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, 2010

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	(I.R.S. Employer Identification No.)
Incorporation or Organization)
1226 Eastchester Drive
High Point, North Carolina	27265
(Address of Principal Executive Offices)	(Zip Code)

(336) 476-9200

(Registrant’s telephone number, including area code)

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 registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨        No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated filer ¨ Accelerated filer x Non-Accelerated filer ¨

Smaller Reporting Company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes ¨    No  x

$79,240,000

(Aggregate value of voting and non-voting common equity held by non-affiliates of the registrant based

on the price at which the registrant’s common stock, no par value per share was sold on June 30, 2010)

On March 11, 2011, the registrant had 9,059,809 shares of common stock outstanding.

  

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders of BNC Bancorp to be held on May 17, 2011, are incorporated by reference into Part III.

 

PART I

ITEM 1.        BUSINESS

General

BNC Bancorp (the “Company”, “we”, “our”) was formed in 2002 to serve as a one-bank holding company for Bank of North Carolina (the “Bank”). The Company is registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”) and the bank holding company laws of North Carolina. The Company’s administrative office is located at 1226 Eastchester Drive, High Point, North Carolina 27265 and the Bank’s main office is located at 831 Julian Avenue, Thomasville, North Carolina 27360. The Company’s only business at this time is owning the Bank and its primary source of income is any dividends that are declared and paid by the Bank on its capital stock.

The Bank is a full service commercial bank that was incorporated under the laws of the State of North Carolina on November 15, 1991, and opened for business on December 3, 1991. On April 9, 2010, the Bank acquired certain assets and assumed certain liabilities of Beach First National Bank (“Beach First”) from the Federal Deposit Insurance Corporation (“FDIC”) in a FDIC-assisted transaction. Beach First was a full-service commercial bank headquartered in Myrtle Beach, South Carolina that operated seven branch locations in the Coastal South Carolina region. The Bank made this acquisition to enter into a new market outside the central North Carolina region and to allow the Bank to expand its geographic footprint. The loans and other real estate owned acquired as part of the Purchase and Assumption Agreement are covered by two loss share agreements between the FDIC and the Bank (one for single family residential mortgage loans and the other for all other loans and other real estate owned), which affords the Bank significant loss protection. Under the terms of the loss share agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The term for the loss share agreement for single family residential mortgage loans is in effect for 10 years from the April 9, 2010 acquisition date and the loss share agreement for all other loans and other real estate owned is in effect for 5 years from the acquisition date. The loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date. The South Carolina branches are operated under the name BNC Bank.

As of December 31, 2010, we were the seventh largest North Carolina-domiciled bank by assets and had 23 full-service banking offices along the I-85 / I-40 / I-77 / I-73 corridors in central North Carolina including Davidson, Randolph, Rowan, Forsyth, Guilford, Iredell and Cabarrus Counties and six full-service banking offices along the coast of South Carolina including Horry County, Georgetown County and Beaufort County. The Bank operates under the rules and regulations of and is subject to examination by the FDIC and the North Carolina Commissioner of Banks, North Carolina Department of Commerce (the “Commissioner”). The Bank is also subject to certain regulations of the Federal Reserve governing the reserves to be maintained against deposits and other matters.

The Bank provides a wide range of banking services tailored to the particular banking needs of the communities it serves. It is principally engaged in the business of attracting deposits from the general public and using such deposits, together with other funding from the Bank’s lines of credit, to make primarily consumer and commercial loans. The Bank has pursued a strategy that emphasizes its local affiliations. This business strategy stresses the provision of high quality banking services to individuals and small to medium-sized local businesses. Specifically, the Bank makes 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. The Bank also offers a wide range of banking services, including checking and savings accounts, commercial, installment and personal loans, safe deposit boxes, and other associated services.

The Company targets business professionals and small to mid-size business customers with superior customer service, excellent branch locations and long-term, experienced bankers. The Company believes that the markets it operates in provide a unique opportunity for the Bank, as the Company is able to target customers with credit relationships in the $250,000 to $5 million range that are too small for regional community banks but too large for smaller community banks with lower legal lending limits. The Company has been able to grow assets, deposits and loans while maintaining above peer asset quality with non-performing assets to total assets, excluding assets covered under loss share agreements of 2.75% and 2.04% at December 31, 2010 and 2009, respectively.  Including assets covered by loss share agreements, the nonperforming assets to total assets ratio was 6.29%.  In large part, the Company’s superior asset quality relative to peers is due to our strong team of lenders and asset quality management; most of our asset quality personnel have been in the banking industry for more than 20 years and several members of our senior credit team have experienced several economic and real estate cycles during their banking careers.

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Lending involves credit risk. Credit risk is controlled and monitored through active asset quality management including the use of lending standards, thorough review of potential borrowers, and active asset quality administration. Credit risk management is discussed under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive Summary”, “Asset/Liability Management”, “Lending Activities”, “Asset Quality”, “Nonperforming Assets” and “Analysis of Allowance for Loan Losses”. Also see Item 1A, “Risk Factors.”

Deposits are the primary source of the Bank’s funds for lending and other investment purposes. The Bank attracts both short-term and long-term deposits from the general public locally and out-of-state by offering a variety of accounts and rates. The Bank offers statement savings accounts, negotiable order of withdrawal accounts, money market demand accounts, noninterest-bearing accounts, and fixed interest rate certificates with varying maturities.

Deposit flows are greatly influenced by economic conditions, the general level of interest rates, competition, and other factors. The Bank’s deposits are obtained both from its primary market area and through wholesale sources throughout the United States. The Bank uses traditional marketing methods to attract new customers and savings deposits, including print media advertising and direct mailings.

The Company’s primary sources of revenue are interest and fee income from its lending and investing activities, primarily consisting of making business loans for small- to medium-sized businesses, and, to a lesser extent, from its investment portfolio. In prior years, investments have not been a primary source of income for the Company. In November and December of 2008, the Company purchased $265 million in government agency sponsored mortgage-backed securities and an additional $76 million of bank-qualified municipal government securities during the fourth quarter of 2008 and first quarter of 2009, to leverage the $31.3 million of proceeds from the U.S. Department of the Treasury (“UST”) Capital Purchase Program (“CPP”). Under the CPP, the Company sold shares of preferred stock and issued a warrant to purchase common stock to the UST. During the first quarter of 2009, the Company negotiated an unsecured $250 million money market funding arrangement and interest rate swap agreement resulting in a five-year interest cost of 2.95%. This leverage transaction has provided sufficient net interest income to offset the cost of dividends on the CPP preferred stock and provide additional operational income to the Company. The major expenses of the Company are interest paid on deposits and borrowings and general administrative expenses such as salaries, employee benefits, advertising and office occupancy.

On June 14, 2010, the Company entered into an Investment Agreement (the “Investment Agreement”) with Aquiline BNC Holdings LLC, a Delaware limited liability company (“Aquiline”). Pursuant to the Investment Agreement, Aquiline purchased 892,799 shares of the Company’s common stock, no par value per share, at $10.00 per share and 1,804,566 shares of the Company’s Mandatorily Convertible Non-Voting Preferred Stock, Series B (the “Series B Preferred Stock”) at $10.00 per share. The purchase of common stock and Series B Preferred Stock by Aquiline was part of a $35 million private placement that closed on June 14, 2010 (the “Private Placement”). In addition to Aquiline, other investors, including certain directors of the Company, purchased 802,635 shares of the Company’s common stock at $10.00 per share (collectively, with Aquiline, the “Investors”) as a part of the Private Placement on June 14, 2010. The Investors, other than Aquiline, entered into Subscription and Registration Rights Agreements with the Company in connection with their investment in the Company’s common stock in the Private Placement.

The Bank has experienced steady growth over its twenty-year history. The Company’s assets totaled $2.15 billion and $1.63 billion as of December 31, 2010 and 2009, respectively. Net income for the year ended December 31, 2010 was $7.7 million compared to $6.5 million for the year ended December 31, 2009. Net income available to common shareholders for the year ended December 31, 2010 totaled $5.5 million, or $0.61 per diluted common share, as compared to $4.6 million, or $0.62 per diluted common share, for the year ended December 31, 2009.

Because the Bank is the sole banking subsidiary of the Company, the Company’s operations are located at the Bank level. Throughout this Annual Report, results of operations will relate to the Bank’s operation, unless a specific reference is made to the Company and its operating results other than through the Bank’s business and activities.

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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. 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 loans, 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 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.

The Company operates 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 as severe. Based on SNL Financial data, the Company’s markets had population growth of 18.3% from 2000-2010, versus 10.6% nationwide. The Company’s markets have a projected population growth rate of 8.0% for 2010 to 2015, which is higher than the projected growth rate of 3.9% for the U.S.

As of June 30, 2010, the Company has a deposit market share of 34.6% in its largest market, Davidson County. Rowan 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. 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 numerous NASCAR-related suppliers and team headquarters. 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.

The Company’s primary market areas in South Carolina are located along the coastal regions and predominately center on the Metro regions of Myrtle Beach and Hilton Head Island, South Carolina.  In the three counties in South Carolina in which the Company operates six branch offices, Horry County, Georgetown County and Beaufort County, the Company has deposit market shares of 7.6%, 2.75%, and 1.94%, respectively.

Employees

At December 31, 2010, the Bank had 358 full-time and 14 part-time equivalent employees. When the Company acquired Beach First it retained 78 employees to operate the 6 branches throughout the Myrtle Beach, South Carolina area.

Subsidiaries

The Company is a one-bank holding company for Bank of North Carolina. In addition, the Company has wholly owned subsidiaries to issue trust preferred securities:  BNC Bancorp Capital Trust I, BNC Bancorp Capital Trust II, BNC Bancorp Capital Trust III and BNC Bancorp Capital Trust IV. These long-term obligations, which qualify as Tier I capital for the Company, constitute a full and unconditional guarantee by the Company of the trusts’ obligations under the preferred securities.

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

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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 the Company and the Bank. This summary contains what management believes to be the material information related to the supervision and regulation of the Company and the Bank but is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company. The Company cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which the business of the Company and the Bank may be affected by a statute or regulation.

General. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default or in default. For example, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank’s total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all acceptable capital standards as of the time the bank fails to comply with such capital restoration plan. The Company, as a registered bank holding company, is subject to the regulation of the Federal Reserve. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve under the BHCA also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

In addition, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by its deposit insurance funds as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the deposit insurance funds. The FDIC’s claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

As a result of the Company’s ownership of the Bank, the Company is also registered under the bank holding company laws of North Carolina. Accordingly, the Company is also subject to regulation and supervision by the North Carolina Commissioner of Banks.

Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008 (“EESA”) gave the UST authority to take certain actions to restore liquidity and stability to the U.S. banking markets. Based upon its authority in the EESA, a number of programs to implement EESA have been announced. The first program implemented by the UST is the Capital Purchase Program (“CPP”). Pursuant to this program, the UST, on behalf of the U.S. government, is authorized to purchase preferred stock, along with warrants to purchase common stock, from certain financial institutions, including bank holding companies, savings and loan holding companies and banks or savings associations not controlled by a holding company. The investment will have a dividend rate of 5% per year, until the fifth anniversary of the UST’s investment and a dividend of 9% thereafter. During the time the UST holds securities issued pursuant to this program, participating financial institutions will be required to comply with certain provisions regarding executive compensation and corporate governance. Participation in this program also imposes certain restrictions upon an institution’s dividends to common shareholders and stock repurchase activities. As described further herein, we elected to participate in the CPP and received $31.3 million pursuant to the program.

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American Recovery and Reinvestment Act of 2009. The American Recovery and Reinvestment Act of 2009 (“ARRA”) includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate governance obligations on all current and future CPP recipients, including the Company, until the institution has redeemed the preferred stock, which CPP recipients are now permitted to do under ARRA without regard to the three-year holding period and without the need to raise new capital, subject to approval of its primary federal regulator.

Additionally, ARRA amends Section 111 of EESA to require the UST to adopt additional standards with respect to executive compensation and corporate governance for CPP recipients, which are set forth in the TARP Standards for Compensation and Corporate Governance: Interim Final Rule (“Interim Final Rule”), adopted by the UST on June 15, 2009. Among the executive compensation and corporate governance provisions included in ARRA and the Interim Final Rule are the following:

• an incentive compensation “clawback” provision to cover “senior executive officers” (defined in this instance and below to mean the “named executive officers” for whom compensation disclosure is provided in the company’s proxy statement) and the next 20 most highly compensated employees;

• a prohibition on certain golden parachute payments to cover any payment related to a departure for any reason (with limited exceptions) made to any senior executive officer (as defined above) and the next five most highly compensated employees;

• a limitation on incentive compensation paid or accrued to the five most highly compensated employees of the financial institution, subject to limited exceptions for pre-existing arrangements set forth in written employment contracts executed on or prior to February 11, 2009, and certain awards of restricted stock which may not exceed one-third of annual compensation, are subject to a two-year holding period and cannot be transferred until the UST’s preferred stock is redeemed in full;

• a requirement that a company’s chief executive officer and chief financial officer provide in annual securities filings, a written certification of compliance with the executive compensation and corporate governance provisions of the Interim Final Rule;

• an obligation for the compensation committee of the board of directors to evaluate with a company’s chief risk officer certain compensation plans to ensure that such plans do not encourage unnecessary or excessive risks or the manipulation of reported earnings;

• a requirement that companies adopt a company-wide policy regarding excessive or luxury expenditures;

• a requirement that companies permit a separate, non-binding shareholder vote to approve the compensation of executives; and

• a provision that allows the UST to review compensation paid prior to enactment of ARRA to senior executive officers and the next 20 most highly-compensated employees to determine whether any payments were inconsistent with the executive compensation restrictions of EESA, CPP or otherwise contrary to the public interest.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ( the “Dodd-Frank Act”). The Dodd-Frank Act will have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. A summary of certain provisions of the Dodd-Frank Act is set forth below.

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· Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

· The Consumer Financial Protection Bureau (“Bureau”). The Dodd-Frank Act creates the Bureau within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank customers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state- chartered institutions.

· Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. In December 2010, the FDIC increased the reserve ratio to 2.0 percent. The Dodd- Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits.

· Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

· Transactions with Insiders. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

· Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Current banking law limits a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

· Compensation Practices. The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. In June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior. Together, the Dodd-Frank Act and the recent guidance on compensation may impact the current compensation policies at the Company.

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· Holding Company Capital Levels. The Dodd-Frank Act requires bank regulators to establish minimum capital levels for holding companies that are at least of the same nature as those applicable to financial institutions. All trust preferred securities, or TRUPs, issued by bank or thrift holding companies after May 19, 2010 will be counted as Tier II Capital (with an exception for certain small bank holding companies). Bank holding companies with at least $15 billion in assets as of December 31, 2009 will have five years to comply with this provision, and starting on January 1, 2013, these holding companies will phase in the requirement by deducting one-third of TRUPs per year for the following three years from Tier 1 capital. TRUPs issued prior to May 19, 2010 by bank holding companies with less than $15 billion in assets as of December 31, 2009 are exempt from these capital deductions entirely.

We expect that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

Capital Requirements for the Bank. The Bank, as a North Carolina commercial bank, is required to maintain a surplus account equal to 50% or more of its paid-in capital stock. As a North Carolina chartered, FDIC-insured commercial bank which is not a member of the Federal Reserve System, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDIC’s regulations, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated assets; all other banks are required to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%. At December 31, 2010, the Bank’s leverage ratio was 7.42%.

Dividend and Repurchase Limitations. The Company must obtain Federal Reserve approval prior to repurchasing common stock in excess of 10% of its net worth during any twelve-month period unless the Company (i) both before and after the redemption satisfies capital requirements for “well capitalized” state member banks; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues. As long as the UST holds equity in the Company pursuant to the CPP, UST approval is required for the Company to repurchase shares of outstanding common stock.

Although the payment of dividends and repurchase of stock by the Company are subject to certain requirements and limitations of North Carolina corporate law, except as set forth in this paragraph, neither the Commissioner nor the FDIC have promulgated any regulations specifically limiting the right of the Company to pay dividends and repurchase shares. However, the ability of the Company to pay dividends or repurchase shares may be dependent upon the Company’s receipt of dividends from the Bank.

North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Dividends may be paid by the Bank from undivided profits, which are determined by deducting and charging certain items against actual profits, including any contributions to surplus required by North Carolina law. Also, an insured depository institution, such as the Bank, is 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).

Under the terms of the CPP, the UST has a preferential right to the payment of cumulative dividends on the CPP Series A preferred stock. No dividends are permitted to be paid to common shareholders unless all accrued and unpaid dividends for all past dividend periods on the CPP preferred stock were fully paid. In the case of the Company, any increase in dividends to common shareholders above $0.05 per share quarterly is subject to the consent of the UST for the first three years of the CPP preferred stock investment.

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Deposit Insurance. The deposit accounts of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC. Pursuant to EESA and ARRA, the maximum deposit insurance amount per depositor was temporarily increased from $100,000 to $250,000. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009. The Dodd-Frank Act also provides unlimited deposit insurance for non-interest bearing transaction accounts through December 31, 2013.

The FDIC issues regulations and conducts periodic examinations, requires the filing of reports and generally supervises the operations of its insured banks. This supervision and regulations are intended primarily for the protection of depositors. Any insured bank that is not operated in accordance with or does not conform to FDIC regulations, policies and directives may be sanctioned for noncompliance. Civil and criminal proceedings may be instituted against any insured bank or any director, officer or employee of such bank for the violations of applicable laws and regulations, breaches of fiduciary duties or engaging in any unsafe or unsound practice. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose.

The Bank is subject to insurance assessments imposed by the FDIC. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings.

Recently, the FDIC has been actively seeking to replenish the DIF. The FDIC increased risk-based assessment rates uniformly by seven basis points, on an annual basis, beginning in the first quarter of 2009. On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each insured depository institution’s qualifying assets less Tier 1 capital as of June 30, 2009. The FDIC collected this special assessment on September 30, 2009. On November 12, 2009, the FDIC adopted a final rule that required insured financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for the following three years. Such prepaid assessments were collected on December 30, 2009 at a rate based on the insured institution’s modified third quarter 2009 assessment rate. The Company’s prepaid assessment was $8.5 million. Under the Dodd-Frank Act, the minimum designated reserve ratio of the DIF increased from 1.15 percent to 1.35 percent of estimated insured deposits. Additionally, the Dodd-Frank Act revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under the FDIC’s proposed rules, the assessment base will change from adjusted domestic deposits to average consolidated total assets minus average tangible equity.

FDIC Temporary Liquidity Guarantee Program. On October 14, 2008, the FDIC announced its Temporary Liquidity Guarantee Program (“TLGP”), which is comprised of the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program (“TAGP”).

The TAGP provided unlimited deposit insurance coverage through December 31, 2009, for non-interest bearing transaction accounts and certain interest-bearing accounts (negotiable order of withdrawal (NOW) accounts with interest rates of 0.50% or less and lawyers trust accounts) at FDIC-insured depository institutions.  Depository institutions participating in the TAGP were assessed, on a quarterly basis, an annualized 10 basis points fee on the balance of each covered account in excess of the existing FDIC deposit insurance limit of $250,000 that was established on a temporary basis, through December 31, 2009.   The $250,000 deposit insurance coverage limit was scheduled to return to $100,000 on January 1, 2010, but was extended by congressional action until December 31, 2013.  The TLGP was extended to cover debt of FDIC-insured institutions issued through April 30, 2010, and the TAGP was extended through June 30, 2010. The Company participated in the TAGP since its beginning, and has elected to continue its participation during the extension period.

The DGP provides an FDIC guarantee of certain senior unsecured debt of FDIC-insured institutions and their holding companies.  The unsecured debt must have been issued on or after October 14, 2008 and not later than October 31, 2009, and the guarantee is effective through the earlier of the maturity date or June 30, 2012.  The DGP coverage limit is generally 125% of the eligible entity’s eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their liabilities as of September 30, 2008.  The proceeds of debt guaranteed under the DGP may not be used to prepay debt that is not guaranteed by the FDIC.  Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012.   The Company was eligible to participate in the DGP although it chose to not issue any debt under the program.

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FDIC Liquidation Authority under the Dodd-Frank Act. In January 2011, the FDIC issued an interim final rule on depositor preference which clarifies how the FDIC will treat certain creditors’ claims under the FDIC’s new liquidation authority under the Dodd-Frank Act, whereby the FDIC may be appointed as receiver for a financial company if the failure of such company and its liquidation under the Bankruptcy Code or other insolvency proceeding would pose significant risks to U.S. financial stability. Pursuant to the interim final rule, the FDIC will allow additional payments to a creditor in rare circumstances after the FDIC’s board of directors has determined that such payments meet certain statutory standards. The payments would be subject to recoupment; however, if the ultimate recoveries are insufficient to repay any temporary government-provided liquidity support. The interim final rule also (1) provides the FDIC with authority to continue a company’s operations by paying for services provided by employees and others; (2) clarifies how damages will be calculated for creditors’ contingent claims; and (3) describes the application of proceeds from the liquidation of subsidiaries.

Federal Deposit Insurance Corporation Improvement Act of 1991. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) provides for, among other things, (i) publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, (ii) the establishment of uniform accounting standards by federal banking agencies, (iii) the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or receiver, and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.

A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under the regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity. FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution.

Federal Home Loan Bank System. The FHLB system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta and under the its capital plan, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta under the new activity-based stock ownership requirement. On December 31, 2010, the Bank was in compliance with this requirement.

Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings of  “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “satisfactory” rating in its last CRA examination which was conducted during February 2008.

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Changes in Control. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-disapproval) must be obtained prior to any person acquiring control of the Company. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the Company or controls in any manner the election of a majority of the directors of the Company. Control is presumed to exist if a person acquires more than 10% of any class of voting stock and the stock is registered under Section 12 of the Securities Exchange Act of 1934 as amended (the “Exchange Act”) or the acquiror will be the largest shareholder after the acquisition.

Federal Securities Law. The Company has registered its common stock with the Securities and Exchange Commission (the “SEC”) pursuant to Section 12(g) of the Exchange Act. As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company.

Transactions with Affiliates. Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer. The Dodd-Frank Act also increases requirements relating to transactions with affiliates. See “The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” discussed earlier herein.

Loans to One Borrower. The Bank is subject to the Commissioner’s loans to one borrower limits which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus. The Dodd-Frank Act expands the scope of these restrictions. See The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” discussed earlier herein.

Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act (the “GLB Act”) dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act has expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. However, this expanded authority also may present us with new challenges as our larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions. The GLB Act likely will have a significant economic impact on the banking industry and on competitive conditions in the financial services industry generally.

USA Patriot Act of 2001. In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the “Patriot Act”). The Patriot Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

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Interstate Banking and Branching. The BHCA was amended by the Interstate Banking Act. The Interstate Banking Act provides that adequately capitalized and managed financial and bank holding companies are permitted to acquire banks in any state.

State law prohibiting interstate banking or discriminating against out-of-state banks are preempted. States are not permitted to enact laws opting out of this provision; however, states are allowed to adopt a minimum age restriction requiring that target banks located within the state be in existence for a period of years, up to a maximum of five years, before a bank may be subject to the Interstate Banking Act. The Interstate Banking Act, as amended by the Dodd-Frank Act, establishes deposit caps which prohibit acquisitions that result in the acquiring company controlling 30% or more of the deposits of insured banks and thrift institutions held in the state in which the target maintains a breach or 10% or more of the deposits nationwide. States have the authority to waive the 30% deposit cap. State-level deposit caps are not preempted as long as they do not discriminate against out-of-state companies, and the federal deposit caps apply only to initial entry acquisitions.

Under the Dodd-Frank Act, national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. North Carolina law permits a state bank to establish a branch of the bank anywhere in the state. Accordingly, under the Dodd-Frank Act, a bank with its headquarters outside the State of North Carolina may establish branches anywhere within North Carolina.

Government Monetary Policies and Economic Controls. Our earnings and growth, as well as the earnings and growth of the banking industry, are affected by the credit policies of monetary authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit in order to combat recession and curb inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, changes in reserve requirements against member bank deposits, and changes in the Federal Reserve discount rate. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.

In view of changing conditions in the national economy and in money markets, as well as the effect of credit policies by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, and loan demand, or their effect on our business and earnings or on the financial condition of our various customers.

Other. The federal banking agencies, including the FDIC, have developed joint regulations requiring annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state chartered institutions examined by state regulators, and establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards when such compensation would endanger the insured depository institution or would constitute an unsafe practice.

In addition, the Bank is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting laws and laws relating to branch banking. The Bank, as an insured North Carolina commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.

Under Chapter 53 of the North Carolina General Statutes, if the capital stock of a North Carolina commercial bank is impaired by losses or otherwise, the Commissioner is authorized to require payment of the deficiency by assessment upon the bank’s shareholders, pro rata, and to the extent necessary, if any such assessment is not paid by any shareholder, upon 30 days notice, to sell as much as is necessary of the stock of such shareholder to make good the deficiency.

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ITEM 1A.        RISK FACTORS

Risks Related to Recent Economic Conditions and Governmental Response Efforts

Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally. The global, U.S., North Carolina and South Carolina economies are experiencing significantly reduced business activity and consumer spending as a result of, among other factors, disruptions in the capital and credit markets. Dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:

• a decrease in the demand for loans or other products and services offered by us;

• a decrease in the value of our loans or other assets secured by consumer or commercial real estate;

• a decrease to deposit balances due to overall reductions in the accounts of customers;

• an impairment of certain intangible assets or investment securities;

• a decreased ability to raise additional capital on terms acceptable to us or at all; or

• an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs and provision for credit losses, which would reduce our earnings.

Until conditions improve, we expect our business, financial condition and results of operations to be adversely affected.

Recent and future legislation and regulatory initiatives to address the current financial services market and general economic conditions may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall U.S. economy. Recent and future legislative and regulatory initiatives to address current financial services market and economic conditions, such as EESA, ARRA and the Dodd-Frank Act, may not achieve their intended objectives. In addition, Treasury and banking regulators have implemented, and likely will continue to implement, various other programs to address capital and liquidity issues in the banking system. There can be no assurance as to the actual impact that any of the recent, or future, legislative and regulatory initiatives will have on the financial markets and the overall economy. Any failure of these initiatives to improve the financial markets and the economy, and a worsening of the current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

The Dodd-Frank Act was signed into law on July 21, 2010. While many of the provisions of the Dodd-Frank Act are aimed at financial institutions significantly larger than us, it includes several items that could significantly impact our business. These include, among others:

· the creation of the Bureau of Consumer Financial Protection (“BCFP”) authorized to promulgate and enforce consumer protection regulations relating to financial products;

· the establishment of strengthened capital and prudential standards for banks and bank holding companies;

· enhanced regulation of financial markets, including derivatives and securitization markets; and

· a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000.

A number of provisions of the Dodd-Frank Act remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict what the final form of these rules will be when implemented by the respective agencies, but management believes that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance assessment rates, possible future special assessments by the FDIC, and the costs of compliance with disclosure and reporting requirements and examinations by the BCFP, could have a significant impact on our business, financial condition, and results of operations.

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The BCFP may reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices, which may directly impact the business operations of depository institutions offering consumer financial products or services, including the Bank.  The BCFP has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer to consumers covered financial products and services. The BCFP has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is new under the law. The full scope of the impact of this authority has not yet been determined as the implementing rules of the Dodd-Frank Act with respect to the BCFP have not yet been released. Moreover, the Bank will be supervised and examined by the BCFP for compliance with the BCFP’s regulations and policies. The costs and limitations related to this additional regulatory reporting regimen have yet to be fully determined, although they may be material and the limitations and restrictions that will be placed upon the Bank with respect to its consumer product offering and services will also likely produce significant, material effects on the Bank’s (and the Company’s) profitability.

Additional requirements under our regulatory framework, especially those imposed under the Dodd-Frank Act, ARRA, EESA, or other legislation intended to strengthen the U.S. financial system, could adversely affect us. The President, Congress, the Federal Reserve, the Treasury, the FDIC and others have taken numerous actions to address the current liquidity and credit situation in the financial markets. These measures include actions to encourage loan restructuring and modification for homeowners, the establishment of significant liquidity and credit facilities for financial institutions and investment banks, and coordinated efforts to address liquidity and other weaknesses in the banking sector. As part of EESA, the Treasury created the Capital Purchase Program, or CPP, which authorizes the Treasury to invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holdings companies for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On February 17, 2009, ARRA was enacted as a sweeping economic recovery package intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. We participated in the CPP and sold $31.2 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), and a warrant to purchase 543,337 shares of our common stock to the Treasury. Future participation in this or similar programs may subject us to additional restrictions and regulation. There can be no assurance as to the actual impact that EESA or its programs, including the CPP, and ARRA or its programs, will have on the national economy or financial markets.

Further, federal and state regulatory authorities continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies and implementation of EESA, AARA, and the Dodd-Frank Act, could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we may offer or increasing the ability of non-banks to offer competing financial services and products. While we cannot predict the regulatory changes that may be borne out of the current economic condition, and we cannot predict whether we will become subject to increased regulatory scrutiny by any of these regulatory agencies, any regulatory changes or scrutiny could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, credit unions, savings and loan associations and other institutions. We cannot predict whether additional legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition or results of operations.

The limitations on incentive compensation contained in the ARRA may adversely affect our ability to retain our highest performing employees. In the case of a company such as BNC Bancorp that received CPP funds, the ARRA, and subsequent regulations issued by UST, contain restrictions on bonus and other incentive compensation payable to the company’s senior executive officers. As a consequence, we may be unable to create a compensation structure that permits us to retain our highest performing employees and attract new employees of a high caliber. If this were to occur, our businesses and results of operations could be adversely affected.

Our participation in the CPP imposes restrictions and obligations on us that limit our ability to increase dividends, repurchase shares of our common stock and access the equity capital markets. On December 5, 2008, we issued and sold (i) 31,260 shares of Series A Preferred Stock and (ii) a warrant to purchase 543,337 shares of our common stock (“Warrant”) to the UST as part of its CPP. Prior to December 5, 2011, unless we have redeemed all of the Series A Preferred Stock or the UST has transferred all of the Series A Preferred Stock to a third party, the Securities Purchase Agreement pursuant to which such securities were sold, among other things, limits the payment of dividends on our common stock to a maximum quarterly dividend of $0.05 per share without prior regulatory approval, limits our ability to repurchase shares of our common stock (with certain exceptions, including the repurchase of our common stock to offset share dilution from equity-based compensation awards), and grants the holders of such securities certain registration rights which, in certain circumstances, impose lock-up periods during which we would be unable to issue equity securities. In addition, unless we are able to redeem the Series A Preferred Stock during the first five years, the dividends on this capital will increase substantially at that point, from 5% to 9%. Depending on market conditions at the time, this increase in dividends could significantly impact our liquidity.

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The soundness of other financial institutions could adversely affect us. Since mid-2007, the financial services industry as a whole, as well as the securities markets generally, have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. Financial institutions in particular have been subject to increased volatility and an overall loss in investor confidence.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and other institutional clients.

From time to time, we utilize derivative financial instruments, primarily to hedge our exposure to changes in interest rates, but also to hedge cash flow. By entering into these transactions and derivative instrument contracts, we expose ourselves to counterparty credit risk in the event of default of our counterparty or client. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings, limiting our exposure to any single counterparty and regularly monitoring our market position with each counterparty. Nonetheless, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition or results of operations.

Current levels of market volatility are unprecedented. The capital and credit markets have been experiencing volatility and disruption for more than two years. The volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

We may be required to pay significantly higher FDIC deposit insurance premiums and assessments in the future. Recent insured depository institution failures, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the DIF to historical lows. The FDIC recently increased the designated reserve ratio from 1.25 to 2.00. In addition, the deposit insurance limit on FDIC deposit insurance coverage generally has increased to $250,000, which may result in even larger losses to the DIF. These developments have caused an increase to our assessments, and the FDIC may be required to make additional increases to the assessment rates and levy additional special assessments on us. Higher assessments increase our non-interest expense.

Since 2009, our assessment rates, which also include our assessment for participating in the FDIC’s TAGP have increased. Additionally, on May 22, 2009, the FDIC announced a final rule imposing a special 5.00 basis points emergency assessment as of June 30, 2009, payable September 30, 2009, based on assets minus Tier 1 Capital at June 30, 2009, but the amount of the assessment was capped at 10.00 basis points of domestic deposits. Finally, on November 12, 2009, the FDIC adopted a new rule requiring insured institutions to prepay on December 30, 2009, estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. We prepaid an assessment of $7.3 million, which incorporated a uniform increase effective January 1, 2011.

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These higher FDIC assessment rates and special assessments have had and will continue to have an adverse impact on our results of operations. Our FDIC insurance related cost was $3.0 million and $2.8 million for the years ended December 31, 2010 and December 31, 2009, respectively, compared to $642,000 for the year ended December 31, 2008. We are unable to predict the impact in future periods, including whether and when additional special assessments will occur.

Higher insurance premiums and assessments increase our costs and may limit our ability to pursue certain business opportunities. We also may be required to pay even higher FDIC premiums than the recently increased level, because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.

Risks Related to Our Business

Failure to comply with the terms of the loss sharing agreements with the FDIC may result in significant losses. On April 9, 2010, the Bank acquired certain assets and assumed certain liabilities of Beach First from the FDIC in a FDIC-assisted transaction. Beach First was a full-service commercial bank headquartered in Myrtle Beach, South Carolina that operated seven branch locations in the coastal South Carolina region. The loans and other real estate owned acquired as part of the Purchase and Assumption Agreement, are covered by two loss share agreements between the FDIC and the Bank (one for single family residential mortgage loans and the other for all other loans and other real estate owned), which affords the Bank significant loss protection. Under the terms of the loss share agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The term for the loss share agreement for single family residential mortgage loans is in effect for 10 years from the April 9, 2010 acquisition date and the loss share agreement for all other loans and other real estate owned is in effect for 5 years from the acquisition date. The loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date.

The Purchase Assumption Agreement and the related loss share agreements between the FDIC and the Bank have specific, detailed and extensive compliance, servicing, notification and reporting requirements, including certain restrictions on our change of control. The loss sharing agreements prohibit the assignment by the Bank of its rights under the loss sharing agreements and the sale or transfer of any subsidiary of the Bank holding title to assets covered under the loss sharing agreements without the prior written consent of the FDIC. An assignment would include (i) the merger or consolidation of the Bank with or into another bank, if we will own less than 66.66% of the equity of the resulting bank; (ii) our merger or consolidation with or into another company, if our shareholders will own less than 66.66% of the equity of the resulting company; (iii) the sale of all or substantially all of the assets of the  Bank to another company or person; or (iv) a sale of shares by any one or more shareholders of the Company or the Bank that would effect a change in control of the Bank. The Bank’s rights under the loss sharing agreements will terminate if any assignment of the loss sharing agreements occurs without the prior written consent of the FDIC.

Our failure to comply with the terms of the loss share agreements or to properly service the loans and bank owned real estate under the requirements of the loss share agreements may cause individual loans or large pools of loans to lose eligibility for loss share payments from the FDIC. This could result in material losses that are currently not anticipated.

We may have difficulties integrating Beach First’s operations into our own or may fail to realize the anticipated benefits of the acquisition. Our acquisition of Beach First involves the integration of certain operations that have previously operated independently of the Company. Successful integration of Beach First’s operations will depend primarily on our ability to consolidate Beach First’s operations, systems and procedures into those of ours to eliminate redundancies and costs. We may not be able to integrate the operations without encountering difficulties, including, without limitation:

•  the loss of key employees and customers;

•  possible inconsistencies in standards, control procedures and policies; and

•  unexpected problems with costs, operations, personnel, technology or credit.

In addition, any enhanced earnings or cost savings that we expect to result from the acquisition, including by reducing costs, improving efficiencies, and cross-marketing, may not be fully realized or may take longer to be realized than expected.

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We rely on dividends from the Bank for most of our revenue. The Company is a separate and distinct legal entity from the Bank. The Company receives substantially all of its revenue from dividends received from the Bank. These dividends are the principal source of funds to pay dividends on our common and preferred stock, and interest and principal on our outstanding debt securities. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. In the event the Bank is unable to pay dividends to the Company, the Company may not be able to service debt, pay obligations, or pay dividends on its common stock. The inability to receive dividends from the Bank could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Bank is exposed to risks in connection with the loans it makes. A significant source of risk for us and the Bank arises from the possibility that losses will be sustained by the Bank because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Bank has underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that it believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying its loan portfolio. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect the Bank’s results of operations.

If our nonperforming assets increase, our earnings will suffer. At December 31, 2010, our nonperforming assets (which consist of non-accruing loans, loans 90+ days delinquent, and foreclosed real estate assets) totaled $135.3 million, or 6.29% of total assets, which is an increase of $101.9 million over nonperforming assets at December 31, 2009.  The majority of this increase was from the nonperforming assets that were acquired from our acquisition of Beach First. At December 31, 2008, our nonperforming assets were $18.3 million, or 1.17% of total assets. Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or real estate owned. We must reserve for probable losses, which is established through a current period charge to the provision for loan losses as well as from time to time, as appropriate, the write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity. Finally, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly.

Our loan portfolio includes loans with a higher risk of loss. We originate commercial real estate loans, construction and development loans, consumer loans, and residential mortgage loans primarily within our market area. Commercial real estate, commercial, and construction and development loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had greater credit risk than other loans for the following reasons:

• Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of December 31, 2010, commercial and residential real estate loans comprised approximately 44.9% and 26.7%, respectively, of our total loan portfolio.

• Commercial and Industrial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2010, commercial and industrial loans comprised approximately 9.1% of our total loan portfolio.

• Construction and Development Loans. The risk of loss is largely dependent on our initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If our estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of December 31, 2010, commercial and residential construction and development loans comprised approximately 17.6% of our total loan portfolio.

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• Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. As of December 31, 2010, consumer loans comprised approximately 1.0% of our total loan portfolio.

Our allowance for loan losses may be insufficient. All borrowers carry the potential to default and our remedies to recover (seizure and/or sale of collateral, legal actions, guarantees, etc.) may not fully satisfy money previously lent. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments different than those of management. An increase in the allowance for loan losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations.

We may need additional capital resources in the future and these capital resources may not be available on acceptable 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, to fund losses or additional provisions for loan losses in the future, or to maintain certain capital levels in accordance with banking regulations. Such financing may not be available to us on acceptable terms or at all. Our ability to raise additional capital may also be restricted by the Loss Share Agreements we entered into with the FDIC if the capital raise would effect a change in control of the Bank.

Further, in the event that we offer additional shares of our common stock in the future, our articles of incorporation do not provide shareholders with preemptive rights and such shares may be offered to investors other than our existing shareholders for prices at or below the then current market price of our common stock, all at the discretion of the Board. If we do sell additional shares of common stock to raise capital, the sale could reduce market price per share of common stock and dilute your ownership interest and such dilution could be substantial.

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;

• interest rates;

• real estate tax rates;

• operating expenses of the mortgaged properties;

• supply of and demand for rental units or properties;

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

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• zoning laws;

• governmental rules, regulations and fiscal policies; and

• acts of God.

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.

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 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.

Consumers may decide not to use banks to complete their financial transactions, which could limit our revenue. Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks through the use of various electronic payment systems. 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 a material adverse effect on our financial condition and results of operation.

We continue to hold and acquire a significant amount of other real estate, which has led to increased operating expenses and vulnerability to additional declines in real property values. We foreclose on and take title to the real estate serving as collateral for many of our loans as part of our business. Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as “other real estate” or “ORE” property. At December 31, 2010, we had ORE with an aggregate book value of $39.7 million, compared to $14.3 million at December 31, 2009, an increase of $25.4 million.  Of this increase, $15.8 million is covered under loss share agreements. Increased ORE balances have led to greater expenses as we incur costs to manage and dispose of the properties. We expect that our earnings will continue to be negatively affected by various expenses associated with ORE, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with assets that are tied up in ORE. Any further decrease in real estate market prices may lead to additional ORE write-downs, with a corresponding expense in our statement of operations.

We are in the process of improving our policies and procedures relating to the administration of both performing and non-performing loans, however, this process is not currently complete. The administration of loans is an important function in attempting to mitigate any future losses related to our non-performing assets. We are currently in the process of improving and centralizing our credit administration function. While we are making efforts to complete this process in a timely manner, we can give you no assurances that we will be able to successfully update and improve our credit administration policies and procedures. If we are unable to do so in a timely manner or at all, our loan losses could increase and this could have a material adverse effect on our results of operations and the value of, or market for, our common stock.

Loss of key personnel could adversely impact results. The success of the Bank has been and will continue to be greatly influenced by the ability to retain the services of existing senior management. The Bank has benefited from consistency within its senior management team, with its top five executives averaging over 16 years of service with the Bank. The Company has entered into employment contracts with each of these top management officials. Nevertheless, the unexpected loss of the services of any of the key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse impact on the business and financial results of the Bank.

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Changes in interest rates affect profitability and assets. Changes in prevailing interest rates may hurt the Bank’s business. The Bank derives its income primarily from the difference or “spread” between the interest earned on loans, securities and other interest earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more the Bank earns. When market rates of interest change, the interest the Bank receives on its assets and the interest the Bank pays on its liabilities will fluctuate. This can cause decreases in the “spread” and can adversely affect the Bank’s income. Changes in market interest rates could reduce the value of the Bank’s financial assets. Fixed-rate investments, mortgage-backed and related securities and mortgage loans generally decrease in value as interest rates rise. In addition, interest rates affect how much money the Bank lends. For example, when interest rates rise, the cost of borrowing increases and the loan originations tend to decrease. If the Bank is unsuccessful in managing the effects of changes in interest rates, the financial condition and results of operations could suffer.

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability. Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market or other non-depository investments, as providing superior expected returns or seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments, including products offered by other financial institutions or non-bank service providers. Additional increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding costs.

The Company and the Bank compete with much larger companies for some of the same business. The banking and financial services business in our market areas continues to be a competitive field and it is becoming more competitive as a result of:

• changes in regulations;

• changes in technology and product delivery systems; and

• the accelerating pace of consolidation among financial services providers.

We may not be able to compete effectively in our markets, and our results of operations could be adversely affected by the nature or pace of change in competition. We compete for loans, deposits and customers with various bank and nonbank financial services providers, many of which are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services.

Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.

The Company is subject to environmental liability risk associated with lending activities. A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations of enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.

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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 cause us to enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.

Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition. Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

From time to time the Financial Accounting Standards Board (FASB) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.

Impairment of investment securities, goodwill, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations. In assessing the impairment of investment securities, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. Assessment of goodwill and such other intangible assets could result in circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.

We rely on other companies to provide key components of our business infrastructure. Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.

Our information systems may experience an interruption or breach in security. We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity 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 our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a 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 adverse effect on our financial condition and results of operations.

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Government regulations may prevent or impair the Company’s ability to pay dividends, engage in mergers or operate in other ways. Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. The Bank is subject to supervision and periodic examination by the FDIC and the Commissioner. The Company is subject to regulation by the Federal Reserve and the Commissioner. Banking regulations, designed primarily for the protection of depositors, may limit the growth and the return to the Company’s stockholders by restricting certain activities, such as:

• the payment of dividends to our stockholders;

• possible mergers with or acquisitions of or by other institutions;

• our desired investments;

• loans and interest rates on loans;

• interest rates paid on our deposits;

• the possible expansion of our branch offices; and

• our ability to provide securities or trust services.

The Bank also is subject to capitalization guidelines set forth in federal legislation, and could be subject to enforcement actions to the extent that it is found by regulatory examiners to be undercapitalized. The Company cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on the Company’s future business and earnings prospects. The cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

Acquisitions may disrupt our business and dilute shareholder value.  We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services.

Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things:

• difficulty in estimating the value of the target company;

• payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term;

• potential exposure to unknown or contingent liabilities of the target company;

• exposure to potential asset quality issues of the target company;

• there may be volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts;

• difficulty and expense of integrating the operations and personnel of the target company;

• inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits;

• potential disruption to our business;

• potential diversion of our management’s time and attention;

• the possible loss of key employees and customers of the target company; and

• potential changes in banking or tax laws or regulations that may affect the target company.

Risks Related to our Common Stock

Our stock price can be volatile. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

• actual or anticipated variations in quarterly results of operations;

• recommendations by securities analysts;

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• operating results and stock price performance of other companies that investors deem comparable to us;

• news reports relating to trends, concerns, and other issues in the financial services industry;

• perceptions in the marketplace regarding us and/or our competitors;

• new technology used or services offered by competitors;

• significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; and

• changes in government regulations.

Our trading volume has been low compared with larger national and regional banks. Our common stock is traded on the NASDAQ Capital Market. However, the trading volume of our common stock is relatively low when compared with more seasoned companies listed on the NASDAQ Capital Market, NASDAQ Global Select Market, or other consolidated reporting systems or stock exchanges. Thus, the market in our common stock may be limited in scope relative to other larger companies. In addition, we cannot say with any certainty that a more active and liquid trading market for its common stock will develop.

We have issued Series A Preferred Stock and subordinated debentures, and the Bank has issued subordinated debt securities, all of which rank senior to our common stock. We have  issued 31,260 shares of Series A Preferred Stock. This series of preferred stock ranks senior to shares of the Series B Preferred Stock and the common stock. As a result, we must make dividend payments on our Series A Preferred Stock before any dividends can be paid on our Series B Preferred Stock or our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of our Series A Preferred Stock must be satisfied before any distributions can be made on our Series B Preferred Stock or our common stock. If we do not remain current in the payment of dividends on the Series A Preferred Stock, no dividends may be paid on our Series B Preferred Stock or our common stock. In addition, we have issued $23.7 million in subordinated debentures in connection with its issuance of trust preferred securities, and the Bank has issued $8.0 million in subordinated debt securities. These debentures and debt securities also rank senior to our common stock.

We have also issued Series B Preferred Stock, which carries liquidation rights senior to our common stock. We have issued 1,804,566 shares of Series B Preferred Stock to Aquiline. This series of preferred stock ranks junior, with regard to dividends, to the Series A Preferred Stock, and will receive such dividends and other distributions as declared and paid by us to all holders of common stock, on an as-converted basis. The Series B Preferred Stock should have the same priority, with regard to dividends, as our common stock. However, in the event of our liquidation, dissolution or winding-up of affairs, after payment or provision for payment of our debts and other liabilities, holders of the Series B Preferred Stock will be entitled to receive, out of our assets after any payment required to be made to any holders of the Series A Preferred Stock and any other series of preferred stock that we issued from time to time unless so designated in such series of preferred stock, (i) $0.01 per share, (ii) the amount that a holder of shares of our common stock would be entitled to receive (based on each share of Series B Preferred Stock being converted into one share of common stock immediately prior to the liquidation, dissolution or winding up, assuming such shares of common stock were outstanding) and (iii) an amount equal to all declared and unpaid dividends for prior dividend periods, before any distribution shall be made to holders of the common stock or any other class of stock or series thereof ranking junior to the Series B Preferred Stock with respect to the distribution of assets.

Our Series A Preferred Stock reduces net income available to holders of our common stock and earnings per common share, and the Warrant and Series B Preferred Stock may be dilutive to holders of our common stock. The dividends declared on our Series A Preferred Stock will reduce any net income available to holders of common stock and our earnings per common share. Our Series A Preferred Stock will also receive preferential treatment in the event of sale, merger, liquidation, dissolution or winding up of our company, and our Series B Preferred Stock will receive preferential treatment in the event of liquidation, dissolution or winding up of our company. Additionally, the ownership interest of holders of our common stock will be diluted to the extent the Warrant is exercised or the Series B Preferred Stock is converted.

Our common stock is not FDIC insured. The Company’s common stock is not a savings or deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental agency and is subject to investment risk, including the possible loss of principal. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of our common stock may lose some or all of their investment.

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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 of dividends paid on our common stock. This could adversely affect the market price of our common stock. Because of our agreements with the UST as part of the CPP under the TARP, prior to December 5, 2011, or the date on which the UST’s senior preferred stock investment has been fully redeemed or transferred, if earlier, we may not pay quarterly dividends on our common stock greater than $0.05 per share without the UST’s consent. In addition, we may not pay dividends on our common stock unless all accrued and unpaid dividends for all past dividend periods are fully paid on our outstanding preferred stock issued to the UST. 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.

There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock. The Company is not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of the Company’s common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.

There may be future issuances of additional subordinated debentures, which may adversely affect the market price of our common stock. The Company may issue additional subordinated debentures in connection with the issuance of additional trust preferred securities. Such additional debentures would rank senior to the Company’s common stock. The market value of the Company’s common stock could decline as a result of future issuances or the perception that such issuances could occur.

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.

ITEM 2.                PROPERTIES

At December 31, 2010, the Company conducted its business from its headquarters located in High Point, North Carolina, the Bank’s main office in Thomasville and 17 other branch offices and one limited services office in North Carolina and six branch offices in South Carolina. The following list sets forth certain information regarding the Company’s and Bank’s properties.

Owned properties:

Main Office: 831 Julian Avenue, Thomasville, NC  27360.

Archdale Branch Office: 113 Trindale Road, Archdale, NC  27263.

Lexington Branch Office: 115 East Center Street, Lexington, NC  27292.

North Thomasville Branch Office: 1317 National Highway, Thomasville, NC  27360.

Kernersville Branch Office:  211 Broad Street, Kernersville, NC  27284.

Oak Ridge Branch Office:  8000 Linville Road, Oak Ridge, NC  27310.

Elm Street Branch Office:  801 North Elm Street, High Point, NC  27262.

Eastchester Branch Office: 2630 Eastchester Dr., High Point, NC 27265.

Salisbury Branch Office:  415 Jake Alexander Boulevard West, Salisbury, NC  28147.

Harrisburg Branch Office:  3890 Main Street, Harrisburg, NC 28075.

N. Davidson Branch Office:  6355 Old US Hwy 52, Lexington, NC 27295.

Concord Branch Office:  271 Copperfield Blvd., NE Concord, NC  28025

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Raleigh Branch Office:  4525 Falls of Neuse Road, Raleigh, NC  27609

Leased properties:

High Point Administrative Offices:  1224/1226 Eastchester Drive, High Point, NC 27265.

Friendly Center Branch Office:  3202 Northline Avenue, Greensboro, NC 27408.

Dover Road Branch Office:  1110 Dover Road, Greensboro, NC 27408.

Elm Street Branch Office:  112 N. Elm Street, Greensboro, NC 27404.

Winston Salem Branch Office:  1810 N. Peace Haven Road, Winston-Salem, NC  27104

Mooresville Limited Service Office:  125 Commerce Park Road, Mooresville, NC 28117

Charlotte Office:  5970 Fairview Road, Charlotte, NC  28210

Myrtle Beach Office:  3751 Robert M. Grissom Parkway, Myrtle Beach, SC  29577

North Myrtle Beach Office:  710 Highway 17 North, North Myrtle Beach, SC  29582

Surfside Beach Office:  3064 Dick Pond Road, Myrtle Beach, SC  29588

Litchfield Office:  115 Willbrook Blvd, Pawleys Island, SC  29585

Pineland Station Office:  430 William Hilton Pkwy, Hilton Head, SC  29926

The Village at Wexford Office: 1000 William Hilton Pkwy, Hilton Head, SC  29928

The total net book value of the Company’s premises and equipment on December 31, 2010 was $30.6 million. All properties are considered by the Company’s management to be in good condition and adequately covered by insurance.

Any property acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as “real estate owned” until it is sold or otherwise disposed of by the Company to recover its investment. As of December 31, 2010, the Company had $39.7 million of assets classified as real estate owned.

ITEM 3. LEGAL PROCEEDINGS

In the opinion of management, the Company is not involved in any material pending legal proceeding.

ITEM 4. [REMOVED AND RESERVED]

PART II

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

The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “BNCN”. Scott & Stringfellow, Inc., Morgan Keegan, Sandler O’Neill & Partners, L.P., Raymond James & Associates, Howe Barnes, McKinnon and Company, and Monroe Securities are the market makers in the Company’s stock.  Wachovia Securities is not a market maker; however, they do attempt to match-up buyers and sellers through their local offices.

See Table 21 for certain market and dividend information for the last two fiscal years.

As of March 11, 2011, the Company had approximately 1,333 shareholders of record not including persons or entities whose stock is held in nominee or “street” name and by various banks and brokerage firms.

See “Item 1. Business — Supervision and Regulation – Dividend and Repurchase Limitations” above for regulatory restrictions which limit the ability of the Bank to pay dividends.  The Company has paid seven annual cash dividends, with the most recent being a cash dividends of $0.20 per share of common stock on February 22, 2008.  In 2009, the Company began paying quarterly dividends, with the last being a cash dividend of $0.05 paid on February 25, 2011.

There were no purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended December 31, 2010.The maximum amount of shares that may be purchased in the stock repurchase program will be limited to 10% of the outstanding common stock.  As of December 31, 2010, the maximum of stock able to be purchased by the Company amounted to 905,336 shares, with 247,904 shares repurchased.  Because of the Company’s participation in the CPP, there are restrictions on the Company’s ability to repurchase its shares.

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The information required to be disclosed under Item 201(d) of Regulation S-K is presented in Item 12 of this Form 10-K.

Performance Graph

The following graph compares the Company’s cumulative stockholder return on its Common Stock with a NASDAQ index and with a southeastern bank index.  The graph was prepared by SNL Financial, LC using data as of December 31, 2010.

	Period Ending
Index	12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
BNC Bancorp		100.00		111.21		102.19		45.99		47.78		57.97
NASDAQ Composite		100.00		110.39		122.15		73.32		106.57		125.91
S&P 500		100.00		115.79		122.16		76.96		97.33		111.99
SNl Bank Index		100.00		116.98		90.90		51.87		51.33		57.52
SNL Southeast Bank index		100.00		117.26		88.33		35.76		35.90		34.86

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ITEM 6.                SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

The following table sets forth our historical consolidated financial data and operating information for the periods indicated.  The selected historical annual consolidated statement of operations and balance sheet data as of and for each of the five fiscal years presented are derived from our consolidated financial statements.  Historical results are not necessarily indicative of the results to be expected in the future.  You should read the following data together with “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes appearing in “Item 8. Financial Statements and Supplementary Data.”  (Dollars in thousands, except share and per share data).

Table 1

Selected Consolidated Financial Information and Other Data

($ in thousands, except per share and nonfinancial data)

	At or for the Year Ended December 31,
	2010			2009			2008		2007		2006
Operating Data:
Total interest income	$	95,010		$	79,082		$	71,034	$	73,670	$	53,211
Total interest expense		34,747			32,867			37,426		41,265		26,481
Net interest income		60,263			46,215			33,608		32,405		26,730
Provision for loan losses		26,382			15,750			7,075		3,090		2,655
Net interest income after provision for loan losses		33,881			30,465			26,533		29,315		24,075
Non-interest income		28,813			8,686			5,651		5,249		3,821
Non-interest expense		55,172			32,899			27,783		24,068		19,110
Income before income taxes		7,522			6,252			4,401		10,496		8,786
Income tax expense (benefit)		(204	)		(285	)		414		3,058		2,616
Net income		7,726			6,537			3,987		7,438		6,170
Less preferred stock dividends and discount accretion		2,196			1,984			142		-		-
Net income available to common shareholders	$	5,530		$	4,553		$	3,845	$	7,438	$	6,170
Per Common Share Data: (1)
Basic earnings per share	$	0.62		$	0.62		$	0.53	$	1.08	$	1.09
Diluted earnings per share		0.61			0.62			0.52		1.05		1.04
Cash dividends paid		0.20			0.20			0.20		0.18		0.15
Book value		11.63			13.20			12.49		11.90		11.89
Tangible common book value (2)		8.49			9.43			8.69		8.02		7.23
Weighted average shares outstanding:
Basic		9,262,369			7,340,015			7,322,723		6,865,204		5,658,196
Diluted		9,337,392			7,347,700			7,396,170		7,088,218		5,957,478
Year-end shares outstanding		9,053,360			7,341,901			7,350,029		7,257,532		6,709,007
Selected Year-End Balance Sheet Data:
Total assets	$	2,149,932		$	1,634,185		$	1,572,876	$	1,130,112	$	951,731
Investment securities available for sale		352,871			360,506			416,564		86,683		76,700
Loans		1,508,180			1,079,179			1,007,788		932,562		774,664
Allowance for loan losses		24,813			17,309			13,210		11,784		10,400
Goodwill		26,129			26,129			26,129		26,129		26,129
Deposits		1,828,070			1,349,878			1,146,013		855,130		786,777
Short-term borrowings		60,207			50,283			194,143		80,928		4,673
Long-term debt		97,713			100,713			105,713		101,713		81,713
Shareholders' equity		152,224			126,206			120,680		86,392		72,523

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Table 1

Selected Consolidated Financial Information and Other Data

($ in thousands, except per share and nonfinancial data)

	At or for the Year Ended December 31,
	2010			2009			2008			2007			2006
Selected Average Balances:
Total assets	$	2,027,261		$	1,617,744		$	1,227,246		$	1,041,018		$	747,997
Investment securities available for sale		346,099			424,684			117,531			79,727			58,519
Loans, including loans held for sale		1,359,107			1,026,635			981,069			849,271			615,689
Total interest-earning assets		1,799,324			1,496,230			1,116,766			943,756			685,981
Deposits, interest-bearing		1,613,886			1,257,333			890,058			782,755			564,084
Total interest-bearing liabilities		1,765,391			1,418,935			1,063,171			891,695			643,325
Shareholders' Equity		149,959			123,641			86,858			76,065			48,949
Selected Performance Ratios:
Return on average assets (3)		0.38	%		0.40	%		0.32	%		0.71	%		0.82	%
Return on average common equity (4)		4.98	%		4.81	%		4.54	%		9.78	%		12.60	%
Return on average tangible common equity (5)		6.70	%		6.82	%		6.79	%		15.58	%		15.86	%
Net interest margin (6)		3.65	%		3.39	%		3.17	%		3.60	%		4.08	%
Average equity to average assets		7.40	%		7.64	%		7.08	%		7.31	%		6.54	%
Efficiency ratio (7)		58.38	%		55.36	%		67.66	%		61.36	%		60.07	%
Dividend payout ratio		32.26	%		32.26	%		38.09	%		16.61	%		13.34	%
Asset Quality Ratios:
Allowance for loan losses to period-end loans		1.65	%		1.60	%		1.31	%		1.26	%		1.34	%
Allowance for loan losses to nonperforming loans (8)		25.96	%		90.86	%		99.18	%		327.42	%		839.39	%
Nonperforming assets to total assets (9)		6.29	%		2.04	%		1.17	%		0.54	%		0.24	%
Net loan charge-offs to average loans		1.39	%		1.13	%		0.58	%		0.20	%		0.20	%
Capital Ratios: (10)
Total risk-based capital		13.01	%		12.79	%		11.46	%		10.31	%		10.23	%
Tier 1 risk-based capital		11.19	%		10.87	%		9.60	%		8.26	%		8.00	%
Leverage ratio		7.42	%		8.32	%		8.44	%		7.40	%		7.40	%
Other Data:
Number of full service banking offices		23			17			15			14			13
Number of limited service offices		1			1			1			1			1
Number of full time equivalent employees		358			249			221			218			196

(1) All per share data has been restated to reflect the dilutive effect of a 10% stock dividend distributed on January 22, 2007.

(2) Calculated by dividing common equity less intangibles by year-end shares outstanding.  Intangibles include core deposit intangibles of $2.3 million, $1.6 million, $1.8 million, $2.1 million, and $2.3 million at December 31, 2010, 2009, 2008, 2007, and 2006, respectively.

(3) Calculated by dividing net income by average assets.

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

(5) Calculated by dividing net income available to common shareholders by average common equity less average intangibles.

(6) Calculated by dividing tax equivalent net interest income by average interest-earning assets.

(7) Calculated by dividing non-interest expense by the sum of tax-equivalent net interest income plus non-interest income.  The tax-equivalent adjustment was $5.4 million, $4.5 million, $1.8 million, $1.6 million, and $1.3 million for the years ended December 31, 2010, 2009, 2008, 2007, and 2006 respectively.

(8) Includes $69.3 million of nonperforming loans covered under loss share agreements at December 31, 2010.

(9) Nonperforming assets consist of nonaccrual loans, restructured loans in nonaccrual, and real estate owned, where applicable.

(10) Capital ratios are for the bank.

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

Management's discussion and analysis is intended to assist readers in understanding and evaluating of the consolidated financial condition and results of operations of the Company.  It should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this annual report.  Additional discussion and analysis related to fiscal 2010 is contained in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, respectively.

FORWARD-LOOKING INFORMATION

Forward-looking statements appear in this Annual Report, including but not limited to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other written and oral statements made by or on behalf of us. These forward-looking statements include, but are not limited to, statements relating to our goals, strategies, expectations, competitive environment,  general economic conditions, the impact of changes in financial services laws and regulations, the demand for products or services of the Company and the Bank, our ability to integrate and achieve expected synergies from acquired entities, future events and future financial performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically can be identified by such words as “anticipate,” “estimate,” “forecast,” “project,” “intend,” “expect,” “believe,” “should,” “could,” “may,” or other similar words or expressions. We caution readers that such forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied herein, including, but not limited to, the risk factors detailed in this Annual Report.

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

The Company is a one-bank holding company incorporated under the laws of North Carolina to serve as the holding company for the Bank. The Company acquired all of the outstanding capital stock of the Bank on December 16, 2002. The Bank is a full service commercial bank that was incorporated under the laws of the State of North Carolina on November 15, 1991, and opened for business on December 3, 1991. In April 2010, the Bank acquired the assets and certain liabilities of Beach First in an FDIC assisted transaction. The Bank operates the six branches of Beach First, headquartered in Myrtle Beach, South Carolina, under the name BNC Bank. The Bank concentrates its marketing and banking efforts to serve the citizens and business interests of the cities and communities located in Davidson, Randolph, Rowan, Forsyth, Guilford, Iredell and Cabarrus Counties in North Carolina and Horry, Georgetown and Beaufort Counties in South Carolina. The Bank has three subsidiaries: BNC Credit Corp. serves as the Bank’s trustee on deeds of trust and Sterling Real Estate Holdings, LLC and Sterling Real Estate Development of North Carolina, LLC hold and dispose of the Bank’s real estate owned. See “Part I, Item 1 — Business” for an overview of the business operations of the Company and the Bank.

EXECUTIVE SUMMARY

Net income for the year ended December 31, 2010 was $7.7 million compared to $6.5 million for the year ended December 31, 2009.  Net income available to common shareholders for the year ended December 31, 2010 totaled $5.5 million, or $0.61 per diluted common share, as compared to $4.6 million, or $0.62 per diluted common share, for the year ended December 31, 2009.  Preferred stock dividends and accretion of the discount on the Company’s preferred stock reduced net income available to common shareholders by $2.2 million ($0.24 per common share) and $2.0 million ($0.27 per common share) for the years ended December 31, 2010 and 2009, respectively.

The Company’s results of operations and financial condition were impacted by a number of significant events during 2010.  The Company’s investment in people, facilities and technology over the past several years has allowed the Company to quickly integrate a major acquisition and successfully convert it to the Company’s processes and systems, and produce organic growth in both loans and deposits in excess of 10%.  In addition to the gains in both loans and deposits, our positive operating trends in net interest margin, pre-credit operating earnings, and core capital levels were all positive operating trends in a year where national and local economies continued to experience significant weakness.

29

During April 2010, the Bank acquired certain assets and assumed certain liabilities of Beach First National Bank (“Beach First”) from the Federal Deposit Insurance Corporation (“FDIC”) in a FDIC-assisted transaction.  Beach First was a full-service commercial bank headquartered in Myrtle Beach, South Carolina that operated seven branch locations in the Coastal South Carolina region. The Bank made this acquisition to enter into a new market outside the central North Carolina region and to allow the Bank to expand its geographic footprint.  The loans and other real estate owned (“covered loans” or “covered assets”) acquired as part of the Purchase and Assumption Agreement, are covered by two loss share agreements between the FDIC and the Bank (one for single family residential mortgage loans and the other for all other loans and other real estate owned), which affords the Bank significant loss protection.

The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair values are preliminary and 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. A pre-tax gain totaling $19.3 million ($11.8 million tax-effected) resulted from the acquisition and is included as a component of non-interest income in the consolidated statement of income. The amount of the gain is equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed. During the fourth quarter of 2010, adjustments were made to the gains based on additional information regarding the respective acquisition date fair values.  These adjustments were made retroactive to the acquisition date.

The statement of assets acquired and liabilities assumed from the Beach First acquisition are as follows:

	(In thousands)
Assets Acquired
Cash and due from banks	$	61,112
Investment securities available for sale		59,961
Loans		348,842
FDIC indemnification asset		95,765
Other real estate owned		6,721
Core deposit intangible		1,118
Accrued interest receivable		2,717
Other assets		5,704
Total assets acquired	$	581,940
Liabilities Assumed
Deposits	$	499,983
Borrowings		60,569
Deferred tax liability		7,436
Other liabilities		2,127
Total liabilities assumed	$	570,115
Net Assets Acquired	$	11,825

Total assets at December 31, 2010 were $2.15 billion, an increase of $515.7 million, or 31.6%, from $1.63 billion at December 31, 2009.  The increase was primarily due to the acquisition mentioned above and organic growth of 12.1% in the legacy loan portfolio.  Total deposits have increased $478.2 million, or 35.4%, to $1.83 billion.  The Company was able to retain the majority of the Beach First deposits.  Some highlights for 2010 are as follows:

· Net income available to common shareholders increased 21.5% to $5.5 million

o Pre-credit operating earnings increased 19.0%

· Net interest income increased $14.0 million, or 30.4%

· Total assets increased $515.7 million, or 31.6%

· Net interest margin increased 26 basis points to 3.65%

30

· Acquired and integrated Beach First through a loss-sharing FDIC transaction

· Loans increased $429.0 million, or 39.8%

· Loans not covered by loss share increased $130.4 million, or 12.1%

o Non-covered loans, excluding construction related, increased $164.4 million

o Construction and development loans declined by $34.0 million

· Completed a $35 million capital raise

· Completed a conversion of our core bank operating systems to a more robust software platform

· Continued to build our Senior Management Team, with nine of the 13 members added in the last two years

· New offices in Concord, Raleigh, Charlotte and Winston-Salem provided organic growth and strength

· Allowance, as a percentage of non-covered loans, moved from 1.60% to 2.07%

· NPAs on non-covered assets ended the year at 2.75%, still well below peers

· Core deposits increased $619.2 million.  $303.8 million was organic; $315.4 was acquired

· Wholesale CDs declined to $262.6 million

o Wholesale CDs represent 14.4% of total deposits, down from the high of 62.7% in late 2008

· Core tangible book value, excluding the mark-to-market component, increased from $8.73 to $9.24 during 2010

The Company’s year-end results were also impacted by the continued economic slowdown in both the real estate sector and the general economy in our state and local communities.  Weaknesses in residential development and rising unemployment levels in our market areas resulted in higher charge-offs and a higher allowance for loan losses in 2010 also impacted earnings. As a result of these difficult issues, the Company recorded a provision for loan losses of $26.4 million, which represents an increase of $10.6 million compared to 2009.  The weak economy also impacted our allowance for loan losses, which increased to $24.8 million at December 31, 2010 from $17.3 million recorded at December 31, 2009.  Nonperforming assets increased to $135.3 million at December 31, 2010 representing 6.29% of nonperforming assets to total assets, compared to $33.4 million at December 31, 2009 representing 2.04% of nonperforming assets to total assets.  Nonperforming assets not covered by loss share agreements increased to $50.2 million, or 2.75% of total assets.

RESULTS OF OPERATIONS

Overview

The Company reported net income for the year ended December 31, 2010 of $7.7 million compared to $6.5 million for the year ended December 31, 2009.  Net income available to common shareholders for the year ended December 31, 2010 totaled $5.5 million, or $0.61 per diluted common share, as compared to $4.6 million, or $0.62 per diluted common share, for the year ended December 31, 2009.  Net interest income increased $14.0 million in 2010, while non-interest income increased $20.1 million.  The increases in income were partially offset by the increases in the provision for loan losses and non-interest expenses in the amounts of $10.6 million and $22.3 million, respectively.  Included in non-interest income was $19.3 million of gain from the Beach First acquisition.  Also reducing net income available to common shares for 2010 and 2009 were preferred stock dividends and accretion of the discount on the Company’s preferred stock, totaling $2.2 million and $2.0 million, respectively.

Net Interest Income

Like most financial institutions, the primary component of earnings for the Company is net interest income.  Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings.  For internal analytical purposes, management adjusts net interest income to a “fully taxable-equivalent” basis (“(FTE)”) using a 34% federal tax rate on tax exempt items.  Changes in net interest income result from changes in volume, spread and margin.  For this purpose, “volume” refers to the average dollar level of interest-earning assets and interest-bearing liabilities, “spread” refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and “margin” refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities.

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As described above, the primary component of earnings for the Company is net interest income (FTE).  Net interest income (FTE) increased to $65.6 million for the year ended December 31, 2010, a $14.9 million, or 29.3%, increase from the $50.7 million earned in 2009.  The Company experienced an increase of $15.3 million, or 43.3% from 2009 to 2008.  For the year ended December 31, 2010, the net interest margin increased 26 basis points to 3.65% from 3.39% in 2009.   For the year ended December 31, 2009, the net interest margin increased 22 basis points to 3.39% from 3.17% in 2008.  The Company’s net interest spread for the years ended December 31, 2010, 2009 and 2008 were 3.61%, 3.27% and 3.00%, respectively.  The factors contributing to the changes in net interest income (FTE) for 2010, 2009 and 2008 are presented in Table 2 and Table 3.  Table 2 is an analysis of average balances and the components of net interest income (FTE).  Table 3 presents an analysis of the overall changes in the level of net interest income (FTE) into rate/volume activity.

Total interest income (FTE) increased $16.7 million, or 20.0%, to $100.3 million for the year ended December 31, 2010 compared to $83.6 million for the year ended December 31, 2009.  Average total interest-earning assets increased $303.1 million during 2010 as compared to 2009, while the average yield decreased by one basis point from 5.59% to 5.58%.  The increase in interest income was due to the $332.5 million, or 32.4% increase in the average balance of loans, primarily from the Beach First acquisition. The $47.7 million, or 150.3% increase in average interest-earning bank balances was due to the significantly higher liquidity position the Company maintained to support the Beach First acquisition .  The average balance of investment securities decreased $78.6 million, or 18.2%.  The average yield on loans and investment securities increased 12 basis points and 32 basis points, respectively.

Total interest expense increased $1.9 million, or 5.7%, to $34.7 million for the year ended December 31, 2010 compared to $32.9 million for the year ended December 31, 2009.  Average total interest-bearing liabilities increased $346.5 million during 2010 as compared to 2009, while the average cost of funding decreased by 35 basis points from 2.32% to 1.97%.  The average balance of demand deposits increased by $249.3 million, or 55.2%, with the average cost increasing eight basis points to 1.32%.  The average balance of time deposits increased $100.1 million, or 12.6%, with the average cost decreasing 50 basis points, as result of the maturities of higher costing time deposits being replaced by time deposits with lower cost of funds.  Average borrowings decreased by $10.1 million, or 6.2%, with the average cost decreasing four basis points to 2.42%.

When comparing 2009 to 2008, net interest income (FTE) increased by $15.3 million, or 43.3%.  Average earning assets increased $379.5 million, or 34.0%.  During 2009, the Company’s average growth consisted of average investment securities increasing $311.2 million, or 260.3%, average loans increasing $45.6 million, or 4.6%, and interest-earning bank balances increasing $29.5 million from 2008.  With short-term interest rates down significantly from 2008, loan yields decreased 100 basis points, reducing the yield on average-earning assets by 93 basis points.  Offsetting this were decreases of 120 basis points in interest-bearing liabilities, primarily in time deposits where the funding costs decreased by 107 basis points.

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Table 2

Average Balance and Net Interest Income (FTE)

($ in thousands)

	Year Ended December 31, 2010								Year Ended December 31, 2009								Year Ended December 31, 2008
	Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
Interest-earning assets:
Loans (1)	$	1,359,107		$	77,788		5.72	%	$	1,026,635		$	57,556		5.61	%	$	981,069		$	64,855		6.61	%
Investment securities, tax effected (2)		352,099			22,352		6.35	%		430,684			25,982		6.03	%		119,531			7,616		6.37	%
Interest-earning balances		79,509			177		0.22	%		31,765			52		0.16	%		2,243			92		4.10	%
Other		8,609			31		0.36	%		7,146			14		0.20	%		13,923			276		1.98	%
Total interest-earning assets		1,799,324			100,348		5.58	%		1,496,230			83,604		5.59	%		1,116,766			72,839		6.52	%
Other assets		227,937								121,514								110,480
Total assets	$	2,027,261							$	1,617,744							$	1,227,246
Interest-bearing liabilities:
Deposits:
Demand deposits		700,648			9,278		1.32	%		451,317			5,592		1.24	%		180,353			2,725		1.51	%
Savings deposits		18,937			46		0.24	%		11,835			14		0.12	%		11,058			13		0.12	%
Time deposits		894,301			21,752		2.43	%		794,181			23,292		2.93	%		698,647			27,978		4.00	%
Borrowings		151,505			3,671		2.42	%		161,602			3,969		2.46	%		173,113			6,710		3.88	%
Total interest-bearing liabilities		1,765,391			34,747		1.97	%		1,418,935			32,867		2.32	%		1,063,171			37,426		3.52	%
Non-interest-bearing deposits		96,526								63,604								72,008
Other liabilities		15,385								11,564								5,209
Shareholders' equity		149,959								123,641								86,858
Total liabilities and stockholders' equity	$	2,027,261							$	1,617,744							$	1,227,246
Net interest income and interest rate spread (3)				$	65,601		3.61	%				$	50,737		3.27	%				$	35,413		3.00	%
Net interest margin (4)							3.65	%							3.39	%							3.17	%
Ratio of average interest-earning assets to average interest-bearing liabilities		101.92	%							105.45	%							105.04	%

(1) Average loans include non-accruing loans and loans held for sale.

(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $5.4 million, $4.5 million, and $1.8 million for the years 2010, 2009, and 2008, respectively.

(3) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.

(4) Net interest margin is computed by dividing net interest income by total earning assets.

Table 3

Volume and Rate Variance Analysis

(In thousands)

	Year Ended December 31, 2010 vs. 2009									Year Ended December 31, 2009 vs. 2008
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans	$	18,834		$	1,398		$	20,232		$	2,783		$	(10,082	)	$	(7,299	)
Investment securities, tax effected		(4,865	)		1,235			(3,630	)		19,296			(930	)		18,366
Interest-earning balances		92			33			125			630			(670	)		(40	)
Other		4			13			17			(74	)		(188	)		(262	)
Total interest income		14,065			2,679			16,744			22,635			(11,870	)		10,765
Interest expense:
Deposits
Demand deposits		3,195			491			3,686			3,726			(859	)		2,867
Savings deposits		13			19			32			1			-			1
Time deposits		2,686			(4,226	)		(1,540	)		3,314			(8,000	)		(4,686	)
Borrowings		(246	)		(52	)		(298	)		(364	)		(2,377	)		(2,741	)
Total interest expense		5,648			(3,768	)		1,880			6,677			(11,236	)		(4,559	)
Net interest income increase (decrease)	$	8,417		$	6,447		$	14,864		$	15,958		$	(634	)	$	15,324

33

Provision for Loan Losses

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.  The provision for loan losses for the year ended December 31, 2010 was $26.4 million, representing an increase of $10.6 million from the $15.8 million provision made in 2009.  The allowance for loan losses, as a percentage of loans outstanding, increased from 1.60% at the beginning of 2010 to 1.65% at the end of 2010.  At December 31, 2010, the allowance for loan losses was $24.8 million, an increase of $7.5 million, or 43.4% from the $17.3 million at the end of 2009.    The increases in the provision and the allowance for loan losses over the last two years were due to an increase in nonperforming loans, continued weakness in the residential construction and housing markets, and the prolonged economic downturn, as well as overall loan growth.

Net loan growth totaled $119.7 million (excludes $309.3 million of covered loans) in 2010 and $71.4 million in 2009.  At December 31, 2010, the Company had $91.0 million in nonaccrual loans (includes $64.8 million of covered loans) compared to $19.1 million at the end of 2009.  The nonaccrual balance at December 31, 2010 has been written down to a balance that management believes is collectible under current market conditions.

Net loan charge-offs were $18.9 million, an increase of $7.2 million, or 62.0%, from 2009 to 2010.  This increase was primarily from commercial and industrial and residential mortgages having increases in charge-offs of $4.4 million and 2.4 million, respectively.  In addition, commercial real estate loan charge-offs increased by $1.9 million.  The loan net charge-offs exclude write-downs on purchased impaired loans because the fair value already considers the estimated credit losses, as such, no covered loan losses were incurred during 2010.  The ratio of net-charge offs to average loans in 2010 total 1.39%, compared to 1.13% for 2009.

Net loan charge-offs were $11.7 million, an increase of $6.0 million, or 106.2%, from 2008 to 2009.  The allowance for loan losses, as a percentage of loans outstanding, increased from 1.31% at the beginning of 2009 to 1.60% at the end of 2009.  At December 31, 2009, the allowance increased $4.1 million, or 31.0% from the $13.2 million at the end of 2008.  The ratio of net-charge offs to average loans in 2009 total 1.13%, compared to 0.58% for 2008.

Non-Interest Income

Non-interest income increased $20.1 million to $28.8 million for the year ended December 31, 2010 as compared with $8.7 million and $5.7 million for the years ended December 31, 2009 and 2008, respectively.  Table 4 presents a comparative analysis of the components of non-interest income.

The increase in non-interest income for 2010 resulted primarily from the $19.3 million gain on acquisition of Beach First in April 2010 and $1.1 million from the accretion of the FDIC indemnification asset associated with the acquisition.

The gain on sale of investment securities available for sale decreased $3.1 million compared to 2009 due to decreased activity in the sales of investments.  Gain on sale of investment securities available for sale increased $3.4 million in 2009 compared to 2008.

Mortgage fees generated from the Company’s mortgage market operations increased $475,000, compared to 2009 and increased $325,000 when comparing 2009 to 2008.  The increased volume of originations and refinancing continued in 2009 and 2010 due to the historically low interest rates and increased emphasis in this area.

Service charges and fees on deposit accounts increased $376,000 compared to 2009.  Overall growth in volume of the related service charges were offset by lower overdraft and NSF fees due to new Federal Reserve Board’s consumer protection regulations.  When comparing 2009 to 2008, service charges and fees on deposit accounts decreased $314,000 in 2009 largely as a result of the tightened consumer spending and continued effects of the economic environment.

Earnings on bank-owned life insurance increased $55,000 compared to 2009.  Late in 2010, the Company purchased additional bank-owned life insurance which increased the revenue.  When comparing 2009 to 2008, earnings on bank-owned life insurance decreased $170,000 in 2009 from decreased rate of return given to policy holders of the bank-owned life insurance.

34

From the acquisition of Beach First, the Company now has merchant fee revenue as a component of non-interest income.  Merchant fees for 2010 totaled $779,000, a significant source of revenue in the retail-oriented coastal economy of South Carolina.

Table 4

Non-Interest Income

(In thousands)

	Year Ended December 31,
	2010		2009		2008
Mortgage fees	$	1,583	$	1,108	$	783
Service charges		3,083		2,707		3,021
Earnings on bank-owned life insurance		986		931		1,101
Investment brokerage fees		326		249		434
Merchant fees		779		-		-
Core non-interest income		6,757		4,995		5,339
Gain on sale of investment securities available for sale, net		535		3,610		223
Gain on acquisition		19,261		-		-
Other non-interest income		2,260		81		89
Total non-interest income	$	28,813	$	8,686	$	5,651

Non-Interest Expense

The Company strives to maintain levels of non-interest expense that management believes are appropriate given the nature of its operations and the investments in personnel and facilities that have been necessary to generate growth.  One of the keys to the momentum the Company has experienced has been the continuous investment in the core banking franchise, both in people and locations.  As the Company strives to maintain momentum in its growth and strategy, it will incur costs associated with investments in people, facilities and technology that are anticipated to benefit the shareholders as these investments reach their potential.  Non-interest expenses increased $22.3 million to $55.2 million for the year ended December 31, 2010 as compared with $32.9 million and $27.8 million for the years ended December 31, 2009 and 2008, respectively.  Table 5 presents a comparative analysis of the components of non-interest expense.

Salaries and employee benefits increased $7.8 million during 2010 when compared to the prior year and increased $1.2 million from 2008 to 2009.  The increase for 2010 is mainly due to headcount growth resulting from the Beach First acquisition, and to a lesser extent, strategic additions to the Company’s senior management team, several new branch locations, expansion of the credit team and other initiatives.  The increase for 2009 is attributable to the development and expansion of headcount for strategic initiatives, including the opening of new offices.  Salaries and employee benefits consists of employee compensation and employee benefits, incentives, health care, 401(k) employee savings plan, salary continuation plans and other supplemental retirement benefits.

Occupancy expense, including furniture and equipment expenses totaled $5.4 million, an increase of $2.0 million during 2010 compared to 2009, mainly due to facilities acquired from the Beach First acquisition, and to a lesser extent, legacy bank growth in opening new branch locations.  In addition, expenses associated with the increased operating activity from Beach First and a core system conversion initiative were included in the increase.  In comparison of 2009 to 2008, the increase of $149,000 was not significant.

Data processing and supply expenses increased $852,000 during 2010, following a $148,000 increase in 2009.  The increases in 2010 and 2009 were primarily due to increased operating activity from both organic growth of the Company and from the Beach First acquisition.

35

Advertising and business development expenses increased $838,000 in 2010 compared to 2009 mostly due to increased activity from our new markets in South Carolina and increases in business development expenses associated with the Company’s strategy to grow core deposits and increase visibility during a period when many larger competitors were in a defensive posture.  Advertising and business development expenses increased $683,000 from 2008 to 2009 mainly due to above mentioned strategy to grow core deposits.

Insurance, professional and other services increased $1.6 million in 2010 compared to 2009, mostly due to the increased costs associated with the Beach First acquisition, including technology consulting, legal, and valuation expenditures.  For 2009, insurance, professional and other services increased $341,000 when compared to 2008, primarily from strategic related expenditures, increased corporate governance and the overall growth of the Company.

FDIC insurance assessments increased $126,000 in 2010 and increased $2.2 million in 2009 as a result of increased annual assessment fees imposed by the FDIC and a $750,000 special deposit insurance assessment that was levied on all insured depository institutions.

Loan, foreclosure and collection expenses increased $8.0 million due to increased volume of expenses primarily relating to the write-down of other real estate owned properties, the ongoing expenses relating to these properties, and other loan, foreclosure and collection expenses.

Table 5

Non-Interest Expense

(In thousands)

	Year Ended December 31,
	2010		2009		2008
Salaries and employee benefits	$	25,340	$	17,499	$	16,293
Occupancy		3,218		1,913		2,155
Furniture and equipment		2,145		1,475		1,084
Data processing and supply		2,113		1,261		1,113
Advertising and business development		1,994		1,156		473
Insurance, professional and other services		4,012		2,452		2,111
FDIC insurance assessments		2,970		2,844		642
Loan, foreclosure and collection		9,054		1,078		1,173
Other		4,326		3,221		2,739
Total non-interest expense	$	55,172	$	32,899	$	27,783

Income Taxes

The Company generates 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.  For the years ended December 31, 2010 and 2009, non-taxable income exceeded income before income taxes, resulting in a reduction of total income subject to income taxes for the year.  For 2010 and 2009, the provision for income taxes reflects a tax benefit of $204,000 and $285,000, respectively, or 2.7% and 4.6% of income before income taxes, respectively.  For 2008, the provision for income taxes reflects a tax expense of $414,000, or 9.4% of income before income taxes.

Preferred Stock Dividend and Accretion

For the years ended December 31, 2010 and 2009, dividends on preferred stock and accretion amounted to $2.2 million and $2.0 million, respectively.  The increase is associated with the preferred stock dividend paid on the Series B Preferred Stock that was issued during the second quarter of 2010.  The remaining amounts were associated with the Series A Preferred Stock that was issued to the United States Treasury in December 2008, in connection with our participation in the TARP Capital Purchase Program.  For the year ended December 31, 2008, dividends on preferred stock and accretion amounted to $142,000.

36

FINANCIAL CONDITION

Total assets at December 31, 2010 were $2.15 billion, an increase of $515.7 million when compared to total assets at December 31, 2009.  Total earning assets, which are comprised of interest-earning balances at banks, investment securities and loans, were $1.91 billion at December 31, 2010 compared to $1.50 billion at December 31, 2009.  Earning assets serve as the primary revenue sources for the Company.  The majority of the increases resulted from the acquisition of Beach First during the second quarter of 2010, and to a lesser extent, core franchise growth.

The Company continually monitors liquidity levels in relation to the market conditions, and adjusts levels to what we deem to be an appropriate level for the current operating environment.   Historically, liquid assets, consisting of cash and cash equivalents and investment securities available for sale,have been managed towards a target of 10% of total assets.  With debt markets becoming less liquid, unsecured credit availability through correspondent institutions less reliable, and customers shifting funds to maximize their FDIC insurance protection, management began maintaining higher levels of liquid assets throughout 2010 and 2009.  At December 31, 2010, liquid assets totaled $383.0 million, or 17.8% of total assets, with the majority being available to meet short-term liquidity needs.  At December 31, 2009, liquid assets totaled $408.7 million, or 25.0% of total assets.  The average balance of liquid assets during 2010 totaled $451.2 million, or 22.3% of total assets.  The decrease in liquid assets at year-end 2010 was due to the purchase of $32.9 million of seasoned single family residential mortgage loans from another financial institution and the additional investment of $18.0 million in bank-owned life insurance.

Investment Securities

Investment securities were $358.9 million at December 31, 2010 and $366.5 million at December 31, 2009.  The majority of the investment securities in the portfolio are bank-qualified municipal government securities and mortgage-backed securities issued or guaranteed by U.S. government agencies.  The Company’s investment portfolios are high quality securities that are designed to enhance liquidity while providing acceptable rates of return.  The majority of the investment securities in the portfolio are to be held for indefinite periods of time, and not intended to be held to maturity, are classified as available for sale and carried at fair value with any unrealized gains or losses, net of related taxes, reflected as an adjustment to stockholders' equity.  Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks.  It is the Company’s policy to classify all investment securities as available for sale, except in the case with certain corporate bond investments in other local community banks.  Table 6 below summarizes the amortized costs, gross unrealized gains and losses and estimated fair values of investment securities available for sale and held to maturity at December 31, 2010, 2009 and 2008.

37

Table 6

Investment Securities Portfolio Composition

(In thousands)

			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
December 31, 2010
Available for sale:
State and municipals	$	221,902	$	2,722	$	4,082	$	220,542
Mortgage-backed		124,604		7,854		176		132,282
Other		47		-		-		47
	$	346,553	$	10,576	$	4,258	$	352,871
Held to maturity:
Corporate bonds	$	6,000	$	-	$	720	$	5,280
December 31, 2009
Available for sale:
State and municipals	$	186,526	$	4,328	$	2,261	$	188,593
Mortgage-backed		163,067		8,799		-		171,866
Other		47		-		-		47
	$	349,640	$	13,127	$	2,261	$	360,506
Held to maturity:
Corporate bonds	$	6,000	$	-	$	640	$	5,360
December 31, 2008
Available for sale:
U. S. Government agency obligations	$	4,980	$	24	$	-	$	5,004
State and municipals		123,623		1,612		4,802		120,433
Mortgage-backed		286,792		4,297		128		290,961
Other		166		-		-		166
	$	415,561	$	5,933	$	4,930	$	416,564
Held to maturity:
Corporate bonds	$	6,000	$	-	$	600	$	5,400

The Company’s investment security portfolio is an important source of liquidity and earnings.  A stated objective in managing the securities portfolio is to provide consistent liquidity to support balance sheet growth but also to provide a safe and consistent stream of earnings.

The Company does not engage in, nor does it presently intend to engage in, securities trading activities and therefore does not maintain a trading account.  At December 31, 2010, there were no securities of any issuer (other than governmental agencies) that exceeded 10% of the Company's shareholders' equity.

Table 7 below summarizes the amortized costs, fair values and weighted average yields of investment securities available for sale at December 31, 2010, by contractual maturity groups.

38

Table 7

Investment Securities Portfolio Expected Maturities

($ in thousands)

	Amortized		Fair		Book
	cost		value		yield (1)
Available for sale:
State and municipals
Due within one year		4,653		4,662		12.02	%
After one through five years		28,603		28,189		6.41	%
After five through ten years		85,459		84,930		6.92	%
Over ten years		103,187		102,761		7.16	%
		221,902		220,542		7.07	%
Mortgage-backed
Due within one year		25,241		26,846		4.96	%
After one through five years		54,816		58,499		5.07	%
After five through ten years		19,154		20,259		4.76	%
Over ten years		25,393		26,678		5.27	%
		124,604		132,282