’ financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Loans with outstanding balance of $1 million or more, as well as all other loans included in such relationships, are reviewed on an annual basis. Loans with total committed exposure of $250,000 or more that are risk graded as Special Mention or worse, as well as credit relationships with total credit exposure of $500,000 or more that are risk graded Special Mention or worse, are reviewed on a quarterly basis. All other loans are reviewed at any point management becomes aware of information affecting the borrower’s ability to fulfill their obligations. The Company calculates a specific reserve for each loan that has been deemed impaired, which include commercial loans 90 days or more past due, commercial nonaccrual loans above $250,000, and commercial and retail restructurings above $250,000. The amount of the reserve is based on the present value of expected cash flows discounted at the loan’s effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell.

For acquired loans that are not deemed credit impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans, however, the Company records a provision for loan losses only when the required allowance, net of any expected reimbursement under any loss-share agreements, exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the economic life of the loans.

The Company also maintains reserves for collective impairment that reflect an estimate of losses related to non-impaired loans as of the balance sheet date, as well as impaired loans below the parameters described above for specific reserve. Embedded loss estimates are based on estimated migration rates, which are estimated based on historical experience, and current risk mix as indicated by the risk grading process described above. Embedded loss estimates may be adjusted to reflect current economic conditions and current portfolio trends including credit quality, concentrations, aging of the portfolio, and significant policy and underwriting changes.

Purchased Credit Impaired Loans

The allowance for loan and lease losses related to purchased credit impaired loans is based on an analysis that is performed each period to estimate the expected cash flows for each of the loan pools. To the extent that the expected cash flows of a loan pool have decreased since the acquisition date, the Company establishes an allowance for loan losses.

Other Real Estate Owned

Other real estate owned (“OREO”) acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at estimated fair value less cost of disposal at the date of foreclosure, establishing a new cost basis. When property is acquired, the excess, if any, of

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the loan balance over estimated fair value is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loan, foreclosure and other real estate owned expenses as a component of non-interest expense.

Certain OREO properties are subject to loss-sharing agreements with the FDIC and are labeled “covered” on the consolidated balance sheets.

FDIC Indemnification Asset

The FDIC indemnification asset is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should the Company choose to dispose of them. At acquisition date of an FDIC-assisted transaction, fair value is estimated using projected cash flows related to the loss-share agreements based on the expected reimbursements for losses and the applicable loss-sharing percentages and the estimated true-up payment at the expiration of the loss-share agreements, if applicable. These cash flows were discounted to reflect the estimated timing of the receipt of the loss-share reimbursement from the FDIC and the true-up payment to the FDIC. Cash flow projections resulting from the loss-share agreements are reviewed and updated prospectively as loss estimates related to both covered loans and covered other real estate owned change, including the existence of and amount of any required true-up payment owed to the FDIC.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, which are 40 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as incurred.

Bank-Owned Life Insurance

The Company has purchased life insurance policies on certain current and past key employees and directors where the insurance policy benefits and ownership are retained by the employer. These policies are recorded at their cash surrender value. Income from these policies and changes in the net cash surrender value are recorded in non-interest income as earnings on bank-owned life insurance. The cash value accumulation is permanently tax deferred if the policy is held to the insured person’s death and certain other conditions are met.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized but is evaluated for impairment on an annual basis, or more frequently if an event occurs indicating that goodwill may be impaired. Any impairment of goodwill or other intangibles will be recognized as an expense in the period of impairment. The Company completes the annual goodwill impairment test as of June 30 of each year and the test indicated there was no impairment of goodwill.

Identifiable intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or legal rights or because the assets are capable of being sold or exchanged either on their own or in combination with a related contract, asset, or liability. The Company’s identifiable intangible assets relate to premiums on purchased core deposits and are being amortized over their estimated useful lives.

Derivatives

The Company applies hedge accounting to certain interest rate derivatives entered into for risk management purposes. To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, key aspects of achieving hedge accounting are documentation of hedging strategy and hedge effectiveness at the hedge inception and substantiating hedge effectiveness on an ongoing basis. A derivative must be highly effective in accomplishing the hedge objective of offsetting changes in the cash flows of the hedged item for the risk being hedged. Any ineffectiveness in the hedge relationship is recognized in earnings. The effective portion of changes in the fair value of derivatives designated in a hedge relationship and that qualify as cash flow hedges is recorded in accumulated other comprehensive income, net of tax, and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the cash flow of the hedge items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company will discontinue hedge accounting prospectively.

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

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stock during the reporting period adjusted to include the effect of potentially dilutive common shares. 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.

Income Taxes

Deferred income taxes are recognized for the tax consequences of temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities that will result in taxable or deductible amounts in future years. These temporary differences are multiplied by the enacted income tax rate expected to be in effect when the taxes become payable or receivable. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence.

Operating Segments

The Company’s operations are managed along two operating segments, consisting of banking operations and mortgage origination. While the chief operating decision maker uses financial information related to these segments to analyze business performance and allocate resources, the mortgage origination segment does not meet the quantitative threshold under GAAP to be considered a reportable segment. As such, these operating segments are aggregated into a single reportable operating segment in the Consolidated Financial Statements. No revenues are derived from foreign countries or from external customers that comprise more than 10% of the Company’s revenues.

Stock Compensation Plans

The Company follows the provisions of the authoritative guidance regarding share-based compensation. This guidance values share-based awards at the grant date fair value and recognizes the expense over the requisite service period.

Recently Adopted and Issued Accounting Standards

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

In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes to provide guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item’s fair value or a hedged transaction’s cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk). The provisions were effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists thereby reducing diversity in practice. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments are to be applied prospectively to all unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

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

In October 2012, the FASB issued ASU No. 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution, which addresses diversity in practice regarding the subsequent measurement of an indemnification asset in a government-assisted acquisition of a financial

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institution that includes a loss-sharing agreement. The amendments are effective for interim and annual reporting periods beginning on or after December 15, 2012 with early adoption permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

NOTE 2 – ACQUISITIONS

Acquisition of Randolph Bank & Trust Company

On October 1, 2013, the Company completed the acquisition of Randolph Bank & Trust Company (“Randolph”) pursuant to the terms of the Agreement and Plan of Merger dated May 31, 2013. Randolph was a commercial bank with approximately $284 million in assets that served small businesses and professionals and operated six branches in the Piedmont-Triad area of North Carolina. This acquisition aligns with the Company’s strategy of growth focused within existing markets.

Randolph shareholders received 0.87 shares of BNC voting common stock for each share of Randolph common stock, or cash in the amount of $10.00 per share. 80% of Randolph common shares were converted into the right to receive BNC voting common stock, while the remaining 20% were converted into the right to receive cash. As part of the closing, Randolph preferred shareholders, including the United States Department of the Treasury (“Treasury”), received cash payments equal to the liquidation value of their preferred shares.

A summary of assets received and liabilities assumed for Randolph, as well as the associated fair value adjustments, are as follows (dollars in thousands):

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	As Recorded by Randolph			Fair Value Adjustments				As Recorded by BNC
Assets
Cash and due from banks	$	14,207		$	—			$	14,207
Investment securities available-for-sale	5,082			130			(1)	5,212
Federal Home Loan Bank stock, at cost	630			—				630
Loans	161,220			(6,973		)	(2)	154,247
Premises and equipment	4,537			811			(3)	5,348
Accrued interest receivable	800			—				800
Other real estate owned	4,844			(626		)	(4)	4,218
Core deposit intangible	—			2,676			(5)	2,676
Other assets	92,289			1,744			(6)	94,033
Total assets acquired	$	283,609		$	(2,238	)		$	281,371
Liabilities
Deposits	$	(260,484	)	$	(523	)	(7)	$	(261,007	)
Long-term borrowings	(6,100		)	(209		)	(8)	(6,309		)
Other liabilities	(1,291		)	—				(1,291		)
Total liabilities assumed	$	(267,875	)	$	(732	)		$	(268,607	)
Net assets acquired								12,764
Total consideration paid								14,037
Goodwill								$	1,273

Explanation of fair value adjustments:

(1) Adjustment for the fair value of the investment securities portfolio.

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

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

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

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

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

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

(8) Adjustment for the fair value of the borrowings.

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

Common stock issued (726,634 shares)	$	9,642
Redemption of preferred stock	2,300
Cash payments to common stockholders	2,095
Total consideration paid	$	14,037

The Company incurred transaction-related costs of $4.5 million for the year ended December 31, 2013, which were expensed as incurred. Transaction-related costs primarily include severance costs, professional services, data processing fees, marketing and advertising and other non-interest expenses. None of the goodwill is deductible for tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

The following table presents financial information regarding the former Randolph operations included in our Consolidated Statements of Income from the date of acquisition through December 31, 2013 under the column “Actual from acquisition date through December 31, 2013”. These amounts do not include direct costs as explained above. In addition, the following table presents unaudited pro-forma information as if the acquisition of Randolph had occurred on January 1, 2012 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. 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 merged with Randolph at the beginning of 2012. Cost savings are also not reflected in the unaudited pro-forma amounts for the years ended December 31, 2013 and 2012, respectively.

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	Actual from acquisition date through December 31, 2013		Pro-forma year ended December 31,
			2013		2012
Net interest income	$	29,872	$	116,467	$	91,750
Non-interest income	5,178		25,192		38,064
Net income	3,271		18,078		10,967
Net income available to common shareholders	3,271		17,018		8,361
Pro-forma earnings per share:
Basic			$	0.63	$	0.22
Diluted			$	0.63	$	0.22

Acquisition of First Trust Bank

On November 30, 2012, the Company completed the acquisition of First Trust Bank (“First Trust”), which operated three branches in Charlotte, North Carolina. The acquisition of First Trust expanded and enhanced the BNC franchise in the metropolitan Charlotte market.

A summary of assets received and liabilities assumed for First Trust, as well as the associated fair value adjustments, are as follows (dollars in thousands):

	As Recorded by First Trust			Fair Value Adjustments				As Recorded by BNC
Assets
Cash and due from banks	$	46,079		$	—			$	46,079
Investment securities available-for-sale	124,616			—				124,616
Federal Home Loan Bank stock, at cost	753			—				753
Loans	179,702			(9,820		)	(1)	169,882
Premises and equipment	6,938			866			(2)	7,804
Accrued interest receivable	1,565			—				1,565
Other real estate owned	8,686			(535		)	(3)	8,151
Core deposit intangible	—			1,826			(4)	1,826
Other assets	12,337			3,295			(5)	15,632
Total assets acquired	$	380,676		$	(4,368	)		$	376,308
Liabilities
Deposits	$	(323,139	)	$	(884	)	(6)	$	(324,023	)
Short-term borrowings	(7,899		)	—				(7,899		)
Other liabilities	(2,849		)	—				(2,849		)
Total liabilities assumed	$	(333,887	)	$	(884	)		$	(334,771	)
Net assets acquired								41,537
Total consideration paid								36,565
Bargain purchase gain								$	4,972

Explanation of fair value adjustments:

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

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

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

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

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

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

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

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

Acquisition of KeySource Financial, Inc.

On September 14, 2012, the Company completed the acquisition of KeySource Financial, Inc. (“KeySource”), which operated one branch in Durham, North Carolina. The acquisition of KeySource expanded and enhanced the BNC franchise in the Raleigh-Durham market.

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

	As Recorded by KeySource			Fair Value Adjustments				As Recorded by BNC
Assets
Cash and due from banks	$	19,847		$	—			$	19,847
Investment securities available-for-sale	3,445			—				3,445
Federal Home Loan Bank stock, at cost	430			—				430
Loans	148,295			(8,690		)	(1)	139,605
Premises and equipment	650			—				650
Accrued interest receivable	547			—				547
Other real estate owned	1,289			(150		)	(2)	1,139
Core deposit intangible	—			621			(3)	621
Other assets	4,445			3,516			(4)	7,961
Total assets acquired	$	178,948		$	(4,703	)		174,245
Liabilities
Deposits	(151,553		)	(854		)	(5)	(152,407		)
Short-term borrowings	(780		)	—				(780		)
Long-term debt	(5,999		)	(48		)	(6)	(6,047		)
Other liabilities	(1,754		)	102			(7)	(1,652		)
Total liabilities assumed	$	(160,086	)	$	(800	)		(160,886		)
Net assets acquired								13,359
Total consideration paid								13,942
Goodwill								$	583

Explanation of fair value adjustments:

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

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

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

(4) Adjustment for deferred tax asset recognized from acquisition.

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

(6) Adjustment for the fair value of the subordinated debt assumed.

(7) Adjustment for the reversal of an accrued liability.

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

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Common stock issued (1,810,267 shares)	$	13,686
Fair value of KeySource stock options assumed	256
Total consideration paid	$	13,942

None of the goodwill is deductible for income tax purposes.

Acquisition of Branches from The Bank of Hampton Roads

On September 21, 2012, the Company acquired two branches of Gateway Bank & Trust Company located in Cary and Chapel Hill, North Carolina, respectively, which were owned and operated by The Bank of Hampton Roads (“BHR”). The estimated fair value of the assets acquired, which included cash, premises and equipment, and other assets, totaled $24.1 million, while the estimated fair value of liabilities assumed, which included deposits and other liabilities, totaled $24.5 million. BNC recorded approximately $0.4 million of goodwill related to this acquisition. None of the goodwill is deductible for income tax purposes.

FDIC-Assisted Acquisition of Carolina Federal Savings Bank

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

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

	As Recorded by Carolina Federal			Fair Value Adjustments				As Recorded by BNC
Assets
Cash and due from banks	$	8,394		$	—			$	8,394
Federal Home Loan Bank stock, at cost	112			—				112
Loans	32,328			(2,862		)	(1)	29,466
Accrued interest receivable	124			—				124
Core deposit intangible	—			93			(2)	93
Other assets	35			1,291			(3)	1,326
Total assets acquired	$	40,993		$	(1,478	)		$	39,515
Liabilities
Deposits	$	(52,992	)	$	(148	)	(4)	$	(53,140	)
Deferred tax liability	—			(2,981		)	(5)	(2,981		)
Other liabilities	(42		)	-				(42		)
Total liabilities assumed	(53,034		)	(3,129		)		(56,163		)
Excess of liabilities assumed over assets acquired	$	(12,041	)
Aggregate fair value adjustments				$	(4,607	)
Cash received from the FDIC								21,400
Net assets acquired (net after-tax gain)								4,752
Income tax effect								2,982
Net assets acquired (bargain purchase gain)								$	7,734

Explanation of fair value adjustments:

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

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

(3) Adjustment for amount due to BNC from the FDIC.

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

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(5) Adjustment for the deferred tax liability from the acquisition gain.

The Company has determined the above noted acquisitions constitute a business combination as defined by FASB ASC Topic 805: Business Combinations (“ASC Topic 805”), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. The Company has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with ASC Topic 805.

The estimated fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair value becomes available. During this one year period, the causes of any changes in cash flow estimates are considered to determine whether the change results from circumstances that existed as of the acquisition date or if the change results from an event that occurred after the date of acquisition.

NOTE 3 – SHAREHOLDERS’ EQUITY

Conversion of Preferred Stock

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

Series A Preferred Stock Issued under TARP

On December 5, 2008, as part of the United States Treasury’s ("Treasury") Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”), the Company issued and sold to the Treasury 31,260 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), and a warrant to purchase up to 543,337 shares of the Company’s common stock at an exercise price of $8.63 per share.  On August 29, 2012, the Treasury completed the auction and sale of its investment in the Company’s Series A Preferred Stock to private investors.  The Company received no proceeds from the auction. On September 19, 2012, the Company repurchased the warrant from the Treasury for approximately $0.9 million. The warrant has been cancelled.

On April 29, 2013, the Company redeemed all 31,260 shares of the Series A Preferred Stock that were issued under the Treasury’s TARP CPP. The redemption was made using cash on hand and the proceeds of a $30.0 million term loan that was obtained in April 2013. See further discussion of the terms of the loan agreement at Note 13.

NOTE 4 - EARNINGS PER SHARE

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

The Company's basic and diluted earnings per share calculations for the years ended December 31, 2013, 2012 and 2011 are presented in the following table (dollars in thousands, except per share data):

	2013		2012		2011
Net income available to common shareholders	$	16,187	$	8,049	$	4,526
Add: Convertible preferred stock dividends	—		361		361
Net income available to participating common shareholders	$	16,187	$	8,410	$	4,887
Weighted average common shares - basic	26,495,211		15,790,448		9,073,024
Add: Effect of convertible preferred stock	187,873		1,804,566		1,804,566
Weighted average participating common shares - basic	26,683,084		17,595,014		10,877,590
Effects of dilutive Stock Rights	31,090		4,204		16,541
Weighted average participating common shares - diluted	26,714,174		17,599,218		10,894,131
Basic earnings per common share	$	0.61	$	0.48	$	0.45
Diluted earnings per common share	$	0.61	$	0.48	$	0.45

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For the years ended December 31, 2013, 2012, and 2011, there were 106,283, 428,536 and 677,590 shares, respectively, of Stock Rights excluded in computing diluted common shares outstanding because the exercise price exceeded the average share value for the periods.

NOTE 5 – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities at December 31, 2013 and 2012 are presented in the following tables (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2013
Available-for-sale:
U.S. Government agencies	$	15,720	$	4	$	663	$	15,061
State and municipals	194,224		2,704		5,665		191,263
Corporate debt securities	9,011		16		138		8,889
Other debt securities	4,727		—		347		4,380
Equity securities	979		—		57		922
Mortgage-backed securities:
Residential government sponsored	41,231		1,442		659		42,014
Other government sponsored	7,615		276		3		7,888
	$	273,507	$	4,442	$	7,532	$	270,417
Held-to-maturity:
State and municipals	$	221,378	$	379	$	10,169	$	211,588
Corporate debt securities	16,000		—		1,081		14,919
Other debt securities	10,000		—		—		10,000
	$	247,378	$	379	$	11,250	$	236,507

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

During the second quarter of 2013, the Company transferred $86.5 million of available-for-sale state and municipal debt securities to the held-to-maturity category, reflecting the Company’s intent to hold those securities to maturity. Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The related $1.2 million of unrealized holding gain that was included in the transfer is retained in accumulated other comprehensive income and in the carrying value of the held-to-maturity securities. This amount will be amortized as an adjustment to interest income over the remaining life of the securities. This will offset the impact of amortization of the net premium created in the transfer. There were no gains or losses recognized as a result of this transfer.

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

	Amortized Cost		Fair Value
Available-for-sale:
Due in one year or less	$	2,300	$	2,308
Due after one through five years	1,683		1,712
Due after five through ten years	16,535		16,511
Due after ten years	252,010		248,964
Total debt securities	272,528		269,495
Equity securities	979		922
	$	273,507	$	270,417
Held-to-maturity:
Due in one year or less	$	542	$	549
Due after one year through five years	13,847		12,905
Due after five through ten years	23,018		22,864
Due after ten years	209,971		200,189
	$	247,378	$	236,507

At December 31, 2013 and 2012, investment securities with an estimated fair value of approximately $184.0 million and $175.1 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 sales of investment securities classified as available-for-sale for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

	2013				2012			2011
Proceeds from sales	$	18,414			$	117,381		$	50,717
Gross realized gains on sales	$	201		(1)	$	3,117		$	2,159
Gross realized losses on sales	(243		)		(91		)	(957		)
Total realized (losses) gains, net	$	(42	)		$	3,026		$	1,202

(1) Includes $175 gain derived from the redemption of preferred stock from another financial institution that was purchased at auction from the Treasury.

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

	Less Than 12 Months					12 Months or More					Total
December 31, 2013	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale:
U.S. Government agencies	5	$	14,583	$	663	—	$	—	$	—	$	14,583	$	663
State and municipals	47	72,821		3,647		21	27,976		2,018		100,797		5,665
Corporate debt securities	2	7,862		138		—	—		—		7,862		138
Other debt securities	1	4,380		347		—	—		—		4,380		347
Equity securities	1	922		57		—	—		—		922		57
Mortgage-backed securities	15	14,146		444		4	4,582		218		18,728		662
	71	$	114,714	$	5,296	25	$	32,558	$	2,236	$	147,272	$	7,532
Held-to-maturity:
State and municipals	150	$	162,565	$	8,325	25	$	28,238	$	1,844	$	190,803	$	10,169
Corporate debt securities	1	4,939		61		1	2,980		1,020		7,919		1,081
	151	$	167,504	$	8,386	26	$	31,218	$	2,864	$	198,722	$	11,250

	Less Than 12 Months					12 Months or More					Total
December 31, 2012	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale:
State and municipals	56	$	75,551	$	1,152	—	$	—	$	—	$	75,551	$	1,152
Mortgage-backed securities	23	22,465		34		—	—		—		22,465		34
	112	$	98,016	$	1,186	—	$	—	$	—	$	98,016	$	1,186
Held-to-maturity:
State and municipals	9	$	10,301	$	146	—	$	—	$	—	$	10,301	$	146
Corporate debt securities	—	—		—		2	5,000		1,000		5,000		1,000
	9	$	10,301	$	146	2	$	5,000	$	1,000	$	15,301	$	1,146

At December 31, 2013, the gross unrealized losses reported for the U.S. government agency securities relate to investment securities issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the United States Small Business Administration. The agency securities with an unrealized loss have been in that position for less than 12 months. The Freddie Mac securities have investment grade ratings. The Company noted that, of the 243 state and municipal securities in an unrealized loss position, only 46 of these securities have been in an unrealized loss position for greater than 12 months. All state and municipal securities in the Company's portfolio were rated as investment grade at December 31, 2013. The corporate debt securities are with well-capitalized and sound financial institutions. These securities are all rated as investment grade. The other debt security is backed by a pool of student loan debt. The security has been in that position for less than 12 months and has an investment grade rating. The equity securities held by the Company consists of common stock that was acquired as part of the Company’s acquisition of Randolph. These shares have been in an unrealized loss position for less than 12 months and there are no concerns about the long-term viability of issuer. The gross unrealized losses reported for the mortgage-backed securities relate to investment securities issued by the Federal National Mortgage Association, the Government National Mortgage Association, or Freddie Mac.

The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, these investment securities before the anticipated recovery of the amortized cost basis. The unrealized losses for the debt securities are caused by changes in market interest rates and not credit concerns related to the respective issuers. Based on this analysis, the Company does not consider these investment securities to be other-than-temporarily impaired at December 31, 2013.

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NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	December 31, 2013						December 31, 2012
	Covered Loans (1)		Non-covered Loans (2)		Total		Covered Loans (1)		Non-covered Loans (2)		Total
Commercial real estate	$	96,452	$	1,236,204	$	1,332,656	$	114,757	$	1,034,686	$	1,149,443
Commercial construction	18,331		226,229		244,560		33,447		183,747		217,194
Commercial and industrial	5,919		163,020		168,939		10,898		150,870		161,768
Leases	—		16,137		16,137		—		13,209		13,209
Total commercial	120,702		1,641,590		1,762,292		159,102		1,382,512		1,541,614
Residential construction	16		32,418		32,434		215		34,514		34,729
Residential mortgage	65,024		402,899		467,923		87,015		359,260		446,275
Consumer and other	1,919		11,949		13,868		2,598		10,042		12,640
	$	187,661	$	2,088,856	$	2,276,517	$	248,930	$	1,786,328	$	2,035,258

(1) The unpaid principal balance for covered loans was $195.4 million and $272.7 million at December 31, 2013 and 2012, respectively.

(2) Amount includes $384.0 million and $347.2 million of acquired, non-covered loans as of December 31, 2013 and 2012, respectively.

Unearned income and net deferred fees and costs totaled $2.3 million and $1.4 million at December 31, 2013 and 2012, respectively.

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

	2013						2012
	Accretable Yield			Carrying Yield			Accretable Yield			Carrying Yield
Balance at beginning of period	$	(12,895	)	$	248,930		$	(8,387	)	$	320,033
Reductions from payments and foreclosures, net	—			(69,074		)	—			(74,998		)
Reclass from non-accretable to accretable yield	(968		)	—			(8,403		)	—
Accretion	7,805			7,805			3,895			3,895
Balance at end of period	$	(6,058	)	$	187,661		$	(12,895	)	$	248,930

The Company evaluates loans acquired with evidence of credit deterioration in accordance with the provisions of ASC Topic 310-30: Loans and Debt Securities Acquired with Deteriorated Credit Quality. 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. The following tables present loans acquired during the years ended December 31, 2013 and 2012, at acquisition date, accounted for under ASC Topic 310-30 (dollars in thousands):

	2013			2012
Contractually required payments receivable	$	3,781		$	52,865
Contractual cash flows not expected to be collected (non-accretable)	(1,336		)	(11,716		)
Expected cash flows	2,445			41,149
Interest component of expected cash flows	(261		)	(1,954		)
Fair value of loans acquired	$	2,184		$	39,195

The acquisition date unpaid balance of loans acquired during the years ended December 31, 2013 and 2012 that did not have credit deterioration was $158.0 million and $254.3 million, respectively, with an estimated fair value of $152.1 million and $240.8 million,

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respectively. The discount of $5.9 million and $13.5 million for the years ended December 31, 2013 and 2012, respectively, will be amortized on a level-yield basis over the economic life of the loans.

The Company has loan relationships with its directors and executive officers and with companies with which certain directors and executive officers are associated. The following is a summary of loans to executive officers, directors and their affiliates for the year ended December 31, 2013 (dollars in thousands):

Balance at beginning of year	$	21,827
Additional borrowings	15,943
Loan repayments	(16,249)
Balance at end of year	$	21,521

The Company has the ability to borrow funds from the Federal Home Loan Bank (“FHLB”) and from the Federal Reserve Bank. At December 31, 2013 and 2012, real estate loans with carrying values of $702.5 million and $462.4 million, respectively, were pledged to secure borrowing facilities from these institutions.

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis.   Each class of financing receivable detailed below is subject to risks that could have an adverse impact on the credit quality of the loan portfolio.

Commercial real estate loans

Commercial real estate loans consist primarily of loans secured by nonresidential (owner-occupied and/or non-owner occupied) real estate, multifamily housing, and agricultural loans. Commercial real estate is primarily dependent on successful operation or management of the property in order to generate sufficient cash to repay the outstanding debt. While these loans are normally secured by commercial buildings for office, storage and warehouse space, it is possible that the liquidation of the collateral will not fully satisfy the obligation. High unemployment, generally weak economic conditions or oversupply of properties may result in customers having to provide rental rate concessions to achieve adequate occupancy rates.

Commercial construction loans

Commercial construction loans, including land development loans, are highly dependent on the supply and demand for commercial real estate in the markets served by BNC as well as the demand for newly constructed residential homes and lots that customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.

Commercial and industrial loans and leases

Each commercial loan or lease is underwritten based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower’s businesses including the experience and background of the principals is obtained prior to approval. To the extent that the loan or lease is secured by collateral, which is primarily business assets such as inventory or accounts receivable. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed. Common risks include general economic conditions within the markets the Bank serves, as well as risks that are specific to each transaction, including demand for products and services and reductions in the fair value of collateral.

Residential construction loans

Residential construction loans are made to established homebuilders and are typically secured by 1-4 family residential property. Significant and rapid declines in real estate values or demand can result in increased difficulty in converting these construction loans to permanent loans. Such a decline in values has led to unprecedented levels of foreclosures and losses within the banking industry. In addition, there has been an increase in the average time houses are on the market for sale.

Residential mortgage loans

Each residential mortgage loan is underwritten using credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries. The borrowers' debt-to-income ratio, sources of income and employment history, among other factors, are also evaluated as part of the underwriting process. To the extent that the loan is secured by collateral, the likely value of that collateral is evaluated. Common risks to each class of non-commercial loans include risks that are not specific to individual transactions such as general economic conditions within the markets BNC serves, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to residential mortgage loans. Second mortgage loans and home equity lines of credit generally involve greater credit risk than first mortgage loans because they are secured by mortgages that are subordinate to the first mortgage on the property.  If the borrower is forced into foreclosure, the Company will not receive any proceeds from the sale of the property until

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the first mortgage has been satisfied. Over the past two years, the Company has tightened underwriting criteria and requirements for second mortgage and home equity lines of credit. This includes requiring higher credit scores from borrowers and limiting loan-to-value ratios.

At December 31, 2013, 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 $103.1 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 prinicpal, 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 December 31, 2013, approximately 96% 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 renewed, 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 as of December 31, 2013 (dollars in thousands):

2014	$	1,923
2015	1,592
2016	3,206
2017	3,615
2018	4,597
Thereafter	118,044
	$	132,977

Consumer and other loans

Consumer and other loans include loans secured by personal property such as residential real estate, automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment. Consumer loan collections are sensitive to job loss, illness and other personal factors.

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An analysis of the allowance for loan losses for the years ended December 31, 2013 and 2012 is presented below (dollars in thousands):

2013	Commercial real estate			Commercial construction			Commercial and industrial			Leases		Residential construction			Residential Mortgage			Consumer and other			Total
Allowance for loan losses:
Balance January 1, 2013	$	15,718		$	9,807		$	3,578		$	18	$	593		$	10,441		$	137		$	40,292
Charge-offs	(5,492		)	(9,519		)	(3,442		)	—		—			(9,598		)	(377		)	(28,428		)
Recoveries	1,525			2,712			1,721			—		58			1,696			27			7,739
Provision (1)	5,084			1,879			1,017			38		(412		)	4,224			358			12,188
Change in FDIC indemnification asset (1)	(2,083		)	1,859			263			—		(26		)	967			104			1,084
Balance December 31, 2013	$	14,752		$	6,738		$	3,137		$	56	$	213		$	7,730		$	249		$	32,875
Balances as of December 31, 2013:
Specific reserves:
Impaired loans	$	3,209		$	1,595		$	43		$	—	$	35		$	1,361		$	10		$	6,253
Purchase credit impaired loans	2,979			691			552			—		—			1,833			23			6,078
Total specific reserves	6,188			2,286			595			—		35			3,194			33			12,331
General reserves	8,564			4,452			2,542			56		178			4,536			216			20,544
Total	$	14,752		$	6,738		$	3,137		$	56	$	213		$	7,730		$	249		$	32,875
Loans:
Individually evaluated for impairment	$	33,950		$	12,877		$	1,525		$	—	$	356		$	14,037		$	165		$	62,910
Purchase credit impaired loans	100,290			18,460			6,649			—		16			50,825			1,917			178,157
Loans collectively evaluated for impairment	1,198,416			213,223			160,765			16,137		32,062			403,061			11,786			2,035,450
Total	$	1,332,656		$	244,560		$	168,939		$	16,137	$	32,434		$	467,923		$	13,868		$	2,276,517

2012	Commercial real estate			Commercial construction			Commercial and industrial			Leases		Residential construction			Residential Mortgage			Consumer and other			Total
Allowance for loan losses:
Balance January 1, 2012	$	11,789		$	10,957		$	4,338		$	18	$	699		$	3,058		$	149		$	31,008
Charge-offs	(9,123		)	(10,985		)	(4,727		)	—		(219		)	(9,451		)	(205		)	(34,710		)
Recoveries	753			1,467			324			—		126			862			14			3,546
Provision (2)	8,473			1,359			2,192			—		(13		)	10,600			126			22,737
Change in FDIC indemnification asset (2)	3,826			7,009			1,451			—		—			5,372			53			17,711
Balance December 31, 2012	$	15,718		$	9,807		$	3,578		$	18	$	593		$	10,441		$	137		$	40,292
Balances as of December 31, 2012:
Specific reserves:
Impaired loans	$	578		$	3,023		$	4		$	—	$	2		$	1,612		$	—		$	5,219
Purchase credit impaired loans	6,518			2,704			1,569			—		—			4,000			18			14,809
Total specific reserves	7,096			5,727			1,573			—		2			5,612			18			20,028
General reserves	8,622			4,080			2,005			18		591			4,829			119			20,264
Total	$	15,718		$	9,807		$	3,578		$	18	$	593		$	10,441		$	137		$	40,292
Loans:
Individually evaluated for impairment	$	26,076		$	19,367		$	1,682		$	—	$	361		$	16,850		$	127		$	64,463
Purchase credit impaired loans	121,983			34,666			12,397			—		5,741			68,273			2,590			245,650
Loans collectively evaluated for impairment	1,001,384			163,161			147,689			13,209		28,627			361,152			9,923			1,725,145
Total	$	1,149,443		$	217,194		$	161,768		$	13,209	$	34,729		$	446,275		$	12,640		$	2,035,258

(1) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $0.6 million for the year ended December 31, 2013. This resulted in an increase in the FDIC indemnification asset of $1.1 million, which is the difference between the net provision on covered loans and the total additions to the allowance for loan losses allocable to the covered loan portfolio of $1.7 million for the year ended December 31, 2013.

(2) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $5.0 million for the year ended December 31, 2012. This resulted in an increase in the FDIC indemnification asset of $17.7 million, which is the difference between the net

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provision on covered loans and the total additions to the allowance for loan losses allocable to the covered loan portfolio of $22.7 million for the year ended December 31, 2012.

The following tables present information related to impaired loans, excluding purchased impaired loans, at December 31, 2013 and 2012 (dollars in thousands):

	Impaired Loans - With Allowance						Impaired Loans - With No Allowance
December 31, 2013	Recorded Investment		Unpaid Principal Balance		Allowances for Loan Losses Allocated		Recorded Investment		Unpaid Principal Balance
Originated:
Commercial real estate	$	16,261	$	16,228	$	3,164	$	17,129	$	17,116
Commercial construction	7,239		7,218		1,582		5,536		5,902
Commercial and industrial	934		932		42		3		—
Residential construction	357		355		35		—		—
Residential mortgage	8,529		8,513		1,333		3,719		3,699
Consumer and other	104		104		10		37		37
Total originated	33,424		33,350		6,166		26,424		26,754
Acquired (non-covered):
Commercial real estate	490		489		45		557		565
Commercial construction	142		141		14		—		—
Commercial and industrial	185		185		1		406		648
Residential mortgage	636		636		27		1,236		1,528
Consumer and other	—		—		—		24		21
Total acquired (non-covered)	1,453		1,451		87		2,223		2,762
Acquired (covered):
Commercial real estate	—		—		—		173		183
Commercial construction	—		—		—		400		414
Commercial and industrial	—		—		—		3		35
Residential mortgage	—		—		—		5,788		5,877
Total acquired (covered)	—		—		—		6,364		6,509
Total loans	$	34,877	$	34,801	$	6,253	$	35,011	$	36,025

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

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The following tables present information related to the average recorded investment and interest income recognized on impaired loans, excluding purchased impaired loans, for the years ended December 31, 2013 and 2012 (dollars in thousands):

	2013				2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with allowance:
Commercial real estate	$	20,205	$	839	$	19,414	$	2,376
Commercial construction	6,700		246		17,074		1,758
Commercial and industrial	499		28		1,923		177
Residential construction	367		12		272		18
Residential mortgage	11,074		381		13,955		952
Consumer and other	23		—		—		—
Total impaired loans with allowance	$	38,868	$	1,506	$	52,638	$	5,281
Impaired loans with no allowance:
Commercial real estate	$	12,724	$	600	$	22,673	$	2,271
Commercial construction	8,192		346		19,708		3,042
Commercial and industrial	592		30		2,051		276
Residential construction	—		—		473		96
Residential mortgage	10,614		357		19,909		2,205
Consumer and other	40		—		202		18
Total impaired loans with no allowance	$	32,162	$	1,333	$	65,016	$	7,908

For the years ended December 31, 2013 and 2012, the amount of interest income recognized within the period that the loans were impaired was primarily related to loans modified in a troubled debt restructuring (“TDR”) that remained on accrual status. For the years ended December 31, 2013 and 2012, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

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The following tables present an aging analysis of the recorded investment in the Company's loans at December 31, 2013 and 2012(dollars in thousands):

December 31, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-Accrual		Total Past Due		Current		Total Loans
Originated:
Commercial real estate	$	353	$	—	$	—	$	6,044	$	6,397	$	1,008,236	$	1,014,633
Commercial construction	14		20		—		2,801		2,835		199,305		202,140
Commercial and industrial	533		10		—		245		788		138,779		139,567
Leases	—		—		—		—		—		16,137		16,137
Residential construction	—		—		—		—		—		29,636		29,636
Residential mortgage	1,417		248		—		5,102		6,767		287,893		294,660
Consumer and other	—		—		—		37		37		8,066		8,103
Total originated	2,317		278		—		14,229		16,824		1,688,052		1,704,876
Acquired (non-covered):
Commercial real estate	116		—		—		605		721		220,850		221,571
Commercial construction	50		—		—		—		50		24,039		24,089
Commercial and industrial	—		5		—		591		596		22,857		23,453
Residential construction	—		—		—		—		—		2,782		2,782
Residential mortgage	950		514		—		1,665		3,129		105,110		108,239
Consumer and other	108		1		—		24		133		3,713		3,846
Total acquired (non-covered)	1,224		520		—		2,885		4,629		379,351		383,980
Acquired (covered):
Commercial real estate	1,145		848		—		8,086		10,079		86,373		96,452
Commercial construction	201		38		—		5,111		5,350		12,981		18,331
Commercial and industrial	—		47		—		640		687		5,232		5,919
Residential construction	—		—		—		—		—		16		16
Residential mortgage	313		28		—		9,818		10,159		54,865		65,024
Consumer and other	8		2		—		90		100		1,819		1,919
Total acquired (covered)	1,667		963		—		23,745		26,375		161,286		187,661
Total loans	$	5,208	$	1,761	$	—	$	40,859	$	47,828	$	2,228,689	$	2,276,517

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

Credit quality indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators use an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics are typically risk rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

At least annually the Company will review all loans exceeding a certain threshold and assign a risk rating. Loans excluded from the scope of the annual review process are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Company for a modification or new loan. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss. Loans classified as loss are considered uncollectible and are in the process of being charged-off, as soon as practical, once so classified.

The following tables present the recorded investment in the Company’s loans, by credit quality indicator, at December 31, 2013 and 2012(dollars in thousands):

December 31, 2013	Total		Pass Credits		Special Mention		Substandard		Doubtful		Loss
Originated:
Commercial real estate	$	1,014,633	$	930,554	$	37,685	$	46,394	$	—	$	—
Commercial construction	202,140		175,365		13,113		13,662		—		—
Commercial and industrial	139,567		131,658		5,411		2,498		—		—
Leases	16,137		16,137		—		—		—		—
Residential construction	29,636		28,160		1,120		356		—		—
Residential mortgage	294,660		258,042		19,234		17,384		—		—
Consumer and other	8,103		7,807		177		119		—		—
Total originated	1,704,876		1,547,723		76,740		80,413		—		—
Total acquired (non-covered):
Commercial real estate	221,571		195,526		17,343		8,702		—		—
Commercial construction	24,089		21,126		922		2,041		—		—
Commercial and industrial	23,453		18,681		3,328		1,444		—		—
Residential construction	2,782		2,782		—		—		—		—
Residential mortgage	108,239		91,847		10,766		5,626		—		—
Consumer and other	3,846		3,760		62		24		—		—
Total acquired (non-covered):	383,980		333,722		32,421		17,837		—		—
Acquired (covered):
Commercial real estate	96,452		61,091		12,831		17,929		4,601		—
Commercial construction	18,331		9,756		1,397		6,751		427		—
Commercial and industrial	5,919		4,231		796		332		560		—
Residential construction	16		—		16		—		—		—
Residential mortgage	65,024		36,744		13,246		10,296		4,738		—
Consumer and other	1,919		1,726		103		90		—		—
Total acquired (covered)	187,661		113,548		28,389		35,398		10,326		—
Total loans	$	2,276,517	$	1,994,993	$	137,550	$	133,648	$	10,326	$	—

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

Modifications

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession.  The Company offers various types of concessions when modifying a loan; however, forgiveness of principal is rarely granted.  Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.  Additional collateral, a co-borrower, or a guarantor is often requested.  Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.  Construction loans modified in a TDR may also involve extending the interest-only payment period.  Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time.  After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly.  Land loans are also included in the class of residential mortgage loans.  Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity.  Land loans modified in a TDR typically involve extending the balloon payment by one to three years, or changing the monthly payments from interest-only to principal and interest.  Home equity modifications are made infrequently and are not offered if the Company also holds the first mortgage.  Home equity modifications are uniquely designed to meet the specific needs of each borrower.  Occasionally, the terms will be modified to a standalone second lien mortgage, thereby changing their loan class from home equity to residential mortgage.

Loans modified in a TDR are, in many cases, already on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance.  As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan.  An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.  Management exercises significant judgment in developing these estimates. Once we classify a loan a TDR, the loan is only removed from TDR

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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. 

The following tables provide a summary of loans modified as TDRs at December 31, 2013 and 2012 (dollars in thousands):

	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
December 31, 2013
Commercial real estate	$	3,986	$	1,107	$	5,093	$	767
Commercial construction	5,472		274		5,746		520
Commercial and industrial	662		—		662		36
Residential mortgage	6,545		625		7,170		476
Consumer and other	105		37		142		11
Total modifications	$	16,770	$	2,043	$	18,813	$	1,810
Total contracts	43		10		53

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

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

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

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

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

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

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

Combination modification – Any other type of modification, including the use of multiple categories above.

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The following tables present new TDRs by modification category for the years ended December 31, 2013 and 2012 (dollars in thousands). All balances represent the recorded investment as of the end of the period in which the modification was made.

	2013
	Rate Modifications		Term Modifications		Interest only Modifications		Payment Modifications		Combination Modifications		Total Modifications
Commercial real estate	$	101	$	648	$	331	$	—	$	1,035	$	2,115
Commercial construction	128		—		152		—		827		1,107
Commercial and industrial	—		129		536		—		—		665
Residential mortgage	452		84		1,076		—		573		2,185
Consumer and other	—		23		—		—		—		23
Total modifications	$	681	$	884	$	2,095	$	—	$	2,435	$	6,095

	2012
	Rate Modifications		Term Modifications		Interest only Modifications		Payment Modifications		Combination Modifications		Total Modifications
Commercial real estate	$	71	$	1,374	$	2,870	$	—	$	10,503	$	14,818
Commercial construction	—		1,897		663		—		2,238		4,798
Commercial and industrial	—		31		—		—		290		321
Residential mortgage	—		—		2,679		829		2,726		6,234
Consumer and other	—		—		11		—		—		11
Total modifications	$	71	$	3,302	$	6,223	$	829	$	15,757	$	26,182

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 during the years ended December 31, 2013 and 2012 (dollars in thousands). The Company defines payment default as movement of the restructuring to nonaccrual status, foreclosure or charge-off, whichever occurs first.

	2013
Commercial real estate	$	5,906
Commercial construction	29
Commercial and industrial	630
Residential mortgage	668

	2012
Commercial real estate	$	337
Residential mortgage	1,438

Loans held for sale

The Company originates certain single family, residential first mortgage loans for sale on a presold basis. Loan sale activity for the years ended December 31, 2013, 2012 and 2011 is summarized below (dollars in thousands):

	2013		2012		2011
Loans held for sale	$	30,899	$	57,414	$	9,596
Proceeds from sales of loans held for sale	352,130		233,276		91,942
Mortgage fees	8,979		6,169		2,230

NOTE 7 – 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

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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 acquisition of Beach First National Bank (“Beach First”) and Blue Ridge Savings Bank (“Blue Ridge”).

Each loss-sharing arrangement consists of one single family residential mortgage loan agreement and one commercial and other loans and other real estate owned agreement. The single family residential mortgage loan loss-share agreements provide for FDIC loss sharing and reimbursement for recoveries to the FDIC for ten years from April 9, 2010 and October 14, 2011 for the purchases of Beach First and Blue Ridge, respectively, and reimbursement to the FDIC for ten years from these dates. The commercial and other loan and other real estate owned loss-share agreements provide for FDIC loss-sharing for five years from the above stated dates, and reimbursement to the FDIC for eight years from the above dates.

The following tables present activity for the FDIC indemnification asset for the years ended December 31, 2013 and 2012 (dollars in thousands):

	2013			2012
Balance at beginning of period	$	53,519		$	91,851
Accretion of present value discount, net	192			1,391
Post-acquisition adjustments	(2,248		)	20,493
Receipt of payments from FDIC	(34,577		)	(60,216		)
Balance at end of period	$	16,886		$	53,519

The FDIC indemnification asset is measured separately from the related covered assets and is initially recorded at fair value. The fair value was estimated using projected cash flows related to the loss-share agreements based on the expected reimbursements for losses and the applicable loss-share percentages. Cash flow projections are reviewed and updated prospectively as loss estimates related to both covered loans and covered OREO change.

NOTE 8 – PREMISES AND EQUIPMENT

The following tables present a summary of the Company’s premises and equipment at December 31, 2013 and 2012 (dollars in thousands):

	2013			2012
Land	$	23,264		$	20,116
Buildings and leasehold improvements	49,689			42,584
Furniture, fixtures and equipment	20,290			16,654
Construction in progress	178			474
Premises and equipment, gross	93,421			79,828
Less accumulated depreciation and amortization	(17,295		)	(13,213		)
Premises and equipment, net	$	76,126		$	66,615

Depreciation and amortization expense for the years ended December 31, 2013, 2012 and 2011 amounted to $4.2 million, $3.0 million and $2.3 million, respectively.

The Company has entered into various non-cancellable operating leases for land and buildings used in its operations that expire at various dates through 2029. Most of the leases contain renewal options. Certain leases provide for periodic rate negotiation or escalation. The leases generally provide for payment of property taxes, insurance and maintenance costs by the Company. Rental expense, including month-to-month leases, reported in non-interest expense was $3.1 million, $2.4 million, and $2.0 million for the years ended December 31, 2013, 2012 and 2011, respectively.

At December 31, 2013, future minimum rental commitments under non-cancellable operating leases that have a remaining life in excess of one year are as follows (dollars in thousands):

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2014	$	2,776
2015	2,432
2016	2,190
2017	1,988
2018	1,861
Thereafter	5,421
Total	$	16,668

NOTE 9 – 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. During the first quarter of 2009, the Company entered into a five-year interest rate derivative contract, with a notional amount of $250 million, to offset the effects of interest rate changes on an unsecured $250 million variable rate money market funding arrangement. The maturity date of this interest rate cap is February 16, 2014.

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

Derivatives Not Designated as Hedges

The Company utilizes derivative financial instruments, including 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 December 31, 2013 and 2012, the Company had notional amounts of $31.2 million and $18.0 million, respectively, on interest rate contracts with corporate customers and in offsetting interest rate contracts with another financial institution to mitigate the Company’s rate exposure on its corporate customers’ contracts.

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The following tables present the fair value of the Company’s derivatives at December 31, 2013 and 2012 (dollars in thousands):

	December 31, 2013					December 31, 2012
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
Derivative assets:
Derivatives designated as hedging instruments:
Interest rate cap	$	250,000	Other assets	$	—	$	250,000	Other assets	$	40
Interest rate swap	125,000		Other assets	2,744		—		Other assets	—
	$	375,000		$	2,744	$	250,000		$	40
Derivatives not designated as hedging instruments:
Interest rate swaps	$	27,965	Other assets	$	424	$	11,499	Other assets	$	672
Interest rate cap/floor	3,256		Other assets	98		6,524		Other assets	330
	$	31,221		$	522	$	18,023		$	1,002
Derivative liabilities:
Derivatives not designated as hedging instruments:
Interest rate swaps	$	31,221	Accrued expenses and other liabilities	$	522	$	18,023	Accrued expenses and other liabilities	$	1,002

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 sheet at December 31, 2013 and 2012 is presented in the following tables (dollar amounts in thousands):

							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
December 31, 2013
Derivative assets	$	3,266	$	—	$	3,266	$	—	$	930	$	2,336
Derivative liabilities	522		—		522		—		522		—
Total derivative instruments	$	3,788	$	—	$	3,788	$	—	$	1,452	$	2,336
December 31, 2012
Derivative assets	$	1,042	$	—	$	1,042	$	—	$	—	$	1,042
Derivative liabilities	1,002		—		1,002		—		1,002		—
Total derivative instruments	$	2,044	$	—	$	2,044	$	—	$	1,002	$	1,042

The Company has recorded a net gain of $1.4 million, net of tax, as accumulated other comprehensive income at December 31, 2013 associated with cash flow hedging instruments and expects a net loss of $0.3 million, net of tax, to be reclassified into earnings within the next 12 months. The following tables present the losses recorded in the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, respectively, relating to derivative instruments designated as cash flow hedges for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands, net of tax):

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	2013		2012			2011
Derivatives designated as hedging instruments:
Amount of net gain (losses) recorded in OCI (effective portion)	$	1,662	$	(364	)	$	(3,304	)
Amount of net losses reclassified from OCI to earnings (1)	6,103		4,878			3,146

(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 years ended December 31, 2013, 2012 and 2011. 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. As of December 31, 2013, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $0.5 million, for which the Company has posted collateral of $1.2 million.

NOTE 10 – GOODWILL AND OTHER INTANGIBLES

The following tables present activity for goodwill and other intangible assets for the years ended December 31, 2013 and 2012 (dollars in thousands):

	Goodwill		Other Intangibles			Total
Balance at December 31, 2011	$	26,129	$	2,986		$	29,115
Acquisitions	982		2,663			3,645
Amortization	—		(567		)	(567		)
Balance at December 31, 2012	$	27,111	$	5,082		$	32,193
Acquisitions	1,273		2,676			3,949
Amortization	—		(1,176		)	(1,176		)
Balance at December 31, 2013	28,384		6,582			34,966

During the years ended December 31, 2013, 2012 and 2011, the Company recorded amortization expense of $1.2 million, $0.6 million and $0.4 million, respectively, related to other intangible assets. At December 31, 2013, the weighted-average remaining life of core deposit intangibles was 5.6 years.

The Company performed the annual impairment test of goodwill as of June 30, 2013. The annual impairment test indicated that the estimated fair value exceeded the carrying value (including goodwill) for the Company’s reporting unit. Therefore, a step two analysis was not required and no impairment charge was recorded.

The following tables present the gross carrying amount and accumulated amortization at December 31, 2013 and 2012 for the Company’s core deposit intangible assets, which are the only identifiable intangible assets subject to amortization (dollars in thousands):

	2013			2012
Gross carrying amount	$	9,914		$	7,238
Accumulated amortization	(3,332		)	(2,156		)
Net book value	$	6,582		$	5,082

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The following table presents estimated future amortization expense for other intangible assets (dollars in thousands):

2014	$	1,438
2015	1,263
2016	1,112
2017	974
2018	974
Thereafter	821
Total	$	6,582

NOTE 11 – DEPOSITS

The following tables present the scheduled maturities of time deposits at December 31, 2013 (dollars in thousands):

	Less than $100,000		$100,000 and Greater		Total
2014	$	217,752	$	601,819	$	819,571
2015	29,862		101,304		131,166
2016	7,535		64,608		72,143
2017	12,083		25,719		37,802
2018	2,634		11,901		14,535
Thereafter	1,722		5,860		7,582
Total	$	271,588	$	811,211	$	1,082,799

NOTE 12 – SHORT-TERM BORROWINGS

The following table presents the Company’s short-term borrowings at December 31, 2013 and 2012 (dollars in thousands):

	2013		2012
Repurchase agreements	$	27,202	$	30,332
Advances from FHLB	97,300		2,000
Federal funds purchased	1,090		50
Total short-term borrowings	$	125,592	$	32,382

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 Company may purchase federal funds through unsecured federal funds lines of credit totaling $55.0 million at December 31, 2013. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate.

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 December 31, 2013, investment securities and commercial loans in the amounts of $2.8 million and $188.2 million, respectively, were assigned under these arrangements. At December 31, 2013, the Company had approximately $152.5 million in borrowing capacity available under these arrangements with no outstanding balance due.

Additional information on the Company’s short-term borrowings at and for the years ended December 31, 2013, 2012 and 2011 is presented in the following table (dollars in thousands):

	2013			2012			2011
Maximum outstanding at any month-end during the year	$	143,674		$	40,149		$	100,728
Average outstanding balance	88,635			30,573			49,146
Average interest rate for the year	0.49		%	1.11		%	0.99		%
Average interest rate at year end	0.39		%	0.51		%	0.92		%

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NOTE 13 – LONG-TERM DEBT

The following tables present the Company’s long-term debt at December 31, 2013 and 2012 (dollars in thousands):

	2013		2012
FHLB advances	$	51,100	$	62,000
Term loan	28,875		—
Junior subordinated debentures	23,713		26,173
	103,688		88,173
Less: FHLB prepayment penalty	2,179		—
Total	$	101,509	$	88,173

The following table details the Company's FHLB advances outstanding at December 31, 2013 and 2012 (dollars in thousands):

Maturity	Interest Rate	2013		2012
December 2014	3.62%	$	—	$	2,000
December 2014	3.87%	—		15,000
January 2015	1.00%	100		—
August 2015	2.37%	6,000		—
September 2017	3.73%	—		10,000
September 2017	3.66%	—		10,000
January 2018	2.15%	15,000		15,000
January 2018	2.27%	10,000		10,000
January 2020	0.47%	10,000		—
January 2020	0.47%	10,000		—
Total		$	51,100	$	62,000

During the first quarter of 2013, the Company prepaid and restructured $20.0 million in FHLB advances. The early repayment of the debt resulted in a prepayment penalty of $2.7 million, which is being amortized to interest expense in future periods as an adjustment to the cost of the new FHLB advances.

The above advances have been made against a $381.0 million line of credit secured by real estate loans in the amount of $514.3 million and investment securities with a fair value of $13.9 million as of December 31, 2013. The weighted average rate for paid on FHLB advances for the years ended December 31, 2013 and 2012, respectively, was 2.46% and 3.13%.

On April 26, 2013, the Company entered into a $30.0 million senior unsecured term loan agreement (the “Term Loan”). The Term Loan currently bears interest at 5.50% and matures on April 26, 2018. The net proceeds from the Term Loan were used to redeem the Company’s Series A Preferred Stock. The term loan contains certain restrictive covenants, none of which is expected to impact capital resources and liquidity. The Company was in compliance with all covenants of this term loan at December 31, 2013.

The following tables detail the junior subordinated debentures outstanding at December 31, 2013 and 2012 (dollars in thousands):

	Date of issuance		Shares issued	Interest rate	Maturity date
						2013		2012
BNC Bancorp	9/14/2012	(1)	2,435	8.00% fixed	6/30/2020	$	—	$	2,460
BNC Bancorp Capital Trust I	4/3/2003		5,000	Libor plus 3.25%	4/15/2033	5,155		5,155
BNC Bancorp Capital Trust II	3/11/2004		6,000	Libor plus 2.80%	4/7/2034	6,186		6,186
BNC Capital Trust III	9/23/2004		5,000	Libor plus 2.40%	9/23/2034	5,155		5,155
BNC Capital Trust IV	9/27/2006		7,000	Libor plus 1.70%	12/31/2036	7,217		7,217
Total						$	23,713	$	26,173

(1) This subordinated debt obligation was assumed in the purchase of KeySource on September 14, 2012. On July 1, 2013, the Company exercised its redemption option on this debenture.

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The junior subordinated debentures issued by BNC are classified as Tier II capital for regulatory purposes. The junior subordinated debentures issued by the trusts currently qualify as Tier I capital for the Company, subject to certain limitations, and constitute a full and unconditional guarantee by the Company of the trust’s obligations under the preferred securities. At December 31, 2013 and 2012, respectively, the Company had $0.7 million of equity investment in the above wholly-owned Capital Trusts and is included in other assets in the accompanying consolidated balance sheets. The weighted average rate for the junior subordinated debentures outstanding for the years ending December 31, 2013 and 2012 was 2.86% and 3.41%, respectively.

NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following tables present the changes in accumulated other comprehensive income, net of taxes, for the years ended December 31, 2013 and 2012 (dollars in thousands):

	Unrealized Holding Gains (Losses) on Available-For-Sale Investment Securities			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
Balance at December 31, 2012	$	8,872		$	2,881		$	(6,324	)	$	5,429
Other comprehensive income (loss) before reclassifications	(9,625		)	—			1,662			(7,963		)
Amounts reclassified from accumulated other comprehensive income	26			(289		)	6,103			5,840
Amounts transferred as a result of the reclassification of securities from available-for-sale to held-to-maturity	(1,219		)	1,219			—			—
Net current period other comprehensive income (loss)	(10,818		)	930			7,765			(2,123		)
Balance at December 31, 2013	$	(1,946	)	$	3,811		$	1,441		$	3,306

	Unrealized Holding Gains on Available-For-Sale Investment Securities			Unrealized Holding Gains on Investment Securities Transferred from Available-For-Sale to Held-to-Maturity			Unrealized Holding Losses on Cash Flow Hedging Activities			Total Accumulated Other Comprehensive Income
Balance at December 31, 2011	$	8,637		$	3,211		$	(10,838	)	$	1,010
Other comprehensive income (loss) before reclassifications	2,094			—			(364		)	1,730
Amounts reclassified from accumulated other comprehensive income	(1,859		)	(330		)	4,878			2,689
Net current period other comprehensive income (loss)	235			(330		)	4,514			4,419
Balance at December 31, 2012	$	8,872		$	2,881		$	(6,324	)	$	5,429

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The following table details reclassification adjustments from accumulated other comprehensive income for the years ended December 31, 2013 and 2012 (dollars in thousands):

Component of accumulated other comprehensive income	2013			Affected Line Item in the Consolidated Statement of Income
Unrealized holding gains - investment securities available-for-sale	$	(42	)	Gain (loss) on sale of investment securities, net
	16			Income tax benefit (expense)
	(26		)	Total, net of tax
Unrealized holding gains – investment securities transferred from available-for-sale to held-to-maturity (1)	623			Interest income - investment securities
	(334		)	Income tax benefit (expense)
	289			Total, net of tax
Unrealized holding losses – cash flow hedge instruments	(9,863		)	Interest expense - demand deposits
	3,760			Income tax benefit (expense)
	(6,103		)	Total, net of tax
Total reclassifications for the period	$	(5,840	)	Total, net of tax

Component of accumulated other comprehensive income	2012			Affected Line Item in the Consolidated Statement of Income
Unrealized holding gains – investment securities available-for-sale	$	3,026		Gain (loss) on sale of investment securities, net
	(1,167		)	Income tax benefit (expense)
	1,859			Total, net of tax
Unrealized holding gains – investment securities transferred from available-for-sale to held-to-maturity (1)	538			Interest income - investment securities
	(208		)	Income tax benefit (expense)
	330			Total, net of tax
Unrealized holding losses – cash flow hedge instruments	(7,940		)	Interest expense - demand deposits
	3,062			Income tax benefit (expense)
	(4,878		)	Total, net of tax
Total reclassifications for the period	$	(2,689	)	Total, net of tax

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

NOTE 15 - FAIR VALUE MEASUREMENT

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuations are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

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Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement, and require significant management judgment or estimation using pricing models, discounted cash flow methodologies or similar techniques.

Fair Value on a Recurring Basis – The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.

Investment Securities Available-for-Sale – The fair value of our investment 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 at December 31, 2013 and 2012 (dollars in thousands):

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	Total Measured at Fair Value		Fair Value Measured Using
Description			Level 1		Level 2		Level 3
December 31, 2013
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	15,061	$	—	$	15,061	$	—
State and municipals	191,263		—		191,263		—
Corporate debt securities	8,889		—		8,889		—
Other debt securities	4,380		—		4,380		—
Equity securities	922		922		—		—
Mortgage-backed securities:
Residential government sponsored	42,014		—		42,014		—
Other government sponsored	7,888		—		7,888		—
Total investment securities available-for-sale	270,417		922		269,495		—
Derivative instruments:
Interest rate swap - cash flow hedge	2,744		—		2,744		—
Interest rate cap - cash flow hedge	—		—		—		—
Interest rate swap - not designated	424		—		424		—
Interest rate cap/floor - not designated	98		—		98		—
Total derivative instruments	3,266		—		3,266		—
Total assets measured at fair value on a recurring basis	$	273,683	$	922	$	272,761	$	—
Liabilities:
Interest rate swap - not designated	$	522	$	—	$	522	$	—
Total liabilities measured at fair value on a recurring basis	$	522	$	—	$	522	$	—

	Total Measured at Fair Value		Fair Value Measured Using
Description			Level 1		Level 2		Level 3
December 31, 2012
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	16,395	$	—	$	16,395	$	—
State and municipals	223,886		—		223,886		—
Mortgage-backed securities:
Residential government sponsored	86,890		—		86,890		—
Other government sponsored	14,368		—		14,368		—
Total investment securities available-for-sale	341,539		—		341,539		—
Derivative instruments:
Interest rate cap - cash flow hedge	40		—		40		—
Interest rate swap - not designated	672		—		672		—
Interest rate cap/floor - not designated	330		—		330		—
Total derivative instruments	1,042		—		1,042		—
Total assets measured at fair value on a recurring basis	$	342,581	$	—	$	342,581	$	—
Liabilities:
Interest rate swap - not designated	$	1,002	$	—	$	1,002	$	—
Total liabilities measured at fair value on a recurring basis	$	1,002	$	—	$	1,002	$	—

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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.

The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2013 and 2012 (dollars in thousands):

	Total Measured at Fair Value		Fair Value Measured Using
Description			Level 1		Level 2		Level 3
December 31, 2013
Loans held for sale	$	30,899	$	—	$	30,899	$	—
Impaired loans	228,736		—		—		228,736
Other real estate owned	47,606		—		—		47,606
Total assets measured at fair value on a nonrecurring basis	$	307,241	$	—	$	30,899	$	276,342
December 31, 2012
Loans held for sale	$	57,414	$	—	$	57,414	$	—
Impaired loans	290,085		—		—		290,085
Other real estate owned	51,913		—		—		51,913
Total assets measured at fair value on a nonrecurring basis	$	399,412	$	—	$	57,414	$	341,998

The following table presents the valuation and unobservable inputs for Level 3 assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2013 (dollars in thousands):

Description	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs
Impaired loans	$	228,736	Appraised value	Discount to reflect current market conditions and ultimate collectability	0% - 20%
Other real estate owned	$	47,606	Appraised value	Discount to reflect current market conditions	0% - 20%

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

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

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The following tables present the carrying value and estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at December 31, 2013 and 2012 (dollars in thousands):

December 31, 2013	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	108,390	$	108,390	$	108,390	$	—	$	—
Investment securities available-for-sale	270,417		270,417		—		270,417		—
Investment securities held-to-maturity	247,378		236,507		—		236,507		—
Federal Home Loan Bank stock	10,720		10,720		—		10,720		—
Loans held for sale	30,899		30,899		—		30,899		—
Loans receivable, net	2,243,642		2,266,455		—		2,037,719		228,736
Accrued interest receivable	12,955		12,955		—		12,955		—
FDIC indemnification asset	16,886		16,886		—		—		16,886
Investment in bank-owned life insurance	78,439		78,439		—		78,439		—
Interest rate swap derivative - cash flow hedge	2,744		2,744		—		2,744		—
Interest rate cap derivative - cash flow hedge	—		—		—		—		—
Interest rate swap derivative - not designated	424		424		—		424		—
Interest rate cap/floor derivative - not designated	98		98		—		98		—
Financial liabilities:
Demand deposits and savings	$	1,623,931	$	1,623,931	$	—	$	1,623,931	$	—
Time deposits	1,082,799		1,087,333		—		1,087,333		—
Short-term borrowings	125,592		126,126		—		126,126		—
Long-term debt	101,509		97,983		—		97,983		—
Accrued interest payable	1,434		1,434		—		1,434		—
Interest rate swap derivative - not designated	522		522		—		522		—

December 31, 2012	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	234,071	$	234,071	$	234,071	$	—	$	—
Investment securities available-for-sale	341,539		341,539		—		341,539		—
Investment securities held-to-maturity	114,805		118,235		—		118,235		—
Federal Home Loan Bank stock	7,604		7,604		—		7,604		—
Loans held for sale	57,414		57,414		—		57,414		—
Loans receivable, net	1,994,966		1,976,745		—		1,686,660		290,085
Accrued interest receivable	11,363		11,363		—		11,363		—
FDIC indemnification asset	53,519		53,519		—		—		53,519
Investment in bank-owned life insurance	70,756		70,756		—		70,756		—
Interest rate cap derivative - cash flow hedge	40		40		—		40		—
Interest rate swap derivative - not designated	672		672		—		672		—
Interest rate cap/floor derivative - not designated	330		330		—		330		—
Financial liabilities:
Demand deposits and savings	$	1,496,694	$	1,496,694	$	—	$	1,496,694	$	—
Time deposits	1,159,615		1,170,560		—		1,170,560		—
Short-term borrowings	32,382		32,382		—		32,382		—
Long-term debt	88,173		83,292		—		83,292		—
Accrued interest payable	2,158		2,158		—		2,158		—
Interest rate swap derivative - not designated	1,002		1,002		—		1,002		—

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

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

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

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

Federal home loan bank stock - The fair value for FHLB stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock and the Company, in order to be a member of the FHLB, is required to maintain a minimum investment.

Loans receivable, net - The fair values for loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms and credit ratings for the same remaining maturities, adjusted for the allowance for loan losses.

FDIC indemnification asset - The fair value for the FDIC indemnification asset is estimated based on discounted future cash flows using current discount rates.

Investment in bank-owned life insurance - The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Accrued interest receivable and accrued interest payable - The carrying amount of accrued interest is assumed to approximate fair value.

Deposits - The fair values disclosed for deposits with no stated maturity (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for deposits with a stated maturity date (time deposits) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these accounts to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings - The carrying amount of short-term borrowings is assumed to approximate fair value.

Long-term debt – The fair value is estimated by discounting the future contractual cash flows using current market interest rates for similar debt over the same remaining term.

NOTE 16 – REGULATORY CAPITAL REQUIREMENTS

BNC, as a North Carolina banking corporation, may pay cash dividends to the Company only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank.

The Parent Company and BNC are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a material adverse effect on the Company’s consolidated financial statements. Capital adequacy guidelines and the regulatory framework for prompt corrective action prescribe specific capital guidelines that involve quantitative measures of BNC’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. BNC’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of December 31, 2013, the most recent notification from the FDIC categorized BNC as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized BNC must maintain minimum amounts and ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed BNC’s category. Prompt corrective action provisions are not applicable to bank holding companies.

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Quantitative measures established by regulation to ensure capital adequacy require the Parent Company and BNC to maintain minimum amounts and ratios, as prescribed by regulations, of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. The following tables present BNC’s regulatory capital ratios at December 31, 2013 and 2012 (dollars in thousands):

					For capital adequacy purposes				To be well capitalized under prompt corrective action provisions
	Actual				Minimum				Minimum
December 31, 2013	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)	$	313,624	12.66	%	$	198,187	8.00	%	$	247,734	10.00	%
Tier 1 capital (to risk weighted assets)	282,634		11.41	%	99,094		4.00	%	148,640		6.00	%
Tier 1 capital (to average assets)	282,634		8.96	%	126,118		4.00	%	157,647		5.00	%

					For capital adequacy purposes				To be well capitalized under prompt corrective action provisions
	Actual				Minimum				Minimum
December 31, 2012	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)	$	293,244	13.91	%	$	168,705	8.00	%	$	210,882	10.00	%
Tier 1 capital (to risk weighted assets)	269,192		12.77	%	84,353		4.00	%	126,529		6.00	%
Tier 1 capital (to average assets)	269,192		9.71	%	110,900		4.00	%	138,625		5.00	%

The Company is also subject to these capital requirements. The following table presents the Company’s regulatory capital ratios at December 31, 2013 and 2012:

	2013		2012
Total capital (to risk-weighted assets)	11.57	%	13.80	%
Tier 1 capital (to risk-weighted assets)	10.33	%	12.67	%
Tier 1 capital (to average assets)	8.12	%	9.65	%

NOTE 17 – INCOME TAXES

The following tables present the Company’s income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Current income tax provision:
Federal	$	(314	)	$	(140	)	$	581
State	554			350			742
Total current income tax provision	240			210			1,323
Deferred income tax provision (benefit):
Federal	2,382			(2,244		)	(2,821		)
State	1,423			334			(285		)
Total deferred income tax provision (benefit)	3,805			(1,910		)	(3,106		)
Total income tax provision (benefit)	$	4,045		$	(1,700	)	$	(1,783	)

The following tables present the difference between income tax expense (benefit) and the amount computed by applying the statutory income tax rate for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

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	2013			2012			2011
Tax at statutory federal tax rate	$	7,239		$	2,976		$	1,750
State income tax, net of federal benefit	1,304			451			301
Tax exempt interest income	(4,008		)	(3,241		)	(3,306		)
Income from life insurance	(789		)	(601		)	(546		)
Gain on acquisition	—			(1,690		)	—
Other	299			405			18
Total income tax provision (benefit)	$	4,045		$	(1,700	)	$	(1,783	)

Significant components of deferred tax assets and liabilities at December 31, 2013 and 2012 were as follows (dollars in thousands):

	2013		2012
Deferred income tax assets:
Allowance for loan losses	$	10,660	$	10,841
Net operating loss carryforwards	10,593		6,975
Deferred compensation	2,203		2,112
Unrealized loss on interest rate cap	—		3,662
Other real estate owned writedowns	3,536		3,481
AMT credit carryforward	3,488		3,323
Interest on nonaccrual loans	110		113
Stock-based compensation	546		522
Fair value adjustments from acquisitions	6,273		8,672
Other	1,089		922
Total deferred income tax assets	38,498		40,623
Deferred income tax liabilities:
Premises and equipment	2,978		1,932
Leasing activities	702		486
Unrealized gains on investment securities and derivatives	2,235		7,373
Loan costs	979		—
Core deposit intangibles	2,306		1,755
FDIC acquisitions	4,424		7,494
Other	1,554		1,934
Total deferred income tax liabilities	15,178		20,974
Less valuation allowance	360		—
Net deferred income tax asset	$	22,960	$	19,649

The valuation allowance of $0.4 million at December 31, 2013 relates to the Randolph acquisition net operating loss carryforwards for which realizability is uncertain.

The Company adjusted its net deferred income tax asset as a result of reductions in the North Carolina corporate income tax rate, which was enacted July 23. 2013 and will reduce the state income tax rate to 6% effective January 1, 2014 and to 5% effective January 1, 2015. The lower corporate income tax rate resulted in the reduction in the net deferred income tax asset at December 31, 2013 and an increase in current period income tax expense for the year ended December 31, 2013.

In assessing the realizability of the Company's deferred income tax asset, the Company considered whether it is more likely than not that some portion or all of the deferred income tax asset will not be realized in accordance with the guidance provided by ASC 740. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the weight of available evidence, the Company determined that it is more likely than not that it will be able to realize the benefits of the deferred income tax asset, net of valuation allowance, at December 31, 2013.

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At December 31, 2013, the Company had net operating loss and other carryforwards of approximately $28.9 million available to offset future taxable income, expiring in 2030.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company did not have an accrual for uncertain tax positions at December 31, 2013 or 2012.

We are subject to routine audits of our tax returns by the Internal Revenue Service and various state taxing authorities. With few exceptions, we are no longer subject to Federal and state income tax examinations by tax authorities for years before 2010. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.

NOTE 18 – 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.

At December 31, 2013, the Company committed to purchase up to $8.8 million in limited partnership interests of unconsolidated entities, of which $7.5 million was unfunded at December 31, 2013.

The following tables present the outstanding off-balance sheet financial instruments whose contract amounts represent potential credit risk at December 31, 2013 and 2012 (dollars in thousands):

	2013		2012
Commitments under unfunded loans and lines of credit	$	377,021	$	272,308
Letters of credit	7,926		12,172
Unused credit card lines	4,120		4,536
Unfunded commitments for unconsolidated investments	7,450		4,000

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.

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

NOTE 19 – EMPLOYEE BENEFITS

In May 2013, the Company’s shareholders approved the BNC Bancorp 2013 Omnibus Stock Incentive Plan (the “2013 Omnibus Plan”). The Compensation Committee of the BNC Bancorp Board of Directors may grant or award eligible participants with stock options, rights to receive restricted shares of common stock, restricted stock units, stock appreciation rights, and other stock-based awards or any

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combination of awards (collectively referred to herein as “Rights”). As of May 2013, no further awards were to be granted under the previous BNC Bancorp Omnibus Stock Ownership and Long Term Incentive Plan (the “2006 Omnibus Plan”). At December 31, 2013, the Company had 376,764 grants of Rights issued under the 2006 Omnibus Plan. At December 31, 2013, the Company had 54,750 grants of Rights issued and 1,429,325 Rights available for grants or awards under the 2013 Omnibus Plan.

On September 14, 2012, the Company merged with KeySource and assumed all of the outstanding and unexercised stock options from KeySource’s non-statutory and incentive stock option plans. At December 31, 2013, the Company had 284,219 grants of stock options issued and 35,607 stock options available for issuance related to these plans.

Stock Option Awards. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on the yield at the time of the option grant. There were no grants of options during the years ended December 31, 2013, 2012 and 2011.

A summary of the Company’s stock option activity for the year ended December 31, 2013 is presented below (dollars in thousands, except per share data):

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2012	436,939	11.32
Exercised	—	—
Forfeited or expired	24,602	11.00
Outstanding at December 31, 2013	412,337	11.34	3.14	2,392
Exercisable at December 31, 2013	409,513	11.35	3.12	2,371
Share options expected to vest	2,824	9.71	6.31	21

The related compensation expense recognized for stock option awards was $10,000, $69,000 and $14,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Included in the 2012 amount was $55,000 of additional compensation expense related to the excess fair value of the stock options assumed from KeySource. As of December 31, 2013, there was $7,000 of total unrecognized compensation cost related to non-vested stock options granted under the plans. That cost is expected to be recognized over a weighted average period of 0.86 years. For the years ended December 31, 2013, 2012 and 2011, the intrinsic value of stock option exercised was $0, $85,000 and $1,000, respectively, and the grant-date fair value of options vested was $14,000, $326,000 and $14,000, respectively.

Cash received from stock option exercises under all share-based payment arrangements for the years ended December 31, 2013, 2012 and 2011 was $0, $0.3 million and $0.1 million, respectively. The actual tax benefit realized for income tax deductions from stock option exercises was $0, $17,000 and $0 for the years ended December 31, 2013, 2012 and 2011, respectively.

Restricted Stock Awards. A summary of the activity of the Company’s non-vested stock awards for the year ended December 31, 2013 is presented below:

	Number of Shares	Weighted Average Grant-Date Fair Value
December 31, 2012	153,723	7.73
Granted	250,675	10.29
Vested	(100,002)	8.55
Forfeited	(1,000)	7.95
December 31, 2013	303,396	9.58

The Company measures the fair value of restricted shares based on the price of BNC’s common stock on the grant date, and compensation expense is recorded over the vesting period. The related compensation expense recognized for restricted stock awards for the years ended December 31, 2013, 2012 and 2011 was $1.2 million, $0.5 million and $0.4 million, respectively. As of December 31, 2013, there was

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$2.1 million of total unrecognized compensation cost related to non-vested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 1.46 years. The grant-date fair value of restricted stock grants vested during the years ended December 31, 2013, 2012 and 2011 was $0.9 million, $0.3 million and $0.1 million, respectively.

Qualified Profit Sharing 401(k) Plan - The Company maintains a qualified profit sharing 401(k) plan for employees 20.5 years of age or over which covers substantially all employees. Under the plan, employees may contribute up to an annual maximum as determined by the Internal Revenue Code. The Company matches 50% of the employee contributions up to 6% of the participant's compensation. The plan provides that employees' contributions are 100% vested at all times, and the Company's contributions vest at 20% each year after the second year of service. The expense related to the plan for the years ended December 31, 2013, 2012 and 2011 was $0.9 million, $0.8 million and $0.6 million, respectively.

Employment Agreements - The Company has entered into employment agreements with its chief executive officer and chief financial officer to ensure a stable and competent management base. The agreements provide for a three-year term, with an automatic one-year renewal on each anniversary date. The agreements provide for benefits as set forth in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers’ rights to receive certain vested benefits, including compensation. In the event of a change in control of the Company, as outlined in the agreements, the acquirer will be bound to the terms of the contracts.

Director and Executive Officer Benefit Plans - The Company has Salary Continuation Agreements and supplemental retirement benefits with its chief executive officer and certain other officers. The Salary Continuation Agreements provide for lifetime benefits to be paid to each executive with the payment amounts varying upon different retirement scenarios, such as normal retirement, early termination, disability, or change in control. The Company has purchased life insurance policies on the participating officers in order to provide future funding of benefit payments. Provisions for the years ended December 31, 2013, 2012 and 2011 totaled $0.3 million, $0.6 million and $0.7 million, respectively, were expensed for future benefits to be provided under these benefit plans. The corresponding liability related to these benefit plans was $6.3 million and $6.1 million as of December 31, 2013 and 2012, respectively.

The Company also has a deferred compensation plan for its directors. Expense provided under the plan totaled $0.4 million, $0.5 million and $0.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Since 2003, directors have had the option to invest amounts deferred in Company common stock that is held in a rabbi trust established for that purpose. At December 31, 2013 and 2012, the trust held 339,448 and 337,673 shares of Company common stock, respectively.

NOTE 20 – PARENT COMPANY FINANCIAL DATA

The following are condensed financial statements of the Parent Company as of and for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

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CONDENSED BALANCE SHEETS

December 31, 2013 and 2012

	December 31, 2013			December 31, 2012
Assets
Cash and due from banks	$	1,392		$	11,103
Investment in bank subsidiary	320,941			306,816
Investment in other subsidiaries	1,113			1,113
Other assets	622			222
Total assets	$	324,068		$	319,254
Liabilities and Shareholders' Equity
Other liabilities	$	150		$	10,837
Long-term debt	52,588			26,173
Total liabilities	52,738			37,010
Shareholders' Equity:
Series A, Fixed Rate Cumulative Perpetual Preferred stock	—			30,717
Series B, Mandatorily Convertible Non-Voting Preferred stock	—			17,161
Common stock, no par value	168,616			157,541
Common stock, non-voting, no par value	57,849			40,688
Retained earnings	41,559			30,708
Stock in directors rabbi trust	(3,143		)	(3,090		)
Directors deferred fees obligation	3,143			3,090
Accumulated other comprehensive income	3,306			5,429
Total shareholders' equity	271,330			282,244
Total liabilities and shareholders' equity	$	324,068		$	319,254

CONDENSED STATEMENTS OF INCOME

Years Ended December 31, 2013, 2012 and 2011

	2013		2012		2011
Dividends from bank subsidiary	$	13,760	$	3,675	$	2,100
Equity in undistributed earnings of bank subsidiary	5,434		8,094		5,427
Other income	625		626		637
Interest expense	1,920		939		968
Other expense	652		1,003		266
Total net income	$	17,247	$	10,453	$	6,930

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CONDENSED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2013, 2012 and 2011

	2013			2012			2011
Operating activities
Net income	$	17,247		$	10,453		$	6,930
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of bank subsidiary	(5,434		)	(8,094		)	(5,427		)
Amortization	48			11			11
(Increase) decrease in other assets	(472		)	2			7
Increase (decrease) in other liabilities	(10,687		)	10,267			(362		)
Net cash provided by operating activities	702			12,639			1,159
Investing activities
Net cash used in investment in subsidiaries	—			(61,397		)	—
Financing activities
Proceeds (repayments) on short-term borrowings	—			(6,280		)	3,025
Proceeds on long-term debt	26,440			2,460			—
Proceeds from issuance of preferred stock	(31,260		)	68,308			—
Redemption of common stock warrant	—			(940		)	—
Proceeds from exercise of stock options	—			138			52
Tax benefit from exercise of stock options, net	—			17			—
Common stock issued pursuant to dividend reinvestment plan	260			225			205
Cash dividends paid, net of accretion	(5,853		)	(4,879		)	(3,737		)
Net cash provided by (used in) financing activities	(10,413		)	59,049			(455		)
Net increase (decrease) in cash and cash equivalents	(9,711		)	10,291			704
Cash and cash equivalents, beginning of period	11,103			812			108
Cash and cash equivalents, end of period	$	1,392		$	11,103		$	812

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Our management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer (our principal executive officer and principal financial officer, respectively), has concluded based on their evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Moreover, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that the judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Internal control over financial reporting

Our Management’s Report on Internal Control Over Financial Reporting is included with the financial statements in Part II, Item 8 of this annual report on Form 10-K and is incorporated herein by reference.

The Report of Independent Registered Public Accounting Firm, which includes the attestation report on our internal control over financial reporting, is included with the financial statements in Part II, Item 8 of this annual report on Form 10-K and is incorporated herein by reference.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

On March 12, 2014, the Company entered into a three year Change in Control Severance Agreement with Ronald J. Gorczynski, Executive Vice President and Chief Accounting Officer of the Company (the “Agreement”). The Agreement provides for certain severance benefits upon Mr. Gorczynski’s dismissal for reasons other than for cause, death or disability, or his termination for good reason, either of which occurs within 24 months following the effective date of a change in control or six months before a change in control, but after discussions with a third party regarding a change in control commences (a “Covered Termination”). Upon such Covered Termination, Mr. Gorczynski will receive: (i) his accrued but unpaid vacation, expense reimbursement, wages and other benefits; (ii) a lump sum cash severance payment equal to 24 months of his base salary as in effect immediately prior to his termination date; (iii) 100% of the unvested portion of his then outstanding equity awards; and (iv) continued health insurance benefits. As a condition to his receipt of such benefits, Mr. Gorczynski will enter into a release agreement with the Company. The foregoing summary description of the Agreement is qualified in its entirety by reference to the actual terms of the Agreement, which are incorporated herein by reference to Exhibit 10.32 hereto.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers. The information concerning our directors and named executive officers required by this Item 10 is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

Section 16(a) Beneficial Ownership Reporting Compliance. The information concerning compliance with the reporting requirements of Section 16(a) of the Exchange Act by our directors, officers, and ten percent shareholders required by this Item 10 is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

Code of Ethics. We have adopted a Code of Business Conduct and Ethics that is applicable to all of our directors, officers and employees, including its principal executive and senior financial officers, as required by Section 406 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules. A copy of our Code of Business Conduct and Ethics adopted by our Board of Directors may be found on BNC’s website: www.bncbancorp.com.

In the event that we make any amendment to, or grant any waivers of, a provision of its Code of Business Conduct and Ethics that applies to the principal executive officer or senior financial officer that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver by filing a Form 8-K with the SEC.

The information regarding our Nominating and Corporate Governance Committee and Audit Committee required by this Item 10 is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

ITEM 11.    EXECUTIVE COMPENSATION

The information concerning compensation and other matters required by this Item 11 is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information concerning security ownership of certain beneficial owners and management required by this Item 12 is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

The information required to be disclosed under Item 201(d) of Regulation S-K is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information concerning certain relationships and related transactions and director independence required by this Item 13 is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information concerning principal accounting fees and services required by this Item 14 is incorporated herein by reference from our definitive proxy statement for the 2014 Annual Meeting of Shareholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.

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PART IV

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) The following consolidated financial statements of BNC Bancorp are filed as part of this report under Item 8 — Financial Statements and Supplementary Data:

Consolidated Balance Sheets — December 31, 2013 and 2012

Consolidated Statements of Income — Years ended December 31, 2013, 2012 and 2011

Consolidated Statements of Comprehensive Income — Years ended December 31, 2013, 2012 and 2011

Consolidated Statements of Shareholders‘ Equity — Years ended December 31, 2013, 2012 and 2011

Consolidated Statements of Cash Flows — Years ended December 31, 2013, 2012 and 2011

Notes to Consolidated Financial Statements — Years ended December 31, 2013, 2012 and 2011

(a)(2)    List of Financial Schedules

All schedules are omitted because they are not applicable or because the required information is shown under Item 8 — Financial Statements and Supplementary Data.

(a)(3)    Exhibits

The list of exhibits filed as a part of this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated by reference in this Item 15(a)(3).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 13, 2014	By: /s/ Richard D. Callicutt II
	Richard D. Callicutt II
	President and Chief Executive Officer

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

Signature	Title	Date
/s/Richard D. Callicutt II	President, Chief Executive	March 13, 2014
Richard D. Callicutt II	Officer and Director
/s/ David B. Spencer	Senior Executive Vice President, and	March 13, 2014
David B. Spencer	Chief Financial Officer (Principal
	Financial and Accounting Officer)
/s/ W. Swope Montgomery, Jr.	Director	March 13, 2014
W. Swope Montgomery, Jr.
/s/ Lenin J. Peters, M.D.	Director	March 13, 2014
Lenin J. Peters, M.D.
/s/ Thomas R. Smith, CPA	Director	March 13, 2014
Thomas R. Smith, CPA
/s/ Larry L. Callahan	Director	March 13, 2014
Larry L. Callahan
/s/ Joseph M. Coltrane, Jr.	Director	March 13, 2014
Joseph M. Coltrane, Jr.
/s/ Charles T. Hagan III	Director	March 13, 2014
Charles T. Hagan III
/s/ G. Kennedy Thompson	Director	March 13, 2014
G. Kennedy Thompson
/s/ Thomas R. Sloan	Director	March 13, 2014
Thomas R. Sloan
/s/ Robert A. Team, Jr.	Director	March 13, 2014
Robert A. Team, Jr.
/s/ D. Vann Williford	Director	March 13, 2014
D. Vann Williford
/s/ Richard F. Wood	Director	March 13, 2014
Richard F. Wood
/s/ James T. Bolt, Jr.	Director	March 13, 2014
James T. Bolt, Jr.
/s/ Elaine M. Lyerly	Director	March 13, 2014
Elaine M. Lyerly
/s/ John S. Ramsey, Jr.	Director	March 13, 2014
John S. Ramsey, Jr.

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EXHIBIT INDEX

Exhibit No.	Description
2.1	Purchase and Assumption Agreement Whole Bank All Deposits among the Federal Deposit Insurance Corporation, receiver of Carolina Federal Savings Bank, Charleston, South Carolina, Federal Deposit Insurance Corporation and Bank of North Carolina, dated as of June 8, 2012, incorporated by reference to Exhibit 2.1 to the form 8-K filed with the SEC on June 14, 2012.
2.2	Purchase and Assumption Agreement Whole Bank All Deposits among the Federal Deposit Insurance Corporation, receiver of Beach First National Bank, Myrtle Beach, South Carolina, Federal Deposit Insurance Corporation and Bank of North Carolina, dated as of April 9, 2010, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on April 15, 2010.
2.3	Purchase and Assumption Agreement Whole Bank All Deposits among the Federal Deposit Insurance Corporation, receiver of Blue Ridge Savings Bank, Inc., Asheville, North Carolina, Federal Deposit Insurance Corporation and Bank of North Carolina, dated as of October 14, 2011, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on October 19, 2011.
2.4	Agreement and Plan of Merger by and between KeySource Financial, Inc. and the Registrant, dated as of December 21, 2011, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on December 28, 2011.
2.5	First Amendment to Agreement and Plan of Merger between KeySource Financial Inc. and the Registrant, dated July 9, 2012, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on July 12, 2012.
2.6	Agreement and Plan of Merger, dated as of June 4, 2012, by and among First Trust Bank, the Registrant and Bank of North Carolina, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on June 6, 2012.
2.7	Purchase and Assumption Agreement dated April 27, 2012, by and between The Bank of Hampton Roads and the Bank of North Carolina, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 1, 2012.
2.8	Agreement and Plan of Merger, dated as of May 31, 2013, by and among Randolph Bank & Trust Company, BNC Bancorp and Bank of North Carolina, incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on May 31, 2013.
2.9	Agreement and Plan of Merger, dated as of December 17, 2013, by and among the Company and South Street Financial Corp., incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on December 19, 2013.
2.10	Agreement and Plan of Merger, dated as of December 17, 2013, by and among the Company and Community First Financial Group, Inc., incorporated by reference to Exhibit 2.2 to the Form 8-K filed with the SEC on December 19, 2013.
3.1	Articles of Incorporation, incorporated by reference to Exhibit (3)(i) to the Form 8-K filed with the SEC on December 18, 2002.
3.2	Articles of Amendment, dated December 2, 2008, regarding the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on December 8, 2008.
3.3	Articles of Amendment, dated June 14, 2010, regarding the Mandatorily Convertible Non-Voting Preferred Stock, Series B, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on June 18, 2010.
3.4	Articles of Amendment, dated February 7, 2013, regarding the Mandatorily Convertible Non-Voting Preferred Stock, Series B, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on February 11, 2013.
3.5	Articles of Amendment dated May 22, 2012, regarding the non-voting common stock, incorporated by reference to Exhibit 3.4 to the Form S-4/A filed with the SEC on July 2, 2012.
3.6	Bylaws, incorporated by reference to Exhibit (3)(ii) to the Form 8-K filed with the SEC on December 18, 2002.
4.1	Form of Common Stock Certificate (Voting), incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on August 27, 2012.
4.2	Form of Stock Certificate for the Non-Voting Common Stock, incorporated by reference to Exhibit 4.3 to the Form 8-K filed with the SEC on August 27, 2012.
4.3	Warrant Repurchase Agreement dated September 19, 2012, between the Registrant and the United States Department of the Treasury, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on September 20, 2012.
10.1	Directors Deferred Compensation Plan, incorporated by reference to Exhibit 10(v) of the Form 10-Q, filed with the SEC on November 2, 2009.
10.2	Amended Salary Continuation Agreement, dated as of December 18, 2007, between Bank of North Carolina and Richard D. Callicutt II, incorporated by reference to Exhibit 10(ii)(b) to the Form 8-K filed with the SEC on December 27, 2007.*

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Exhibit No.	Description
10.3	Amended Salary Continuation Agreement, dated as of December 18, 2007, between Bank of North Carolina and David B. Spencer, incorporated by reference to Exhibit 10(ii)(c) to the Form 8-K filed with the SEC on December 27, 2007.*
10.4	Amended Endorsement Split Dollar Agreement, dated December 18, 2007, between Bank of North Carolina and W. Swope Montgomery, Jr., incorporated by reference to Exhibit (10)(vi)(a) to the Form 8-K filed with the SEC on December 27, 2007.*
10.5	Amended Endorsement Split Dollar Agreement, dated December 18, 2007, between Bank of North Carolina and Richard D. Callicutt II, incorporated by reference to Exhibit (10)(vi)(b) to the Form 8-K filed with the SEC on December 27, 2007.*
10.6	Amended Endorsement Split Dollar Agreement, dated December 18, 2007, between Bank of North Carolina and David B. Spencer, incorporated by reference to Exhibit (10)(vi)(c) to the Form 8-K filed with the SEC on December 27, 2007.*
10.7	BNC Bancorp Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(vii) of the Form 10-K filed with the SEC on March 31, 2005.*
10.8	Amendment No. 1 to BNC Bancorp Omnibus Stock Ownership and Long Term Incentive Plan, incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the SEC on June 18, 2010.*
10.9	Investment Agreement by and among the Registrant and Aquiline BNC Holdings LLC, dated as of June 14, 2010, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on June 18, 2010.
10.10	Securities Purchase Agreement and Amendment Number 1 to Investment Agreement dated as of May 31, 2012, by and between the Registrant and Aquiline BNC Holdings LLC, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on June 6, 2012.
10.11	Amendment Number 2 to the Investment Agreement dated as of February 7, 2013, by and between the Registrant and Aquiline BNC Holdings LLC, incorporated by reference to Exhibit 10.18 to the Form 10-K filed with the SEC on March 18, 2013.
10.12	Form of Subscription and Registration Rights Agreement, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on June 18, 2010.
10.13	Form of Securities Purchase Agreement, dated as of May 31, 2012, by and between the Registrant and the Purchasers thereto, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on June 6, 2012.
10.14	Restricted Stock Grant Agreement between the Registrant and W. Swope Montgomery, Jr. dated July 2, 2012, incorporated by reference to Exhibit 10.1A to the Form 8-K filed with the SEC on July 5, 2012.*
10.15	Restricted Stock Grant Agreement between the Registrant and Richard D. Callicutt II dated July 2, 2012, incorporated by reference to Exhibit 10.1B to the Form 8-K filed with the SEC on July 5, 2012.*
10.16	Restricted Stock Grant Agreement between the Registrant and David B. Spencer dated July 2, 2012, incorporated by reference to Exhibit 10.1C to the Form 8-K filed with the SEC on July 5, 2012. *
10.17	Restricted Stock Award granted to W. Swope Montgomery, Jr. dated October 2, 2012, incorporated by reference to Exhibit 10.25 to the Form 10-K filed with the SEC on March 18, 2013. *
10.18	Restricted Stock Award granted to Richard D. Callicutt II dated October 2, 2012, incorporated by reference to Exhibit 10.26 to the Form 10-K filed with the SEC on March 18, 2013. *
10.19	Restricted Stock Award granted to David B. Spencer dated October 2, 2012, incorporated by reference to Exhibit 10.27 to the Form 10-K filed with the SEC on March 18, 2013. *
10.20	Restricted Stock Award Cancellation Agreement between the Registrant and W. Swope Montgomery, Jr. dated November 9, 2012, incorporated by reference to Exhibit 10.28 to the Form 10-K filed with the SEC on March 18, 2013. *
10.21	Restricted Stock Award Cancellation Agreement between BNC Bancorp and Richard D. Callicutt II dated November 9, 2012, incorporated by reference to Exhibit 10.29 to the Form 10-K filed with the SEC on March 18, 2013. *
10.22	Restricted Stock Award Cancellation Agreement between BNC Bancorp and David B. Spencer dated November 9, 2012, incorporated by reference to Exhibit 10.30 to the Form 10-K filed with the SEC on March 18, 2013. *
10.23	Consulting Agreement dated as of April 10, 2013, by and among W. Swope Montgomery, Jr., BNC Bancorp and Bank of North Carolina, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on April 14, 2013.*

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Exhibit No.	Description
10.24	Restricted Stock Award Agreement dated effective as of April 30, 2013 between BNC Bancorp and Richard D. Callicutt II, incorporated by reference to Exhibit 10.3 to the Form 10-Q filed with the SEC on August 9, 2013.*
10.25	Restricted Stock Award Agreement dated effective as of April 30, 2013 between BNC Bancorp and David B. Spencer, incorporated by reference to Exhibit 10.4 to the Form 10-Q filed with the SEC on August 9, 2013.*
10.26	Term Loan Agreement dated April 26, 2013 among BNC Bancorp and Synovus Bank, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on April 30, 2013.
10.27	BNC Bancorp 2013 Omnibus Stock Incentive Plan, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 23, 2013.*
10.28	Employment Agreement dated as of June 28, 2013 among BNC Bancorp, Bank of North Carolina and Richard D. Callicutt II, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on July 3, 2013.
10.29	Employment Agreement dated as of June 28, 2013 among BNC Bancorp, Bank of North Carolina and David B. Spencer, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on July 3, 2013.
10.30	Summary of BNC Bancorp Executive Incentive Program, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on January 27, 2014.
10.31	Form of Director Restricted Stock Award.*
10.32	Change in Control Severance Agreement dated effective as of March 12, 2014, by and between Ronald J. Gorczynski and BNC Bancorp.*
11	Statement regarding computation of per share earnings (See Note 4 in Part II Item 8).
21	Subsidiaries of the Registrant.
23	Consent of Cherry Bekaert, L.L.P.
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	The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 13, 2014, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets at December 31, 2013 and December 31, 2012, (ii) the Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011, (iv) the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.
* Indicates a management contract or compensatory plan or arrangement.
Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 000-50128.

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