10-K 1 v304687_10k.htm ANNUAL REPORT FORM 10-K

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, 2011

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 x 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 ¨

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

Yes ¨ No x

$54,756,000

(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 13, 2012, the registrant had 9,111,102 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2012 Annual Meeting of Stockholders of BNC Bancorp to be held on May 21, 2012, are incorporated by reference into Part III.

Table of Contents

Index

		Page No.
PART I.
ITEM 1.	BUSINESS	4
ITEM 1A.	RISK FACTORS	17
ITEM 1B.	UNRESOLVED STAFF COMMENTS	27
ITEM 2.	PROPERTIES	27
ITEM 3.	LEGAL PROCEEDINGS	27
ITEM 4.	MINE SAFETY DISCLOSURES	28
PART II.
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	28
ITEM 6.	SELECTED FINANCIAL DATA	30
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	63
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	64
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES	66
ITEM 9A.	CONTROLS AND PROCEDURES	66
ITEM 9B.	OTHER INFORMATION	67
PART III.
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	67
ITEM 11.	EXECUTIVE COMPENSATION	67
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	67
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	68
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	68
PART IV.
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	68

PART I

ITEM 1.

BUSINESS

General

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

We are registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”) and the bank holding company laws of North Carolina. BNC operates under the rules and regulations of and is subject to examination by the FDIC and the North Carolina Office of the Commissioner of Banks, North Carolina Department of Commerce (the “NCOCB”). BNC is also subject to certain regulations of the Federal Reserve governing the reserves to be maintained against deposits and other matters. Our administrative office is located at 1226 Eastchester Drive, High Point, North Carolina 27265 and BNC’s main office is located at 831 Julian Avenue, Thomasville, North Carolina 27360.

We have experienced steady primarily organic growth over our twenty-one year history. With numerous banks still in a weakened condition because of the slow rebound of the economy, we decided to expand our franchise through beneficial acquisitions. In 2010, we acquired one institution and in 2011, we acquired two other institutions, with the acquisition of a third scheduled to close in the second quarter of 2012.

On April 9, 2010, we 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 under agreements which included loss-share arrangements which protect us from losses on covered loans and other real estate owned up to stated limits. 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. We made this acquisition to enter into a new market outside the central North Carolina region and to allow us expand our geographic footprint. The South Carolina branches are operated under the name BNC Bank.

On October 14, 2011, in another FDIC-assisted transaction, we acquired certain assets and assumed certain liabilities of Blue Ridge Savings Bank, Inc. (“Blue Ridge”) headquartered in Asheville, North Carolina, under agreements which included loss-share arrangements which protect BNC from losses on covered loans and other real estate owned up to stated limits. The Blue Ridge acquisition enabled us to expand our franchise into Western North Carolina through six branches located in Western North Carolina.

On December 30, 2011, we acquired Regent Bank of South Carolina (“Regent”), a commercial bank organized under the banking laws of South Carolina. Regent has one branch in Greenville, South Carolina, which will operate under the name BNC Bank, as our other South Carolina branches. This acquisition gives us an entry into what is known as the Upstate region of South Carolina, located in the commerce-rich I-85 corridor in the northwest corner of South Carolina. The Upstate is the fastest growing region in the state, and given its strategic position between Atlanta and Charlotte, future development and growth prospects are bright. See Item 1A. “Risk Factors” for risks associated with FDIC-assisted transactions and other acquisitions.

On December 21, 2011, we entered into an Agreement and Plan of Merger (the “Merger”) with KeySource Financial, Inc., a North Carolina corporation serving as a one bank holding company for KeySource Commercial Bank, a North Carolina banking corporation (“KeySource”), with one branch in Durham, North Carolina. We anticipate that the Merger will close in the second quarter of 2012, subject to customary closing conditions, including regulatory and shareholder approval. This combination with KeySource increases our presence in the combined Raleigh-Durham Metropolitan Statistical Area (“MSA”), the market with the highest forecasted five-year growth rate in North Carolina.

As of December 31, 2011, we were the sixth 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, Wake, Buncombe and Cabarrus Counties. We have one full-service banking office along the I-85 corridor in Upstate South Carolina in Greenville County and six full-service banking offices along the coast of South Carolina including Horry, Georgetown, and Beaufort Counties.

We provide a wide range of banking services tailored to the particular banking needs of the communities we serve. We are principally engaged in the business of attracting deposits from the general public and using those deposits, together with other funding from our lines of credit, to make primarily consumer and commercial loans. We have pursued a strategy that emphasizes our local affiliations. This business strategy stresses the provision of high quality banking services to individuals and small to medium-sized local businesses. Specifically, we make business loans secured by real estate, personal property and accounts receivable; unsecured business loans; consumer loans, which are secured by consumer products, such as automobiles and boats; unsecured consumer loans; commercial real estate loans; and other loans. We also offer a wide range of banking services, including checking and savings accounts, safe deposit boxes, and other associated services.

We target business professionals and small to mid-size business 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. We offer our customers superior customer service, convenient branch locations and experienced bankers. We have 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 1.93% and 2.75% at December 31, 2011 and 2010, respectively. Including assets covered by loss-share agreements, the nonperforming assets to total assets ratio was 6.57% at December 31, 2011. In large part, our 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.

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 our funds for lending and other investment purposes. We attract both short-term and long-term deposits from the general public locally and out-of-state by offering a variety of accounts and rates. We offer 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. Our deposits are obtained both from our primary market area and through wholesale sources throughout the United States. We use traditional marketing methods to attract new customers including print media advertising and direct mailings.

Our primary sources of revenue are interest and fee income from our lending and investing activities, primarily consisting of making business loans for small to medium-sized businesses, and, to a lesser extent, from our investment portfolio. In prior years, investments have not been a primary source of income for us.

At December 31, 2011, our assets totaled $2.45 billion and we had 442 full-time and 13 part-time equivalent employees. Through organic growth and our acquisitions of Blue Ridge and Regent, our number of full-time employees increased by 84 from 2010 to 2011.

Competition and Market Area

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

We have traditionally operated in markets that have not experienced the tremendous property value increases recognized in other parts of the country and as a result the property valuation declines have not been quite as severe. Based on SNL Financial data, our North Carolina markets had population growth of 13.5% from 2000-2010, versus 10.6% nationwide. Our markets have a projected population growth rate of 5.8% for 2010 to 2015, which is higher than the projected growth rate of 3.9% for the U.S. Our South Carolina markets had population growth of 36.3% from 2000-2010, and a projected population growth rate of 16.6% for 2010 to 2015, both much higher than the national averages.

In 2011, we had deposit market share of 40.7% in our largest market, Davidson County, which includes both Thomasville and Lexington. We have four offices in Guilford County, two in High Point and two in Greensboro, with combined market share of 2.3%. The Archdale office is located Randolph County were we have 23.1% of the city market share and 3.0% county market share. Lexington, High Point, Archdale and Thomasville’s traditional economic base includes furniture and textile manufacturing, which have been negatively impacted by the recession. Greensboro’s economic base is more diversified and service-oriented and is also home to several colleges and universities. Winston-Salem, located in Forsyth County, like Greensboro and High Point in Guilford County, is part of the Piedmont Triad Region of North Carolina. This region, due to its proximity to four major interstate highways, a Federal Express shipping hub, and central location on the east coast, is transitioning into more of a logistical hub with the trucking and distribution industries growing in prominence. Winston-Salem, where we have one office, is home to numerous educational institutions and two large medical centers, as well as being home to Hanes (textiles) and Reynolds Tobacco. The Piedmont Triad Research Park also located in Winston-Salem is a highly interactive, master-planned innovation community developed to support life science and information technology research and development. Our deposit market share in Forsyth County is minimal at this point but the Piedmont Triad Region has high future growth potential.

We recently expanded into Raleigh, the state capital of North Carolina, and the second most populated city in the state, where the industrial base includes electrical, medical, electronic and telecommunications equipment; clothing and apparel; food processing; paper products; and pharmaceuticals. Raleigh is part of North Carolina's Research Triangle, one of the country's largest and most successful research parks and a major center in the United States for high-tech and biotech research, as well as advanced textile development. Currently, our deposit market share in Raleigh is less than 1%. We believe that after the KeySource acquisition is completed, we will have the opportunity to expand our deposit market share in this Raleigh-Durham high growth area.

Rowan, Iredell and Cabarrus Counties are located in the growing Piedmont region of North Carolina between the Charlotte metro-market and the High Point and Thomasville markets on the I-85 corridor. Rowan and Cabarrus Counties offer a premier location for warehouses, manufacturing and distribution facilities because the largest consolidated rail system in the country is centered in the region. Rowan County is home to over 45 freight companies. Cabarrus County is the home to Lowes Motor Speedway and Cabarrus and Iredell counties have numerous NASCAR-related suppliers and team headquarters. Lowe’s Companies (building supplies), a Fortune 500 company is headquartered in Mooresville, Iredell County. We currently have five offices in these counties where we have 7.4% deposit market share in Cabarrus County and 4.5% market share in Rowan County. While our market share in Iredell County is minimal, the area has high growth potential because of NASCAR, Lowe’s Companies and its proximity to the Charlotte metro area.

Charlotte, the largest city in North Carolina, is located in Mecklenburg County. It is surrounded by Cabarrus, Iredell and Catawba Counties. Many people who work in Charlotte live in the surrounding counties where we have branches. In addition to being the second largest banking center in the United States, the Charlotte metro-area is home to the following Fortune 500 companies: Nucor (steel producer), Duke Energy, Sonic Automotive, Family Dollar, Goodrich Corporation, Harris Teeter and Food Lion. Charlotte also has over 240 companies directly tied to the energy sector, a growing source of jobs in the area. While our deposit market share is minimal in Mecklenburg County at the present time, Mecklenburg and the surrounding counties are poised for growth through new industry initiatives as well as attracting additional Fortune 500 companies like the recently announced Chiquita Brands which is moving its headquarters to Charlotte.

Asheville, Hendersonville, Brevard, Boone and Maggie Valley are markets that we entered as part of the Blue Ridge acquisition in the fourth quarter of 2011. All of these markets are located in the mountainous region of Western North Carolina. Asheville has been ranked as one of the country's "Best Places for Business and Careers" by Forbes Magazine. Western North Carolina ranks among the top destinations for outdoor recreation and adventures. Tourism is a big industry along with medical facilities and nursing and retirement communities. Most of these offices have less than 1.2% market share, with the exception of the Brevard office which has 8.0% market share in Transylvania County, and Hendersonville which has 2.4% market share in Henderson County.

Our market areas in South Carolina are located in the coastal and Upstate regions. In the coastal areas our market area centers predominately in the metro regions of Myrtle Beach and Hilton Head Island, South Carolina. Myrtle Beach is situated on the center of a large and continuous stretch of beach known as the Grand Strand and is considered to be a major tourist destination in the Southeast, attracting an estimated 14.6 million visitors each summer. Hilton Head Island is a Lowcountry resort town that is also a popular vacation destination. As of June 30, 2011, in the three counties in coastal South Carolina in which the Company operates six branch offices, Horry County, Georgetown County and Beaufort County, we have deposit market shares of 3.6%, 1.0%, and 1.3%, respectively. The Upstate is the fastest growing region in the state with Greenville as the largest city in the region and the base of most commercial activity. BMW’s manufacturing facility, Michelin’s North American Headquarters, Caterpillar’s diesel engine manufacturing plant, and General Electric’s gas turbine and wind energy manufacturing operation are located in the Upstate of South Carolina in close proximity to our market center in Greenville. We operate one branch in Greenville County with a deposit market share of 0.5% based on FDIC data from June 30, 2011.

Subsidiaries

In addition to BNC, we have wholly-owned subsidiaries to issue trust preferred securities: BNC Bancorp Capital Trust I, BNC Bancorp Capital Trust II, BNC 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 us of the trusts’ obligations under the preferred securities.

BNC has three subsidiaries that operate in the mortgage and real estate areas: BNC Credit Corp. serves as BNC’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 BNC’s real estate owned. Each of these subsidiaries are incorporated or organized under the laws of the State of North Carolina.

Supervision and Regulation

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

Federal Bank Holding Company Regulation and Structure

As a bank holding company, we are subject to regulation under the Bank Holding Company Act and to the supervision, examination and reporting requirements of the Federal Reserve. BNC has a North Carolina state charter and is subject to regulation, supervision and examination by the FDIC and the NCOCB.

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

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

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

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

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

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

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

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

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

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

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

Under Federal Reserve policy, we are expected to act as a source of financial strength and to commit resources to support BNC. This support may be required at times when, without this Federal Reserve policy, we might not be inclined to provide it. In addition, any capital loans made by us to BNC will be repaid only after its deposits and various other obligations are repaid in full.

BNC is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations and is supervised and examined by state and federal bank regulatory agencies. The FDIC and the NCOCB regularly examine the operations of BNC and are given the authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions. These agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Emergency Economic Stabilization Act of 2008

The Emergency Economic Stabilization Act of 2008 (“EESA”) gave the United States Treasury (“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 are 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.

Payment of Dividends and Other Restrictions

We are a legal entity separate and distinct from BNC. While there are various legal and regulatory limitations under federal and state law on the extent to which BNC can pay dividends or otherwise supply funds to us, the principal source of our cash revenues is dividends from BNC. The prior approval of applicable regulatory authorities is required if the total amount of all dividends declared by BNC in any calendar year exceeds 50% of BNC’s net profits for the previous year. The relevant federal and state regulatory agencies also have authority to prohibit a state bank or bank holding company, which would include us and BNC, from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of BNC, be deemed to constitute an unsafe or unsound practice in conducting its business.

North Carolina commercial banks, such as BNC, are subject to legal limitations on the amounts of dividends they are permitted to pay. Dividends may be paid by BNC 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 BNC, 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).

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

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

Furthermore, under rules and regulations of the EESA to which we are subject, no dividends may be declared or paid on the common stock unless the dividends due with respect to the Series A preferred shares owned by the Treasury Department have been paid in full.

Capital Adequacy

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

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

Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. At least half of total capital must be comprised of Tier 1 Capital, which is common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remainder may consist of Tier 2 Capital, which is subordinated debt, other preferred stock and a limited amount of loan loss reserves. At December 31, 2011, our total risk-based capital ratio and our Tier 1 risk-based capital ratio were 11.19% and 9.65%, respectively. Neither the Company nor BNC has been advised by any federal banking agency of any additional specific minimum capital ratio requirement applicable to it.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3% for bank holding companies that meet specified criteria. All other bank holding companies generally are required to maintain a minimum leverage ratio of 4%. Our ratio at December 31, 2011 was 7.13% compared to 7.26% at December 31, 2010. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indications of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised the Company of any additional specific minimum leverage ratio or tangible Tier 1 Capital leverage ratio applicable to it.

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

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

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

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

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

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

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

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

An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2011, we had capital levels that qualify as “well capitalized” under such regulations.

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

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

The regulatory capital framework under which we operate is expected to change in significant respects as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010, and other regulations, including a separate regulatory capital initiative known as “Basel II.” Currently, we are now governed by a set of capital rules that the Federal Reserve and the FDIC have had in place since 1988, with some subsequent amendments and revisions. These rules are popularly known as “Basel I.” Before the current financial crisis began to have a dramatic effect on the banking industry, the U.S. regulators had participated in an effort by the Basel Committee on Banking Supervision to develop Basel II. Basel II provides several options for determining capital requirements for credit and operational risk. In December 2007, the agencies adopted a final rule implementing Basel II’s “advanced approach” for “core banks” – U.S. banking organizations with over $250 billion in banking assets or on-balance-sheet foreign exposures of at least $10 billion. For other banking organizations, the U.S. banking agencies proposed a rule in July 2008 that would have enabled these organizations to adopt the Basel II “standardized approach.” As a result of the financial crisis that has adversely affected global credit markets and increases in credit, liquidity, interest rate and other risks, in September 2009, the Treasury issued principles for stronger capital and liquidity standards for banking firms, which included recommendations for higher capital standards for all banking organizations to be implemented as part of a broader reconsideration of international risk-based capital standards developed by Basel II. In December 2010, Basel III was finalized, with new standards that, when fully phased in, would require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. The Basel III requirements also call for a capital conservation buffer, designed to absorb losses during periods of economic stress. Basel III emphasizes quality of capital rather than the appropriate allocation of capital to bank assets based on credit risk, and it does not purport to replace or overrule Basel II.

Our compliance with these new capital requirements will likely affect our operations. However, the extent of that impact cannot be known until there is greater clarity regarding the specific requirements applicable to us. While the Dodd-Frank Act was enacted in 2010, many of its provisions will require additional implementing rules before becoming effective, and while the Basel III requirements have been endorsed by U.S. banking regulators, they have yet to be translated into official regulation for U.S. financial institutions. It is anticipated that banking regulators will adopt new regulatory capital requirements similar to those proposed by the Basel Committee, with a phase-in for compliance beginning in 2013. It is also widely anticipated that the capital requirements for most bank and financial holding companies and insured depository institutions will increase as a result.

Acquisitions

As an active acquirer, we must comply with numerous laws related to our acquisition activity. Under the Bank Holding Company Act, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states has opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years, and to certain deposit market-share limitations. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

FDIC Insurance Assessments

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

The assessment paid by each DIF member institution is based on its relative risks of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. Our insurance assessments during 2011 and 2010 were $2.4 million and $3.0 million, respectively. Because of the growing number of bank failures and costs to the DIF, the FDIC required a special assessment during 2009 totaling $1.1 million and further required that we prepay the assessments that would normally have been paid during 2010-2012. The remaining prepaid balance at December 31, 2011 was $3.7 million and is included in other assets on our consolidated balance sheets. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized.

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

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

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

The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of the Financing Corporation (the “FICO”). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and in 2011 ranged from 1.02 basis points in the first quarter to 0.68 basis points in the fourth quarter per $100 of assessable deposits. These assessments will continue until the debt matures in 2017 through 2019.

Community Reinvestment Act

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

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

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

Consumer Protection Laws

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

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

Additional Legislative and Regulatory Matters

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. The USA PATRIOT Act also requires the Secretary of the Treasury to prescribe by regulation minimum standards that financial institutions must follow to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

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

Fiscal and Monetary Policy

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

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

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

Federal Home Loan Bank System

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

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

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

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

Real Estate Lending Evaluations

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

Commercial Real Estate Concentrations

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

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

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

As of December 31, 2011 and excluding covered assets, our C&D concentration as a percentage of BNC’s capital totaled 105% and BNC’s CRE concentration, net of owner-occupied loans, as a percentage of capital totaled 348%. Including loans subject to loss-share agreements with the FDIC, BNC’s C&D concentration as a percentage of capital totaled 134% and our CRE concentration, net of owner-occupied loans, as a percentage of capital totaled 419%.

Troubled Asset Relief Program (“TARP”) Regulations

Under the EESA, Congress has the ability to impose additional terms and conditions on TARP participants. As a participant in the CPP under TARP, we are subject to any such retroactive legislation. On February 10, 2009, the Treasury announced the Financial Stability Plan under the EESA (the “Financial Stability Plan”), which is intended to further stabilize financial institutions and stimulate lending across a broad range of economic sectors. On February 18, 2009, President Obama signed the American Recovery and Reinvestment Act (“ARRA”), a broad economic stimulus package that includes additional restrictions on, and potential additional regulation of, financial institutions.

On June 10, 2009, under the authority granted to it under ARRA and EESA, the Treasury issued an interim final rule under Section 111 of EESA, as amended by ARRA, regarding compensation and corporate governance restrictions that would be imposed on TARP participants, effective June 15, 2009. As a TARP participant with currently outstanding obligations under TARP, we are subject to the compensation and corporate governance restrictions and requirements set forth in the interim final rule, which, among other things: (i) prohibit us from paying or accruing bonuses, retention awards or incentive compensation, except for certain long-term stock awards, to our senior executives; (ii) prohibit us from making severance payments to any of our senior executive officers or next five most highly compensated employees; (iii) require us to conduct semi-annual risk assessments to assure that our compensation arrangements do not encourage “unnecessary and excessive risks” or the manipulation of earnings to increase compensation; (iv) require us to recoup or “claw back” any bonus, retention award or incentive compensation paid by us to a senior executive officer or any of our next 20 most highly compensated employees, if the payment was based on financial statements or other performance criteria that are later found to be materially inaccurate; (v) prohibit us from providing tax gross-ups to any of our senior executive officers or next 20 most highly compensated employees; (vi) require us to provide enhanced disclosure of perquisites, and the use and role of compensation consultants; (vii) required us to adopt a corporate policy on luxury and excessive expenditures; (viii) require our chief executive officer and chief financial officer to provide period certifications about our compensation practices and compliance with the interim final rule; (ix) require us to provide enhanced disclosure of the relationship between our compensation plans and the risk posed by those plans; and (x) require us to provide an annual nonbinding shareholder vote, or “say-on-pay” proposal, to approve the compensation of our executives, consistent with regulations promulgated by the SEC. On January 12, 2010, the SEC adopted final regulations setting forth the parameters for such say-on-pay proposals for public company TARP participants.

Additional regulations applicable to TARP recipients adopted as part of EESA, the Financial Stability Plan, ARRA or other legislation may subject us to additional regulatory requirements.

Limitations on Incentive Compensation

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

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

Due to our participation in the CPP, we are also subject to additional executive compensation limitations, as discussed above.

Economic Environment

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

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

Evolving Legislation and Regulatory Action

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

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

ITEM 1A.

RISK FACTORS

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

Difficult market conditions have adversely affected the industry in which we operate.

The capital and credit markets have been experiencing volatility and disruption for over three years. Declines in the housing market over this period, with falling home prices and increasing foreclosures, unemployment and under employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. As a result of the broad based economic decline and the troubled economic conditions, financial institutions have pursued strategies that include seeking additional capital or merging with larger and stronger institutions. In some cases, financial institutions that did not pursue defensive strategies or did not succeed in those strategies, have failed. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. Additionally, the market disruptions have increased the level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. We do not expect that the difficult conditions in the financial markets are likely to improve materially in the near future and are managing the Company with numerous defensive strategies. A worsening of the current conditions would exacerbate the adverse effects of these difficult market conditions on us and others in the financial institution industry. In particular, we may face the following risks in connection with these events:

Unreliable market conditions with significantly reduced real estate activity may adversely affect our ability to determine the fair value of the assets we hold. If we determine that a significant portion of our assets have values that are significantly below their recorded carrying value, we could recognize a material charge to earnings in the quarter during which such determination was made, our capital ratios would be affected and may result in increased regulatory scrutiny.

We may expect to face increased regulation of our industry, including as a result of the EESA or the Dodd-Frank Act. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

Market developments and the resulting economic pressure on consumers may affect consumer confidence levels and may cause increases in delinquencies and default rates, which, among other effects, could affect our charge-offs and provision for loan losses.

Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

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

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

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

Our revenues are highly correlated to market interest rates.

Our assets and liabilities are primarily monetary in nature, and as a result, we are subject to significant risks tied to changes in interest rates. Our ability to operate profitably is largely dependent upon net interest income. In 2011, net interest income made up 84% of our recurring revenue. Unexpected movement in interest rates, that may or may not change the slope of the current yield curve, could cause our net interest margins to decrease, subsequently decreasing net interest income. In addition, such changes could materially adversely affect the valuation of our assets and liabilities.

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

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

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

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

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

The majority of our loan portfolio is secured by real estate. As the economy has deteriorated and depressed real estate values, the collateral value of the portfolio and the revenue stream from those loans has come under stress and has required additional provision to the allowance for loan losses. Our ability to dispose of foreclosed real estate and resolve credit quality issues is dependent on real estate activity and real estate prices, both of which have been unpredictable for more than three years.

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

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

general or local economic conditions;

environmental cleanup liability;

neighborhood values;

real estate tax rates;

operating expenses of the foreclosed properties;

ability to obtain and maintain adequate occupancy of the properties;

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

natural disasters.

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

Greater loan losses than expected may materially adversely affect our earnings.

We, as lenders, are exposed to the risk that our customers will be unable to repay their loans in accordance with their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio will relate principally to the creditworthiness of business entities and the value of the real estate serving as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within our local markets.

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

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

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

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

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

an increase in loan delinquencies;

an increase in problem assets and foreclosures;

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

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

Our growth and financial performance may be negatively impacted if we are unable to successfully execute our growth plans.

Economic conditions and other factors, such as our ability to identify appropriate markets for expansion, our ability to recruit and retain qualified personnel, our ability to fund earning asset growth at a reasonable and profitable level, sufficient capital to support our growth initiatives, competitive factors and banking laws, will impact our success.

We may seek to supplement our internal growth through acquisitions. We cannot predict with certainty the number, size or timing of acquisitions, or whether any such acquisition will occur at all. Our acquisition efforts have traditionally focused on targeted banking entities in markets in which we currently operate and markets in which we believe we can compete effectively. However, as consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. We may compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than we do and may be able to pay more for an acquisition than we are able or willing to pay. We also may need additional debt or equity financing in the future to fund acquisitions. We may not be able to obtain additional financing or, if available, it may not be in amounts and on terms acceptable to us. If we are unable to locate suitable acquisition candidates willing to sell on terms acceptable to us, or we are otherwise unable to obtain additional debt or equity financing necessary for us to continue making acquisitions, we would be required to find other methods to grow our business and we may not grow at the same rate we have in the past, or at all.

Generally, we must receive federal and state regulatory approval before we can acquire a bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal and state bank regulators will consider, among other factors, the effect of the acquisition on the competition, financial condition and future prospects. The regulators also review current and projected capital ratios and levels, the competence, experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the Community Reinvestment Act) and the effectiveness of the acquiring institution in combating money laundering activities. We cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted.

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

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

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

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

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

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

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

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

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

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

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

Our Common Stock is listed and traded on the NASDAQ Market. Although we anticipate that our capital resources will be adequate for the foreseeable future to meet our capital requirements, at times we may depend on the liquidity of the NASDAQ market to raise equity capital. If the market should fail to operate, or if conditions in the capital markets are adverse, we may be constrained in raising capital. Downgrades in the opinions of the analysts that follow us may cause our stock price to fall and significantly limit our ability to access the markets for additional capital requirements. Should these risks materialize, our ability to further expand our operations through internal growth or acquisition may be limited.

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

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

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

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

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

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

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

Reputational risk and social factors may impact our results.

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

We may not be able to attract and retain skilled people.

Our success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities we engage in can be intense and we may not be able to hire people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

The limitations on incentive compensation contained in the ARRA and imposed by the Dodd-Frank Act may adversely affect our ability to retain our highest performing employees.

Because we received CPP funds under TARP, the ARRA, and subsequent regulations issued by UST, contain restrictions on bonus and other incentive compensation payable to our 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. In addition, the Dodd-Frank Act provides for implementation of a variety of corporate governance and compensation practices applicable to all public companies which may impact our executive officers and employees. If this were to occur, our businesses and results of operations could be adversely affected.

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

In May 2009, the FDIC announced that it had voted to levy a special assessment on insured institutions in order to facilitate the rebuilding of the Deposit Insurance Fund. During 2009, we were required to pay a special assessment totaling $7.3 million and also to prepay the assessments that would normally have been paid during 2010-2012. The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any future assessments. Any such future assessments will decrease our earnings.

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. In addition, unless we are able to redeem the Series A Preferred Stock before December 5, 2013, 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. Furthermore, under rules and regulations of the EESA to which we are subject, no dividends may be declared or paid on the common stock unless the dividends due with respect to the Series A Preferred Stock owned by the UST have been paid in full.

The terms governing the issuance of the Preferred Shares and the Warrant to the UST may be changed, the effect of which may have an adverse effect on our operations.

The terms of the Securities Purchase Agreement – Standard Terms incorporated by reference therein (collectively, the “Purchase Agreement”), which we entered into with the UST in connection with its purchase of the Preferred Shares and the Warrant, provides that the UST may unilaterally amend any provision of the Purchase Agreement to the extent required to comply with any changes in applicable federal law that may occur in the future. We have no control over any change in the terms of the transaction that may occur in the future. Such changes may place restrictions on our business or results of operation, which may adversely affect the market price of our Common Stock.

Risks Related to FDIC-Assisted Transactions

We are subject to certain risks related to FDIC-assisted transactions.

The success of past FDIC-assisted transactions, including the acquisitions of Beach First and Blue Ridge, and any FDIC-assisted transaction in which we may participate in the future will depend on a number of factors, including, but not limited to, the following:

our ability to fully integrate, and to integrate successfully, the branches acquired into BNC’s operations;

our ability to limit the outflow of deposits held by our new customers in the acquired branches and to successfully retain and manage interest-earning assets (loans) acquired in FDIC-assisted transactions;

our ability to retain existing deposits and to generate new interest-earning assets in the geographic areas previously served by the acquired banks;

our ability to effectively compete in new markets in which we did not previously have a presence;

our success in deploying the cash received in the FDIC-assisted transactions into assets bearing sufficiently high yields without incurring unacceptable credit or interest rate risk;

our ability to control the incremental non-interest expense from the acquired branches in a manner that enables us to maintain a favorable overall efficiency ratio;

our ability to retain and attract the appropriate personnel to staff the acquired branches; and

our ability to earn acceptable levels of interest and non-interest income, including fee income, from the acquired branches.

As with any acquisition involving a financial institution, particularly one involving the transfer of a large number of bank branches as is often the case with FDIC-assisted transactions, there may be higher than average levels of service disruptions that would cause inconveniences or potentially increase the effectiveness of competing financial institutions in attracting our customers. Integrating the acquired branches would not be an operation of substantial size and expense that we are not familiar with, but we anticipate unique challenges and opportunities because of the nature of the transaction. Integration efforts will also likely divert our management’s attention and resources. It is not known whether we will be able to integrate acquired branches successfully, and the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the FDIC-assisted transactions. We may also encounter unexpected difficulties or costs during the integration that could materially adversely affect our earnings and financial condition, perhaps materially. Additionally, we may be unable to achieve results in the future similar to those achieved by our existing banking business, to compete effectively in the market areas previously served by the acquired branches or to manage any growth resulting from FDIC-assisted transactions effectively.

Our willingness and ability to grow the acquired branches following FDIC-assisted transactions depend on several factors, most importantly the ability to retain certain key personnel that we hire or transfer in connection with such transactions. Our failure to retain these employees could adversely affect the success of such transactions and our future growth.

We engage in acquisitions of other businesses from time to time, including FDIC-assisted acquisitions. These acquisitions may not produce revenue or earnings enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties.

When appropriate opportunities arise, we will engage in acquisitions of other businesses. Difficulty in integrating an acquired business or company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence or other anticipated benefits from any acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of our business or the business of the acquired company, or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. We are likely to need to make additional investment in equipment and personnel to manage higher asset levels and loan balances as a result of any significant acquisition, which may materially adversely impact our earnings. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected.

In evaluating potential acquisition opportunities, we may seek to acquire failed banks through FDIC-assisted transactions. While the FDIC may, in such transactions, provide assistance to mitigate certain risks, such as sharing in exposure to loan losses, and providing indemnification against certain liabilities, of the failed institution, we may not be able to accurately estimate our potential exposure to loan losses and other potential liabilities, or the difficulty of integration, in acquiring such institution.

Depending on the condition of any institution that we may acquire, any acquisition may, at least in the near term, materially adversely affect our capital and earnings and, if not successfully integrated following the acquisition, may continue to have such effects.

FDIC-assisted acquisition opportunities may not become available and increased competition may make it more difficult for us to bid on failed bank transactions on terms we consider to be acceptable.

Our near-term business strategy includes consideration of potential acquisitions of failing banks that the FDIC plans to place in receivership. The FDIC may not place banks that meet our strategic objectives into receivership. Failed bank transactions are attractive opportunities in part because of loss-share arrangements with the FDIC that limit the acquirer’s downside risk on the purchased loan portfolio and, apart from our assumption of deposit liabilities, we have significant discretion as to the nondeposit liabilities that we assume. In addition, assets purchased from the FDIC are marked to their fair value and in many cases there is little or no addition to goodwill arising from an FDIC-assisted transaction. The bidding process for failing banks could become very competitive, and the increased competition may make it more difficult for us to bid on terms we consider to be acceptable.

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

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

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

Risks Related to Our Common Stock

The price of our Common Stock is volatile and may decline.

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

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

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

failure to meet analysts’ revenue or earnings estimates;

speculation in the press or investment community;

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

actions by institutional shareholders;

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

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

proposed or adopted regulatory changes or developments;

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

domestic and international economic factors unrelated to our performance.

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

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 our Common Stock will develop.

Securities issued by us, including our Common Stock, are not FDIC insured.

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

We have issued Series A Preferred Stock and Series B Preferred Stock and subordinated debentures, and BNC 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 and have outstanding $23.7 million in subordinated debentures in connection with the issuance of trust preferred securities, and BNC has issued and have outstanding $8.0 million in subordinated debt securities. These debentures and debt securities also rank senior to our Common Stock.

Our Series B Preferred Stock has liquidation rights senior to our Common Stock.

We have issued 1,804,566 shares of Series B Preferred Stock. 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.

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

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

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

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

We may reduce or eliminate dividends on our common stock.

Although we have historically paid a quarterly cash dividend to the holders of our Common Stock, holders of our Common Stock are not entitled to receive dividends. Downturns in the domestic and global economies could cause our Board of Directors to consider, among other things, reducing or eliminating of dividends paid on our Common Stock. This could adversely affect the market price of our Common Stock. 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.

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

We lease our corporate headquarters, located in High Point, North Carolina. BNC owns its main office and operations center, located in Thomasville, North Carolina.

BNC operates 30 branch offices and one limited service office throughout North and South Carolina. We own many of the buildings and we lease other facilities from third parties.

The total net book value of our premises and equipment on December 31, 2011 was $43.2 million. All properties are considered by our management to be in good condition and adequately covered by insurance. See Note F to the accompanying Consolidated Financial Statements contained in Item 8 for information on premises and equipment.

Any property acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as “other real estate owned” until it is sold or otherwise disposed of in order to recover our investment. As of December 31, 2011, we had $68.5 million of assets classified as other real estate owned (“OREO”).

ITEM 3.

LEGAL PROCEEDINGS

In the opinion of management, we are not involved in any material pending legal proceeding. Additional information relating to legal proceedings is set forth in Note P to the accompanying Consolidated Financial Statements.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

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

Our Common Stock is traded in the NASDAQ Capital Market under the symbol “BNCN”.

See Table 21 under “Per share data” for certain market and dividend information for the last two fiscal years.

As of March 13, 2012, we had approximately 1,292 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 – Payment of Dividends and Other Restrictions” above for regulatory restrictions which limit the ability of BNC to pay dividends. In 2009, we began paying quarterly dividends rather than annual dividends. On January 17, 2012, the Board of Directors declared a cash dividend of $0.05 paid on February 24, 2012 to shareholders of record as of February 10, 2012. We have remained current with all payments due on our Series A Preferred Stock to the UST and Series B Preferred Stock to Aquiline BNC Holdings, LLC (“Aquiline”).

We made no purchases, nor did any of our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended), of our Common Stock during the three months ended December 31, 2011. The maximum number of shares that may be purchased in our stock repurchase program is limited to 10% of the outstanding Common Stock. As of December 31, 2011, the maximum of stock we could purchase amounted to 910,089 shares, with 247,904 repurchased.

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 our cumulative stockholder return on our Common Stock with a NASDAQ index and with a southeastern bank index. The graph was prepared by SNL Financial, LLC using data as of December 31, 2011.

BNC Bancorp

	*Period Ending*
Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
BNC Bancorp		100.00		91.89		41.35		42.97		52.13		43.11
NASDAQ Composite		100.00		110.66		66.42		96.54		114.06		113.16
S&P500		100.00		105.49		66.46		84.05		96.71		98.76
SNL Bank Index		100.00		77.71		44.34		43.88		49.17		38.08
SNL Southeast Bank index		100.00		75.33		30.50		30.62		29.73		17.39

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 the accompanying Consolidated Financial Statements and the related notes appearing in “Item 8. Financial Statements and Supplementary Data.”

Table 1

Selected Consolidated Financial Information and Other Data

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

	At or for the Year Ended December 31,
	2011			2010			2009			2008		2007
Operating Data:
Total interest income	$	103,343		$	95,010		$	79,082		$	71,034	$	73,670
Total interest expense		32,920			34,747			32,867			37,426		41,265
Net interest income		70,423			60,263			46,215			33,608		32,405
Provision for loan losses		18,214			26,382			15,750			7,075		3,090
Net interest income after provision for loan losses		52,209			33,881			30,465			26,533		29,315
Non-interest income		20,802			28,813			8,686			5,651		5,249
Non-interest expense		67,864			55,172			32,899			27,783		24,068
Income before income taxes		5,147			7,522			6,252			4,401		10,496
Income tax expense (benefit)		(1,783	)		(204	)		(285	)		414		3,058
Net income		6,930			7,726			6,537			3,987		7,438
Less preferred stock dividends and discount accretion		2,404			2,196			1,984			142		-
Net income available to common shareholders	$	4,526		$	5,530		$	4,553		$	3,845	$	7,438

Per Common Share Data: (1)
Basic earnings per share	$	0.45		$	0.62		$	0.62		$	0.53	$	1.08
Diluted earnings per share		0.45			0.61			0.62			0.52		1.05
Cash dividends paid		0.20			0.20			0.20			0.20		0.18
Book value		12.80			11.63			13.20			12.49		11.90
Tangible common book value (2)		9.60			8.49			9.43			8.69		8.02
Weighted average shares outstanding:
Basic		10,877,590			9,262,369			7,340,015			7,322,723		6,865,204
Diluted		10,894,131			9,337,392			7,347,700			7,396,170		7,088,218
Year-end shares outstanding		9,100,890			9,053,360			7,341,901			7,350,029		7,257,532

Selected Year-End Balance Sheet Data:
Total assets	$	2,454,930		$	2,149,932		$	1,634,185		$	1,572,876	$	1,130,112
Investment securities available for sale		282,221			352,871			360,506			416,564		86,683
Investment securities held to maturity		97,036			6,000			6,000			6,000		-
Loans		1,709,483			1,508,180			1,079,179			1,007,788		932,562
Allowance for loan losses		31,008			24,813			17,309			13,210		11,784
Goodwill		26,129			26,129			26,129			26,129		26,129
Deposits		2,118,187			1,828,070			1,349,878			1,146,013		855,130
Short-term borrowings		70,211			60,207			50,283			194,143		80,928
Long-term debt		93,713			97,713			100,713			105,713		101,713
Shareholders' equity		163,855			152,224			126,206			120,680		86,392

Table 1

Selected Consolidated Financial Information and Other Data (continued)

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

	At or for the Year Ended December 31,
	2011			2010			2009			2008			2007
Selected Average Balances:
Total assets	$	2,208,525		$	2,027,261		$	1,617,744		$	1,227,246		$	1,041,018
Investment securities		339,067			346,099			424,684			117,531			79,727
Loans, including loans held for sale		1,561,257			1,359,107			1,026,635			981,069			849,271
Total interest-earning assets		1,936,069			1,799,324			1,496,230			1,116,766			943,756
Deposits, interest-bearing		1,770,106			1,613,886			1,257,333			890,058			782,755
Total interest-bearing liabilities		1,914,179			1,765,391			1,418,935			1,063,171			891,695
Shareholders' Equity		156,968			149,959			123,641			86,858			76,065

Selected Performance Ratios:
Return on average assets (3)		0.31	%		0.38	%		0.40	%		0.32	%		0.71	%
Return on average common equity (4)		4.12	%		4.98	%		4.81	%		4.54	%		9.78	%
Return on average tangible common equity (5)		5.56	%		6.70	%		6.82	%		6.79	%		15.58	%
Net interest margin (6)		3.93	%		3.65	%		3.39	%		3.17	%		3.60	%
Average equity to average assets		7.11	%		7.40	%		7.64	%		7.08	%		7.31	%
Efficiency ratio (7)		70.09	%		58.38	%		55.36	%		67.66	%		61.36	%
Dividend payout ratio		44.44	%		32.26	%		32.26	%		38.09	%		16.61	%

Asset Quality Ratios:
Allowance for loan losses to period-end loans		1.81	%		1.65	%		1.60	%		1.31	%		1.26	%
Allowance for loan losses to nonperforming loans (8)		33.44	%		25.96	%		90.86	%		99.18	%		327.42	%
Nonperforming assets to total assets (9)		6.57	%		6.29	%		2.04	%		1.17	%		0.54	%
Net loan charge-offs to average loans (10)		1.33	%		1.39	%		1.13	%		0.58	%		0.20	%

Capital Ratios: (11)
Total risk-based capital		11.51	%		13.01	%		12.79	%		11.46	%		10.31	%
Tier 1 risk-based capital		9.99	%		11.19	%		10.87	%		9.60	%		8.26	%
Leverage ratio		7.38	%		7.42	%		8.32	%		8.44	%		7.40	%

Other Data:
Number of full service banking offices		30			23			17			15			14
Number of limited service offices		1			1			1			1			1
Number of full time equivalent employees		442			358			249			221			218

(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 $3.0 million, $2.3 million, $1.6 million, $1.8 million, and $2.1 million at December 31, 2011, 2010, 2009, 2008, and 2007, 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 $5.6 million, $5.4 million, $4.5 million, $1.8 million, and $1.6 million for the years ended December 31, 2011, 2010, 2009, 2008, and 2007 respectively.

(8)	Includes $73.3 million and $69.3 million of nonperforming loans covered under loss share agreements at December 31, 2011 and 2010, respectively.

(9)	Nonperforming assets consist of nonaccrual loans, accruing loans greater than 90 days past due, and other real estate owned, where applicable.

(10)	Net loan charge-offs include $3.8 million of covered loans that are reimbursed 80% by the FDIC for the year ended December 31, 2011.
(11)	Capital ratios are for BNC.

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 our operations. 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 2011 is contained in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2011, June 30, 2011 and September 30, 2011, respectively.

Although certain amounts for prior years have been reclassified to conform to statement presentations for 2011, the reclassifications have no effect on shareholders’ equity or net income as previously reported.

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 our products or services, 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.

Executive Summary

Net income for the year ended December 31, 2011 was $6.9 million, or $0.64 per share, compared to $7.7 million, or $0.84 per share, for the year ended December 31, 2010. Income available to common shareholders was $4.5 million, or $0.45 per diluted share, a decrease compared to the $5.5 million, or $0.61 per diluted share, reported for the year-ended December 31, 2010. Included in the financial results for the years ended December 31, 2011 and 2010 are $7.8 million and $19.3 million, respectively, of acquisition gains from FDIC-assisted transactions.

Total assets at December 31, 2011 were $2.45 billion, an increase of $305.0 million, or 14.2%, compared to $2.15 billion at December 31, 2010. The increase was due to strong organic growth in our North Carolina franchise, along with $148 million in assets from the acquisition of Blue Ridge and $53 million from the acquisition of Regent. See Note B to the accompanying Consolidated Financial Statements contained in Item 8 for a full description of the acquisition activities. Some highlights for 2011 are as follows:

Merger and Acquisition Activities

Acquired Blue Ridge Savings Bank, a $168 million thrift with six offices in western North Carolina - Asheville, Hendersonville, Brevard, Boone, Maggie Valley, and Mooresville – through a FDIC-assisted transaction completed on October 14, 2011.

Acquired in an all cash transaction, Regent Bank of South Carolina, a $53 million thrift with one office located in Greenville, South Carolina, which closed on December 31, 2011.

Announced an all-stock transaction with KeySource Commercial Bank, a $196 million commercial bank with one office located in Durham, North Carolina, which is expected to close in the second quarter of 2012.

None of the acquisitions required additional capital raises to complete.

Organic Growth

Increased non-covered loans, excluding loans acquired in the Regent transaction, by $158.9 million, or 13.3%.

Increased demand deposits by $106.5 million, or 11.2%.

Recruited a seasoned leader to expand mortgage operations by assembling a seasoned team of 13 support professionals and 27 originators to provide mortgage lending in the Charlotte, Raleigh, Asheville, Piedmont-Triad, and Lake Norman markets in North Carolina, and the Myrtle Beach, Hilton Head, and Greenville markets in South Carolina. We anticipate this team, when fully phased-in, to close and sell into the secondary market in excess of $350 million in mortgages annually.

Recruited a seasoned leader to build a SBA origination team, which includes all SBA certifications, with underwriters and a seasoned lending staff in both Raleigh and Charlotte, North Carolina.

Absorbed necessary start-up costs for the Mortgage and SBA divisions in 2011.

Executive Level Talent

Recruited a highly seasoned risk professional to serve as our Chief Enterprise Risk Officer. This executive joined us after a twenty plus year career in banking; most recently serving seven years in a senior leadership position with one of the top regional banks known for its stellar risk management practices and results.

Additionally, on December 21, 2011, we entered into a Merger Agreement with KeySource, a $196 million commercial bank servicing the Raleigh-Durham, North Carolina MSA. See Note T to the accompanying Consolidated Financial Statements contained in Item 8 of Part II of this Form 10-K for a full description of the Merger. The Merger is expected to close in the second quarter of 2012.

Our year-end results were impacted by the continued economic slowdown in both the real estate sector and the general economy in our state and local communities. Credit costs remain high due to elevated nonperforming asset levels and our continuing efforts to resolve asset quality issues. 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 2011 also impacted earnings. Net charge-offs on loans not covered by loss-share agreements for 2011 were $17.0 million, a decrease from the $20.7 million of net charge-offs for 2010. We recorded a provision for loan losses of $18.2 million, which represents a decrease of $8.2 million compared to 2010 results. With the above mentioned positive credit trends in place, our focus will be on accelerating the sales cycle for OREO, including taking substantial discounts on the larger OREO properties. As a result, the loan, foreclosure and collection expenses, including OREO valuation adjustments, increased $5.0 million during 2011.

We continue to maintain strong capital ratios. Shareholders’ equity increased $11.6 million to $163.9 million at December 31, 2011. We paid $3.7 million in common and preferred dividends, net of accretion, during 2011. All of our capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures.

Results of Operation

Overview

We reported net income for the year ended December 31, 2011 of $6.9 million compared to $7.7 million for the year ended December 31, 2010. Net income available to common shareholders for the year ended December 31, 2011 totaled $4.5 million, or $0.45 per diluted common share, as compared to $5.5 million, or $0.61 per diluted common share, for the year ended December 31, 2010. Net interest income increased $10.2 million in 2011, while non-interest income decreased $8.0 million. The provision for loan losses decreased by $8.2 million, offset by increases in non-interest expenses of $12.7 million. Included in non-interest income for 2011 was $7.8 million of gain from the Blue Ridge and Regent acquisitions. Also reducing net income available to common shares for 2011 and 2010 were preferred stock dividends and accretion of the discount on our preferred stock, totaling $2.4 million and $2.2 million, respectively.

Net Interest Income

Like most financial institutions, the primary component of our earnings 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, we adjust 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.

As described above, the primary component of our earnings is net interest income (FTE). Net interest income (FTE) increased to $76.0 million for the year ended December 31, 2011, a $10.4 million, or 15.9%, increase from the $65.6 million earned in 2010. We experienced an increase of $14.9 million, or 29.3% from 2010 to 2009. For the year ended December 31, 2011, the net interest margin increased 28 basis points to 3.93% from 3.65% in 2010. For the year ended December 31, 2010, the net interest margin increased 26 basis points to 3.65% from 3.39% in 2009. Our net interest spread for the years ended December 31, 2011, 2010 and 2009 were 3.91%, 3.61% and 3.27%, respectively. The factors contributing to the changes in net interest income (FTE) for 2011, 2010 and 2009 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 $8.6 million, or 8.6%, to $108.9 million for the year ended December 31, 2011 compared to $100.3 million for the year ended December 31, 2010. Average total interest-earning assets increased $136.7 million during 2011 as compared to 2010, while the average yield decreased by five basis points from 5.58% to 5.63%. The increase in interest income was due to the $201.1 million, or 14.8% increase in the average balance of loans, primarily from organic loan growth and to a lesser extent, from our acquisitions of Blue Ridge and Regent during the fourth quarter of 2011. The $53.8 million, or 67.7% decrease in average interest-earning bank balances was due to the reduction of the significantly higher liquidity position we maintained to support the Beach First acquisition during 2010. The average balance of investment securities decreased $13.0 million, or 3.7%. The average yield on loans and investment securities decreased 12 basis points and nine basis points, respectively.

Included in interest income for loans was the impact of the purchase accounting adjustments that favorably affected net interest income in 2011. The accretion of yield and fair value discounts on the acquired loan portfolios totaled $6.7 million and $3.3 million for the years ended December 31, 2011 and 2010, respectively. The additional accretion was due to accelerated cash flows on the Beach First loan portfolio, and accretion on the performing Blue Ridge loan portfolio utilizing a level-yield basis over the economic life of the loans.

Total interest expense decreased $1.8 million, or 5.3%, to $32.9 million for the year ended December 31, 2011 compared to $34.7 million for the year ended December 31, 2010. Average total interest-bearing liabilities increased $148.8 million during 2011 as compared to 2010, while the average cost of funding decreased by 25 basis points from 1.97% to 1.72%. The increases in interest-bearing liabilities were from primarily from organic growth and acquisitions of Blue Ridge and Regent during the fourth quarter of 2011. The average balance of demand deposits increased by $113.8 million, or 16.3%, with the average cost increasing 10 basis points to 1.42%. The average balance of time deposits increased $24.7 million, or 2.8%, with the average cost decreasing 49 basis points, as result of the maturities of higher costs time deposits being replaced by time deposits with lower costs. Average borrowings decreased by $7.4 million, or 4.9%, with the average cost decreasing eight basis points to 2.34%.

When comparing 2010 to 2009, net interest income (FTE) increased by $14.9 million, or 29.3%. Average earning assets increased $303.1 million, or 20.3%. During 2010, our average growth consisted of average loans increasing $332.5 million, or 32.4% and interest-earning bank balances increasing $47.7 million or 150.3% from 2009. This increase was primarily due from the acquisition of Beach First. The average balance of time deposits increased $100.1 million, or 12.6%, with the average cost decreasing 50 basis points, as a result of the maturities of higher cost time deposits being replaced by time deposits with lower costs.

Table 2

Average Balance and Net Interest Income (FTE)

(dollars in thousands)

	Year Ended December 31, 2011								Year Ended December 31, 2010								Year Ended December 31, 2009
	Average					Average			Average					Average			Average					Average
	balance			Interest		rate			balance			Interest		rate			balance			Interest		rate
Interest-earning assets:
Loans and leases, net(1)	$	1,556,937		$	87,424		5.62	%	$	1,355,827		$	77,655		5.73	%	$	1,024,330		$	57,443		5.61	%
Loans held for sale		4,320			167		3.87	%		3,280			133		4.05	%		2,305			113		4.90	%
Investment securities, taxable		119,797			5,688		4.75	%		150,011			7,579		5.05	%		259,910			13,421		5.16	%
Investment securities, tax exempt (2)		219,270			15,541		7.09	%		202,088			14,773		7.31	%		170,774			12,561		7.36	%
Interest-earning balances		25,775			41		0.16	%		79,509			177		0.22	%		31,765			52		0.16	%
Other		9,970			77		0.77	%		8,609			31		0.36	%		7,146			14		0.20	%
Total interest-earning assets		1,936,069			108,938		5.63	%		1,799,324			100,348		5.58	%		1,496,230			83,604		5.59	%
Other assets		272,456								227,937								121,514
Total assets	$	2,208,525							$	2,027,261							$	1,617,744
Interest-bearing liabilities:
Deposits:
Demand deposits		814,518			11,557		1.42	%		700,648			9,278		1.32	%		451,317			5,592		1.24	%
Savings deposits		36,564			162		0.44	%		18,937			46		0.24	%		11,835			14		0.12	%
Time deposits		919,024			17,836		1.94	%		894,301			21,752		2.43	%		794,181			23,292		2.93	%
Borrowings		144,073			3,365		2.34	%		151,505			3,671		2.42	%		161,602			3,969		2.46	%
Total interest-bearing liabilities		1,914,179			32,920		1.72	%		1,765,391			34,747		1.97	%		1,418,935			32,867		2.32	%
Non-interest-bearing deposits		125,969								96,526								63,604
Other liabilities		11,409								15,385								11,564
Shareholders' equity		156,968								149,959								123,641
Total liabilities and stockholders' equity	$	2,208,525							$	2,027,261							$	1,617,744
Net interest income and interest rate spread (3)				$	76,018		3.91	%				$	65,601		3.61	%				$	50,737		3.27	%
Net interest margin (4)							3.93	%							3.65	%							3.39	%

Ratio of average interest-earning assets to average interest-bearing liabilities		101.14	%							101.92	%							105.45	%

(1)

Average loans include non-accruing loans

(2)

Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using a composite federal/state income tax rate of 36%. The taxable equivalent adjustment was $5.6 million, $5.4 million, and $4.5 million for the years 2011, 2010, and 2009, 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

(dollars in thousands)

	Year Ended December 31, 2011 vs. 2010									Year Ended December 31, 2010 vs. 2009
	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans and leases, net	$	11,406		$	(1,637	)	$	9,769		$	18,788		$	1,424		$	20,212
Loans held for sale		41			(7	)		34			44			(24	)		20
Investment securities, taxable		(1,481	)		(410	)		(1,891	)		(5,614	)		(228	)		(5,842	)
Investment securities, tax exempt		1,237			(469	)		768			2,296			(84	)		2,212
Interest-earning balances		(103	)		(33	)		(136	)		92			33			125
Other		8			38			46			4			13			17
Total interest income		11,108			(2,518	)		8,590			15,610			1,134			16,744
Interest expense:
Deposits
Demand deposits		1,562			717			2,279			3,195			491			3,686
Savings deposits		60			56			116			13			19			32
Time deposits		541			(4,457	)		(3,916	)		2,686			(4,226	)		(1,540	)
Borrowings		(177	)		(129	)		(306	)		(246	)		(52	)		(298	)
Total interest expense		1,986			(3,813	)		(1,827	)		5,648			(3,768	)		1,880
Net interest income increase	$	9,122		$	1,295		$	10,417		$	9,962		$	4,902		$	14,864

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, 2011 was $18.2 million, representing a decrease of $8.2 million from the $26.4 million provision made in 2010. The allowance for loan losses, as a percentage of loans outstanding, increased from 1.65% at the beginning of 2011 to 1.81% at the end of 2011. At December 31, 2011, the allowance for loan losses was $31.0 million, an increase of $6.2 million, or 25.0% from the $24.8 million at the end of 2010. At December 31, 2011, the allowance calculated on the loan portfolio that excludes loans acquired, that are marked to fair value, was $24.0 million or 1.76% of loans excluding loans acquired. The elevated levels 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. Total loans include loans covered under loss-share agreements (“covered”) and loans not covered under loss-share agreements (“non-covered”).

Since December 2010, total loans increased $201.3 million, or 13.3%, while non-covered loans increased by $190.6 million, or 15.9%. At December 31, 2011, our loan portfolio included $320.0 million in covered loans and $1.39 billion of non-covered loans. At December 31, 2011, we had $87.3 million in nonaccrual loans (includes $67.9 million of covered loans) compared to $91.0 million in nonaccrual loans (includes $64.8 million of covered loans) at the end of 2010. The nonaccrual balance at December 31, 2011 has been written down to a balance that we believe is collectible under current market conditions.

Net loan charge-offs were $20.7 million, an increase of $1.8 million, or 10.0%, from 2010 to 2011. This increase was primarily from commercial construction and residential mortgages having increases in charge-offs of $3.5 million and $1.9 million, respectively. In addition, commercial real estate loan charge-offs increased by $1.0 million. Off-setting these increases was a $4.5 million decrease in charge-offs in the commercial and industrial loan portfolio. During 2011, net loan charge-offs included $3.8 million of purchased impaired loans because the credit losses were greater than the estimated credit losses. There were no loan charge-offs for purchased impaired loans during 2010. The ratio of net-charge offs to average loans in 2011 total 1.33%, compared to 1.39% for 2010.

Net loan charge-offs were $18.9 million, an increase of $7.2 million, or 62.0%, from 2009 to 2010. 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 increased $7.5 million, or 43.4% from the $17.3 million at the end of 2009. The ratio of net-charge offs to average loans in 2010 total 1.39%, compared to 1.13% for 2009.

Non-Interest Income

Non-interest income decreased $8.0 million to $20.8 million for the year ended December 31, 2011 as compared with $28.8 million and $8.7 million for the years ended December 31, 2010 and 2009, respectively. Table 4 presents a comparative analysis of the components of non-interest income. The decrease in non-interest income for 2011 resulted from the $11.5 million decrease from gain on acquisitions. For the years ended December 31, 2011 and 2010, gains on acquisitions were $7.8 and $19.3 million, respectively.

Mortgage fees generated from our mortgage division increased $647,000, compared to 2010 and increased $475,000 when comparing 2010 to 2009. During 2011, our original mortgage origination platform was terminated and replaced with a more robust platform that is expected to drive increases in mortgage origination volume and fee income in future periods. Due to the historically low interest rates, there were elevated volumes of originations and refinancing during 2010 and 2009.

Service charges and fees on deposit accounts increased $107,000 compared to 2010. Overall growth in volume of the related service charges were offset by lower overdraft and NSF fees due to new Federal Reserve consumer protection regulations. When comparing 2010 to 2009, service charges and fees on deposit accounts increased $376,000 in 2010 largely as a result of the tightened consumer spending and continued effects of the economic environment.

Investment brokerage fees increased $619,000 compared to 2010. During 2010, we started winding down the original investment platform and replaced it with a more robust investment platform that was fully operational during 2011. When comparing 2010 to 2009, investment brokerage fees increased $77,000.

Earnings on bank-owned life insurance increased $702,000 compared to 2010. Late in 2010, we purchased additional bank-owned life insurance which increased the revenue. When comparing 2010 to 2009, earnings on bank-owned life insurance increased $55,000 in 2010 due to a decreased rate of return given to policy holders of the bank-owned life insurance.

The gain on sale of investment securities available for sale increased $667,000 compared to 2010 due to decreased activity in the sales of investment securities. Gain on sale of investment securities available for sale decreased $3.1 million in 2010 compared to 2009.

Other non-interest income increased $709,000 compared to 2010. During 2011, our new SBA division became operational, with $540,000 of SBA fee income. Also included in non-interest income is FDIC-related income associated with our FDIC acquisitions, including present value accretion of the FDIC indemnification asset. When comparing 2010 to 2009, other non-interest income increased $3.0 million, primarily from the FDIC-related income from the acquisition of Beach First during 2010.

Table 4

Non-Interest Income

(dollars in thousands)

	Year Ended December 31,
	2011		2010		2009

Mortgage fees	$	2,230	$	1,583	$	1,108
Service charges		3,190		3,083		2,707
Investment brokerage fees		945		326		249
Earnings on bank-owned life insurance		1,688		986		931
Gain on sale of investment securities available for sale, net		1,202		535		3,610
Gain on acquisitions		7,800		19,261		-
Other non-interest income		3,747		3,039		81
Total non-interest income	$	20,802	$	28,813	$	8,686

Non-Interest Expense

We strive to maintain levels of non-interest expense that management believes are appropriate given the nature of our operations and the investments in personnel and facilities that have been necessary to generate growth. One of the keys to the momentum we have experienced has been the continuous investment in the core banking franchise, both in people and locations. As we strive to maintain momentum in its growth and strategy, we will incur costs associated with investments in people, facilities and technology that are anticipated to benefit the shareholders as these investments reach their potential. Non-interest expenses increased $12.7 million to $67.9 million for the year ended December 31, 2011 as compared with $55.2 million and $32.9 million for the years ended December 31, 2010 and 2009, respectively. Table 5 presents a comparative analysis of the components of non-interest expense.

Salaries and employee benefits increased $6.5 million during 2011 when compared to the prior year and increased $7.8 million from 2009 to 2010. The increase for 2011 is mainly due to increases in personnel costs are attributable to investments in the new mortgage and SBA lending platforms, as well as additions to our personnel from our acquisitions and our new offices in the Charlotte and Raleigh markets. All of these additions are expected to contribute to our long-term focus on driving both top line and fee income growth. The increase for 2010 is attributable to headcount growth resulting from the Beach First acquisition, and to a lesser extent, strategic additions to our senior management team, opening several new branch locations, expansion of the credit team and other initiatives. 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 $6.6 million, an increase of $1.3 million during 2011 compared to 2010, mainly due to legacy bank growth in opening new branch locations and operating activity from Blue Ridge. In comparison of 2010 to 2009, the increase of $2.0 was 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.

Advertising and business development expenses decreased $261,000 in 2011 compared to 2010 mostly due to decreases in the high activity reported during 2010. During 2010, advertising and business development expenses increased $838,000 from 2009 to 2010 mainly due to increased activity from our new markets in South Carolina and increases in business development expenses associated with our strategy to grow core deposits and increase visibility during a period when many larger competitors were in a defensive posture.

Insurance, professional and other services increased $154,000 in 2011 compared to 2010, primarily due to the continued levels of professional and other serviced utilized during 2011. For 2010, insurance, professional and other services increased $1.6 million when compared to 2009, primarily from the increased costs associated with the Beach First acquisition, including technology, consulting, legal, and valuation expenditures.

FDIC insurance assessments decreased $537,000 in 2011 from the implementation of a new deposit insurance assessment calculation method that had a favorable impact on assessments. In comparison, from 2009 to 2010, insurance assessments increased $126,000.

Loan, foreclosure and collection expenses increased $5.0 million due to increased volume of expenses primarily relating to the write-down of OREO properties, the ongoing expenses relating to these properties, and other loan, foreclosure and collection expenses. For the year ended December 31, 2011 and 2010, OREO valuation adjustments totaled $9.5 million and $5.1 million, respectively.

Table 5

Non-Interest Expense

(dollars in thousands)

	Year Ended December 31,
	2011		2010		2009

Salaries and employee benefits	$	31,810	$	25,340	$	17,499
Occupancy		3,859		3,218		1,913
Furniture and equipment		2,761		2,145		1,475
Data processing and supply		2,291		2,113		1,261
Advertising and business development		1,733		1,994		1,156
Insurance, professional and other services		4,166		4,012		2,452
FDIC insurance assessments		2,433		2,970		2,844
Loan, foreclosure and collection		14,072		9,054		1,078
Other		4,739		4,326		3,221
Total non-interest expense	$	67,864	$	55,172	$	32,899

Income Taxes

We generate significant amounts of non-taxable income from tax exempt investment securities and from investments in bank-owned life insurance. Accordingly, the level of such income in relation to income before income taxes significantly affects our effective tax rate. For the years ended December 31, 2011, 2010 and 2009, non-taxable income exceeded income before income taxes, resulting in a reduction of total income subject to income taxes for those years. For 2011, 2010 and 2009, the provision for income taxes reflects a tax benefit of $1.8 million, $204,000 and $285,000, respectively, or 3.5%, 2.7% and 4.6% of income before income taxes, respectively.

Preferred Stock Dividend and Accretion

For the years ended December 31, 2011 and 2010, dividends on preferred stock and accretion amounted to $2.4 million and $2.2 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 UST in December 2008, in connection with our participation in the CPP. For the year ended December 31, 2009, dividends on preferred stock and accretion amounted to $2.0 million.

Financial Condition

Total assets at December 31, 2011 were $2.45 billion, an increase of $305.0 million or 14.2% when compared to total assets of $2.15 billion at December 31, 2010. Total earning assets, which are comprised of interest-earning balances at banks, investment securities, loans and investment in bank-owned life insurance, were $2.20 billion at December 31, 2011 compared to $1.95 billion at December 31, 2010. Earning assets serve as our primary revenue sources. The majority of the increases resulted from the acquisitions of Blue Ridge and Regent during the fourth quarter of 2011, and to a lesser extent, core franchise growth.

We continually monitor liquidity levels in relation to the market conditions, and adjust 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, 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 has maintained higher levels of liquid assets throughout 2011 and 2010. At December 31, 2011, liquid assets totaled $347.6 million, or 14.2% of total assets, with the majority being available to meet short-term liquidity needs. At December 31, 2010, liquid assets totaled $389.7 million, or 18.1% of total assets. The average balance of liquid assets during 2011 totaled $370.0 million, or 11.0% of total assets. In addition to liquid assets held at December 31, 2011, we also had the capacity to borrow approximately $321.0 million under established credit lines with the Federal Reserve Bank of Richmond, the FHLB and other financial institutions.

Investment Securities

Investment securities were $379.3 million at December 31, 2011 and $358.9 million at December 31, 2010. 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. Our investment portfolios are high quality securities that are designed to provide liquidity while also providing acceptable rates of return. The majority of the investment securities in the portfolio, representing 74.4% of the total, are to be held for indefinite periods of time, although not necessarily intended to be held to maturity. These investment securities are classified as available for sale and are carried at fair value with any unrealized gains or losses, net of related taxes, reflected as an adjustment to shareholders' equity. Investment securities held for indefinite periods of time include investment 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.

During the fourth quarter of 2011, we reclassified at fair value $85.8 million in available for sale investment securities to the held to maturity category. Substantially all of the securities transferred were of longer duration with maturities exceeding ten years. The related unrealized after tax gains of approximately $3.2 million remained in accumulated other comprehensive income to be amortized over the estimated remaining lives of the securities as an adjustment of yield, in a manner consistent with the amortization of any premium or discount. Table 6 below summarizes the amortized costs, gross unrealized gains and losses and fair values of investment securities available for sale and held to maturity at December 31, 2011, 2010 and 2009.

Table 6

Investment Securities Portfolio Composition

(dollars in thousands)

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
December 31, 2011
Available for sale:
U.S. government agencies	$	22,719	$	482	$	-	$	23,201
State and municipals		152,688		7,996		128		160,556
Mortgage-backed securities:
Residential government sponsored		76,622		4,823		9		81,436
Other government sponsored		16,089		892		-		16,981
Other		47		-		-		47
	$	268,165	$	14,193	$	137	$	282,221
Held to maturity:
State and municipals	$	91,036	$	446	$	20	$	91,462
Other debt securities		6,000		-		1,120		4,880
	$	97,036	$	446	$	1,140	$	96,342

December 31, 2010
Available for sale:
State and municipals	$	221,902	$	2,722	$	4,082	$	220,542
Mortgage-backed securities:
Residential government sponsored		100,117		5,928		176		105,869
Other government sponsored		24,487		1,926		-		26,413
Other		47		-		-		47
	$	346,553	$	10,576	$	4,258	$	352,871
Held to maturity:
Other debt securities	$	6,000	$	-	$	720	$	5,280

December 31, 2009
Available for sale:
State and municipals	$	186,526	$	4,328	$	2,261	$	188,593
Mortgage-backed securities:
Residential government sponsored		134,438		7,304		-		141,742
Other government sponsored		28,629		1,495		-		30,124
Other		47		-		-		47
	$	349,640	$	13,127	$	2,261	$	360,506
Held to maturity:
Other debt securities	$	6,000	$	-	$	640	$	5,360

Our 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.

We do not engage in, nor do we presently intend to engage in, securities trading activities and therefore we do not maintain a trading account. At December 31, 2011, there were no securities of any issuer (other than governmental agencies) that exceeded 10% of our shareholders' equity.

Table 7 below summarizes the amortized costs, fair values and weighted average yields of investment securities available for sale at December 31, 2011, by contractual maturity groups.

Table 7

Investment Securities Portfolio Expected Maturities

(dollars in thousands)

	Amortized		Fair		Book
	Cost		Value		Yield (1)
Available for sale:
U. S. Government agencies:
Due within one year	$	502	$	502		0.48	%
Due after five through ten years		22,217		22,699		2.97	%
		22,719		23,201		2.98	%
State and municipals:
Due within one year		3,747		3,767		7.17	%
Due after one through five years		26,234		26,980		6.44	%
Due after five through ten years		105,862		111,288		6.39	%
Over ten years		16,845		18,521		7.54	%
		160,556		160,556		6.55	%
Mortgage-backed securities:
Due within one year		20,119		21,416		4.77	%
Due after one through five years		38,818		41,270		4.76	%
Due after five through ten years		12,517		13,295		4.57	%
Over ten years		21,257		22,436		4.74	%
		92,711		98,417		4.73	%
Other:
Over ten years		47		47		0.00	%

Total available for sale:
Due within one year		24,368		25,685		5.12	%
Due after one through five years		65,052		68,250		5.42	%
Due after five through ten years		140,596		147,282		5.71	%
Over ten years		38,149		41,004		6.73	%
	$	268,165	$	282,221		5.73	%
Held to maturity:
State and municipals:
Due after five through ten years	$	2,207	$	2,219		6.56	%
Over ten years		88,829		89,243		6.52	%
		91,036		91,462		6.52	%
Other debt securities:
Due after five through ten years		6,000		4,880		4.64	%

Total held to maturity:
Due after five through ten years		8,207		7,099		5.24	%
Over ten years		88,829		89,243		6.52	%
	$	97,036	$	96,342		6.41	%

(1) Based on amortized cost, tax-equivalent basis.

Loans

Loans increased by $201.3 million to $1.71 billion at December 31, 2011 from $1.51 billion at December 31, 2010. For 2011, average total loans were $1.56 billion, compared to $1.36 billion for 2010. A significant portion of this increase resulted from the acquisitions of Blue Ridge and Regent in the fourth quarter of 2011 where we acquired $65.6 million and $31.7 million, respectively, of loans. The remaining increase was a result of our continued focus to lend to our customers during this economic downturn. A majority of the loan growth of $429.0 million during 2010 resulted from the acquisition of Beach First during the second quarter of 2010 where we acquired $356.8 million of loans. In addition, during December of 2010, we purchased $32.9 million of seasoned single family residential mortgage loans from another financial institution. These loans were for properties located within our existing footprint and were comprised of low loan-to-value ratios and good to excellent FICO scores. At December 31, 2011 and 2010, covered loans amounted to $320.0 million and $309.3 million, respectively.

Table 8 sets forth information about our loan portfolio composition, for the periods indicated:

Table 8

Loan Portfolio Composition

(dollars in thousands)

	At December 31,
	2011					2010					2009					2008					2007
			% of					% of					% of					% of					% of
			Total					Total					Total					Total					Total
	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
Non-covered:
Commercial real estate	$	723,268		42.3	%	$	557,634		37.0	%	$	449,209		41.6	%	$	350,849		34.8	%	$	306,450		32.9	%
Commercial construction		175,823		10.3	%		170,079		11.3	%		183,509		17.0	%		228,330		22.7	%		196,105		21.0	%
Commercial and industrial		124,557		7.3	%		111,668		7.4	%		113,670		10.5	%		98,595		9.8	%		109,869		11.8	%
Leases		12,815		0.7	%		10,985		0.7	%		12,216		1.1	%		15,190		1.5	%		14,370		1.5	%
Residential construction		25,757		1.5	%		29,949		2.0	%		50,156		4.6	%		78,942		7.8	%		89,897		9.7	%
Residential mortgage		318,148		18.6	%		308,615		20.4	%		257,445		23.9	%		223,053		22.1	%		197,904		21.2	%
Consumer and other		9,949		0.6	%		10,099		0.7	%		12,655		1.2	%		12,829		1.3	%		17,967		1.9	%
Total not covered		1,390,317		81.3	%		1,199,029		79.5	%		1,078,860		100.0	%		1,007,788		100.0	%		932,562		100.0	%

Covered:
Commercial real estate		135,242		7.9	%		120,053		8.0	%		-		-			-		-			-		-
Commercial construction		51,426		3.0	%		62,879		4.2	%		-		-			-		-			-		-
Commercial and industrial		16,402		1.0	%		24,903		1.6	%		-		-			-		-			-		-
Residential construction		3,992		0.2	%		2,402		0.1	%		-		-			-		-			-		-
Residential mortgage		109,058		6.4	%		94,701		6.3	%		-		-			-		-			-		-
Consumer and other		3,913		0.2	%		4,404		0.3	%		-		-			-		-			-		-
Total covered		320,033		18.7	%		309,342		20.5	%		-		-			-		-			-		-

Total loans	$	1,710,350		100.0	%	$	1,508,371		100.0	%	$	1,078,860		100.0	%	$	1,007,788		100.0	%	$	932,562		100.0	%

Excluding covered loans, the mix and stratification within certain classifications of our loan portfolio has changed when compared to the loan portfolio composition at December 31, 2010. Our construction, land, and acquisition & development (“A&D”) portfolios increased from $200.9 million at December 31, 2010 to $203.2 million at December 31, 2011, representing an increase of 1.1%. At December 31, 2011, the residential construction portfolios were reduced by 14.0% from year-end 2010 levels, including reducing the speculative 1-4 family construction loans to $11.6 million, down from $17.7 million. Residential and commercial A&D exposure was reduced by $13.1 million during 2011 after having been reduced by $14.5 million during 2010. We will continue our efforts to divest A&D exposures as needed and deemed appropriate by management, and continue to rebalance the portfolio mix and concentrations as needed. Our non-covered commercial real estate portfolio increased from $557.6 million at December 31, 2010 to $723.3 million at December 31, 2011, including increases of $35.2 million and $108.6 million, respectively in the owner occupied retail commercial real estate and investment retail commercial real estate portfolios. Since 2009 new loan originations in this area have carried much higher credit standards for liquidity, contingencies, net worth, loan-to-value and management expertise.

Table 9

Loan Maturities

(dollars in thousands)

	At December 31, 2011
			Due after
	Due within		one year but		Due after
	one year		within five		five years		Total
By loan type:
Commercial real estate	$	154,067	$	601,706	$	102,737	$	858,510
Commercial construction		108,116		98,631		20,502		227,249
Commercial and industrial		75,488		60,592		4,879		140,959
Leases		1,668		11,010		137		12,815
Residential construction		23,470		4,211		2,068		29,749
Residential mortgage		81,146		159,602		186,458		427,206
Consumer and other		2,322		5,836		5,704		13,862
Total		446,277		941,588		322,485		1,710,350

By interest rate type:
Fixed rate loans	$	203,969	$	598,617	$	181,775	$	984,361
Variable rate loans		242,306		342,973		140,710		725,989
Total		446,275		941,590		322,485		1,710,350

The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.

Deposits

We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source. At December 31, 2011, deposits totaled $2.12 billion, an increase of $290.1 million, or 15.9%, from year-end 2010. The increase in year-end deposits was due primarily to the Blue Ridge and Regent acquisitions, which collectively brought us $204.0 million of deposits. Total average deposits increased by $185.7 million, or 10.85%, from $1.71 billion at December 31, 2010 to $1.90 billion at December 31, 2011. Non-interest-bearing demand accounts increased by $38.1 million, or 35.5%, while interest-bearing demand accounts increased by $68.3 million, or 8.1%. Time deposits increased $183.6 million, or 20.9%, and comprise 50.2% of total deposits at December 31, 2011, an increase from 48.1% at December 31, 2010. Time deposits of $100,000 or more represented 38.6% and 34.4%, respectively, of our total deposits at December 31, 2011 and 2010.

While overall deposit growth continues to be an emphasis, the more important element is the increase in transactional account deposits. Over the one-year period from December 31, 2010 to December 31, 2011, transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $106.5 million, or 11.2%. At December 31, 2011, time deposits were 50.2% of total deposits, compared to 48.1% at December 31, 2010. In addition, at December 31, 2011 and 2010, wholesale time deposits were 47.8% and 40.9%, respectively, of total time deposits. We believe that the Blue Ridge and Regent acquisitions will provide good markets for core deposit growth.

We continue our efforts to grow core relationships and focus on our Business Services, Retail and Private Banking groups. This focus has created a solid foundation of seasoned leadership and specialized banking expertise, dedicated to delivering exceptional service to each and every customer. This commitment transformed our deposit mix and deposit growth capabilities into a driver of current and future franchise value.

During 2009, we established a brokered money market relationship which enabled us to pay down borrowings at the FHLB that required over $270 million of our investment securities to be pledged as collateral. The collateral became unencumbered and was available to meet certain unforeseen liquidity demands that could arise. At December 31, 2011 and 2010, the money market relationship totaled $330.6 million and $330.1 million, respectively.

The following is our average deposits for a three-year period:

Table 10

Average Deposits

(dollars in thousands)

	For the Year Ended December 31,
	2011					2010					2009
	Average		Average			Average		Average			Average		Average
	amount		rate			amount		rate			amount		rate

Demand deposits	$	814,518		1.42	%	$	700,648		1.32	%	$	451,317		1.24	%
Savings deposits		36,564		0.44	%		18,937		0.24	%		11,835		0.12	%
Time deposits		919,024		1.94	%		894,301		2.43	%		794,181		2.93	%
Total interest-bearing deposits		1,770,106		1.67	%		1,613,886		1.92	%		1,257,333		2.30	%
Non-interest-bearing deposits		125,969		-			96,526		-			63,604		-
Total deposits	$	1,896,075		1.56	%	$	1,710,412		1.81	%	$	1,320,937		2.19	%

The following is our maturities of time deposits of $100,000 or more as of December 31, 2011:

Table 11

Maturities of Time Deposits of $100,000 or More

(dollars in thousands)

	At December 31, 2011
	3 months		Over 3 months		Over 6 months		Over 12
	or less		to 6 months		to 12 months		months		Total

Time deposits of $100,000 or more	$	263,803	$	134,514	$	130,434	$	287,829	$	816,580

Borrowings

Borrowings provide an additional source of funding for us. Short-term borrowings increased from $60.2 million at December 31, 2010 to $70.2 million at December 31, 2010. Short-term borrowings consist of FHLB term advances with remaining maturities of less than one year, Federal funds purchased from correspondent banks, securities sold under repurchase agreements and an unsecured revolving line of credit. During 2011, short-term FHLB advances increased by $7.0 million, including $5.0 million in daily rate overnight funding, while all of the other components of short-term borrowings have increased in the aggregate by $3.0 million. BNC may purchase federal funds through unsecured federal funds guidance lines of credit totaling $57.0 million at December 31, 2011. In addition, we have an unsecured revolving line of credit of $10.0 million that is available to utilize at management’s discretion, with $6.3 million and $3.3 million outstanding at December 31, 2011 and 2010, respectively.

The average balances for short-term borrowings during 2010 decreased by $4.3 million to $49.1 million, down from the 2010 average balance of $53.4 million. During 2011 and 2010, we maintained a higher position of liquidity at the Federal Reserve to assure that any funding needs from the acquisitions of Blue Ridge and Beach First were immediately addressed and to provide less reliance on overnight funding.

At December 31, 2011, long-term debt outstanding totaled $93.7 million, compared to $97.7 million outstanding at year-end 2010. Long-term debt consists of $62.0 million of FHLB advances and $31.7 million of subordinated debt, of which $23.7 million have been issued through our trust subsidiaries. There were no additional long-term borrowings during either 2011 or 2010. Note I and Note J to the accompanying Consolidated Financial Statements present detailed information on short-term borrowings and long-term debt, respectively.

Table 12 sets forth information about our borrowings, both short-term and long-term, for the three-year period ending December 31, 2010:

Table 12

Borrowings

(dollars in thousands)

	For the Year Ended December 31,
	2011			2010			2009
Short-term borrowings:
Repurchase agreements, federal funds purchased, lines of credit, and current portion of Federal Home Loan Bank advances
Balance outstanding at end of period	$	70,211		$	60,207		$	50,283
Maximum amount outstanding at any month end during the period		100,728			104,175			176,971
Average balance outstanding		49,146			53,406			62,305
Weighted-average interest rate during the period		0.99	%		1.10	%		1.01	%
Weighted-average interest rate at end of period		0.92	%		0.74	%		2.68	%
Long-term debt:
Federal Home Loan Bank advances and subordinated debentures
Balance outstanding at end of period	$	93,713		$	97,713		$	100,713
Maximum amount outstanding at any month end during period		97,713			100,713			105,713
Average balance outstanding		94,910			98,405			99,297
Weighted-average interest rate during the period		3.03	%		3.13	%		3.37	%
Weighted-average interest rate at end of period		2.99	%		2.92	%		3.02	%
Total borrowings:
Balance outstanding at end of period	$	163,924		$	157,920		$	150,996
Maximum amount outstanding at any month end during period		198,441			201,888			282,684
Average balance outstanding		144,056			151,811			161,602
Weighted-average interest rate during the period		2.33	%		2.42	%		2.46	%
Weighted-average interest rate at end of period		2.10	%		2.09	%		2.91	%

As an additional source of short-term borrowings, BNC utilizes securities sold under agreements to repurchase, with balances outstanding of $8.6 million and $7.7 million at December 31, 2011 and 2010, respectively. Securities sold under agreements to repurchase generally mature within one day from the transaction date and are collateralized by either U.S. Government Agency obligations, government agency sponsored mortgage-backed securities or securities issued by local governmental municipalities.

In addition, BNC has the ability to borrow funds from the Federal Reserve of Richmond utilizing the discount window and the borrower-in-custody of collateral arrangement. As of December 31, 2011, we had approximately $124.5 million in additional borrowing capacity available under these arrangements with no outstanding balances for 2011 or 2010.

BNC also uses advances from the FHLB of Atlanta under a line of credit equal to 30% of BNC’s total assets, subject to qualifying collateral being pledged. Outstanding advances totaled $62.0 million and $66.0 million at December 31, 2011 and 2010, respectively. These advances are secured by a blanket-floating lien on qualifying first mortgage loans, equity lines of credit, certain commercial real estate loans, and certain government agency sponsored mortgage-backed securities pledged to the FHLB. At December 31, 2011, we had $135.6 million additional borrowing capacity that was secured. A more detailed analysis of FHLB advances is presented in Note I and Note J to the accompanying Consolidated Financial Statements in Item 8 of Part II of this Form 10-K.

Other Real Estate Owned

OREO increased by $28.8 million during 2011, with the most significant factor in this increase being the $30.1 million of OREO in the acquisition of Blue Ridge. Total OREO of $68.5 million and $39.7 million, respectively, at December 31, 2011 and 2010, consisted of properties covered under loss-share agreements of $47.6 million and $15.8 million, respectively, and properties not covered under loss-share agreements were $20.9 million and $23.9 million, respectively.

Once OREO is acquired, OREO carrying values are reviewed at least annually, or more frequently depending on the property or market conditions, to evaluate if write-downs are required. We utilize various resources to value OREO including, but not limited to, appraisals, market conditions, number of days on the market and like-kind sales.

During the fourth quarter of 2011, we evaluated options for accelerating the disposition of OREO. Where a normal OREO sales cycle can be up to 18 months, we decided the best course of action included taking substantial discounts on certain larger OREO properties in order to accelerate the sales cycle on these properties to within six months. This decision resulted in an additional impairment charge during the fourth quarter of $7.4 million on $23.4 million of OREO or loans in the final stages of the foreclosure process, resulting in an updated carrying value of $15.0 million. Many of these properties have now been marked at significant discounts to appraised values and to levels where we have received confirmed interest from multiple parties. Management believes we will be able to liquidate the selected assets in a more cost-effective manner than a bulk sale option.

FDIC Indemnification Asset

We have recorded FDIC indemnification assets in connection with the loss-share agreements we entered into in connection with its acquisitions of Beach First and Blue Ridge. This asset is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should we choose to dispose of them. Fair value is estimated using projected cash flows related to the loss-share agreements based on the expected reimbursements for losses and the applicable loss-share percentages and the estimated true-up payment at the expiration of the loss-share agreements, if applicable. These cash flows were discounted to reflect the estimated timing of the receipt of the loss-share reimbursement from the FDIC and the true-up payment to the FDIC. Cash flow projections resulting from the loss-share agreements are subject to change during the term of the agreements, including the existence of and amount of any required true-up payment owed to the FDIC. The FDIC indemnification asset totaled $91.9 million and $69.5 million at December 31, 2011 and 2010, respectively.

Other

As a member of the FHLB, we had an investment of $9.1 million in FHLB stock at both December 31, 2011 and 2010. Our investment in premises and equipment increased by $12.7 million. In connection with the acquisition of Regent, we acquired a branch in Greenville, SC at a recorded cost of $4.4. During 2011, we also opened new branches in Greensboro, NC and Raleigh, NC having a combined cost of approximately $4.8 million. In addition, we had two new branches under construction in Charlotte, NC with total costs incurred as of December 31, 2011 of approximately $4.0 million. At December 31, 2011, we had goodwill of $26.1 million that is not amortizable and core deposit intangibles, associated with our acquisitions, amounted to $3.0 million.

During 2011, total shareholders' equity increased by $11.6 million, or 7.6%, to $163.9 million. Our retained earnings increased by $2.7 million for the year ended December 31, 2011, which was comprised of net income of $6.9 million, offset by common share dividends of $1.8 million and dividend and discount accretion on preferred stock of $2.4 million. Accumulated other comprehensive income increased $7.8 million from a loss of $6.8 million at December 31, 2010 to income of $1.0 million at December 31, 2011. The increase related principally to unrealized gains on available for sale investment securities. We are subject to minimum capital requirements, and as such, all capital ratios continue to place us in excess of the minimum required to be deemed a “well-capitalized” bank by regulatory measures.

Capital Resources

We are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and the regulatory framework for prompt corrective action prescribe specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of December 31, 2011, 2010 and 2009, we exceeded all regulatory capital requirements to be considered “well capitalized” as such terms are defined in applicable regulations. Our capital adequacy ratios are set forth below:

Table 13

Capital Adequacy Ratios

	To be well
	capitalized
	under prompt			December 31,
	action			2011			2010			2009
	provisions			Ratio			Ratio			Ratio
BNC Bancorp:
Total Capital (to risk weighted assets)		10.00	%		11.19	%		12.75	%		11.60	%
Tier 1 Capital (to risk weighted assets)		6.00	%		9.65	%		10.94	%		9.71	%
Tier 1 Capital (to average assets)		5.00	%		7.13	%		7.26	%		7.43	%

Bank of North Carolina:
Total Capital (to risk weighted assets)		10.00	%		11.51	%		13.01	%		12.79	%
Tier 1 Capital (to risk weighted assets)		6.00	%		9.99	%		11.19	%		10.87	%
Tier 1 Capital (to average assets)		5.00	%		7.38	%		7.42	%		8.32	%

Shareholders’ Equity

Our shareholders’ equity totaled $163.9 million, an increase of $11.6 million, or 7.6%, compared to $152.2 million at December 31, 2010. At December 31, 2011 and 2010, our tangible shareholders’ equity totaled $135.0 million and $123.8 million, respectively, and tangible equity to asset ratio on those dates was 5.56% and 5.76%, respectively. At December 31, 2009, shareholders’ equity totaled $126.2 million, there was $98.5 million of tangible shareholders’ equity and the tangible equity to asset ratio was 6.03%.

On June 14, 2010, we entered into an Investment Agreement (the “Investment Agreement”) with Aquiline. Pursuant to the Investment Agreement, Aquiline purchased 892,799 shares of our common stock, no par value per share, at $10.00 per share and 1,804,566 shares of our 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 of our directors, purchased 802,635 shares of our 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 us in connection with their investment in our common stock in the Private Placement.

On December 5, 2008, we issued 31,260 shares of Series A preferred stock and a warrant to purchase 543,337 shares of our common stock to the UST through a private placement. This issuance of shares was not registered under the Securities Act of 1933, as amended, in reliance on the exemption set for in Section 4(2) thereof. The Series A preferred stock qualifies as Tier I capital under risk-based capital guidelines and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Series A preferred stock is non-voting except for class voting rights on matters that would adversely affect the rights of the holders of the Series A preferred stock.

We also utilize alternative forms of regulatory capital to supplement our shareholders’ equity in order to remain “well capitalized” for regulatory purposes. We have issued four blocks of 30 year variable rate junior subordinated debentures to its wholly owned capital trusts: $5.2 million in April of 2003 priced at 3 month LIBOR + 3.25%; $6.2 million in March of 2004 priced at 3 month LIBOR + 2.80%; $5.2 million in September of 2004 priced at 3 month LIBOR + 2.40%; and $7.2 million in September of 2006 priced at 3 month LIBOR + 1.70%. In addition, during 2005 BNC issued $8.0 million of subordinated debentures at 3 month LIBOR + 1.80%, which counts as Tier II capital for regulatory purposes. These instruments are classified as long-term debt on our financial statements.

Note L to the accompanying Consolidated Financial Statements presents an analysis of our regulatory capital position as of December 31, 2011 and 2010. Management expects that we will remain "well-capitalized" for regulatory purposes throughout 2012, although there can be no assurance that we will not fall into the “adequately-capitalized” classification.

Lending Activities

General

We provide our customers with a full range of short to medium-term commercial, mortgage, construction and personal loans, both secured and unsecured. We also make real estate mortgage and construction loans.

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

Table 8 in this Item 7 provides an analysis of our loan portfolio composition by type of loan as of the end of each of the last five years.

Table 9 in this Item 7 presents, at December 31, 2011, (i) the aggregate maturities or repricing of loans in the named segments of our loan portfolio and (ii) the aggregate amounts of variable and fixed rate loans that mature or reprice after one year.

Commercial Loans

Commercial business lending is a major focus of our lending activities. At December 31, 2011, our commercial and industrial loan portfolio and lease portfolio equaled $153.8 million or 9.0% of total loans, as compared with $147.6 million or 9.8% of total loans at December 31, 2010. At December 31, 2011, commercial and industrial loans covered under loss-share agreements totaled $16.4 million as compared with $24.9 million at December 31, 2010. Commercial and industrial loans and leases include both secured and unsecured loans for working capital, expansion, and other business purposes. Short-term working capital loans generally are secured by accounts receivable, inventory and/or equipment. We also make term commercial loans secured by real estate, which are categorized as real estate loans. Lending decisions are based on an evaluation of the financial strength, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, we require personal guarantees and secondary sources of repayment.

Commercial loans generally provide greater yields and reprice more frequently than other types of loans, such as real estate loans. More frequent repricing means that yields on our commercial loans adjust with changes in interest rates.

Real Estate Loans

Real estate loans are made for purchasing and refinancing 1-4 family, multi-family and commercial properties. Real estate loans also include home equity credit lines. We offer fixed and adjustable rate options and provide customers access to long-term conventional real estate loans through our mortgage loan department which makes secondary market conforming loans that are originated with a commitment from a correspondent financial institution to purchase the loan within 30 days of closing. Residential real estate loans amounted to $427.2 million and $403.3 million at December 31, 2011 and 2010, respectively. Our residential mortgage loans are generally secured by properties located within our market area. At December 31, 2011 and 2010, residential real estate loans covered under loss-share agreements totaled $109.1 million and $94.7 million, respectively.

Many of the residential mortgage loans that we make are originated for the account of third parties. Such loans are classified as loans held for sale in the financial statements. At December 31, 2011 and 2010, loans held for sale amounted to $9.6 million and $6.8 million, respectively. We receive fees for each such loan originated, with such fees aggregating $2.2 million for the year ended December 31, 2011 and $1.6 million for the year ended December 31, 2010. We anticipate that we will continue to be an active originator of residential loans for the account of third parties. We do not originate sub-prime mortgages, unless through a correspondent who has full underwriting authority. In these cases, since we are not involved in the credit decision, there is limited exposure to defaults and buy back provisions.

Commercial real estate loans totaled $858.5 million and $677.7 million at December 31, 2011 and 2010, respectively, with $135.2 million and $120.1 million, respectively, covered under loss-share agreements. This lending has involved loans secured principally by commercial buildings for office, storage and warehouse space, and by a lesser extent, agricultural properties. Generally in underwriting commercial real estate loans, we require the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may be in greater amount and involve a greater degree of risk than 1-4 family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties.

Real Estate Construction Loans

Real estate loans are made for constructing 1-4 family and multi-family residential properties, the acquisition and development of land for the purpose of providing residential and commercial lots for sale, and the construction of commercial properties. We primarily offer a variable rate option and provide customers access to short-term conventional real estate financing through a reasonable construction and development process. At December 31, 2011 and 2010, the real estate construction loan portfolio was $257.0 million and $265.3 million, respectively, with $55.4 million and $65.3 million, respectively, of loans covered under loss-share agreements. Loans not covered under loss-share agreements consisted of the following categories at December 31, 2011 and 2010:

		2011	2010
·	Acquisition and development	$14.0 million	$26.2 million
·	Residential construction	$25.0 million	$29.9 million
·	Commercial construction	$71.7 million	$44.9 million
·	1-4 family buildable lots	$32.8 million	$42.8 million
·	Commercial buildable lots	$15.3 million	$13.6 million
·	Land held for development	$25.4 million	$26.9 million
·	Raw/Agricultural land	$19.0 million	$15.7 million

Management closely monitors residential real estate, specifically our Acquisition, Development and Construction loans, since these loans are generally considered most vulnerable to economic downturns. We attempt to mitigate this risk by employing experienced real estate lenders, providing real estate underwriting standards within the Credit Policy Manual, engaging an outside firm to conduct ongoing credit reviews and, most recently, contracting with a firm to provide quarterly real estate updates and trends for communities in which we have credit exposure. Most residential construction loans require full personal guarantees from the principals of the borrowing entity and maturities are typically limited to 12 months. Trends within our real estate portfolio have followed the general trends within our markets including increases in average time houses are on the market for sale and housing inventory available for sale with a slight decrease in average home prices. Increases in 2011 and 2010 non-performing assets were primarily due to specific adjustments within the real estate portfolio.

Consumer and Other Loans

Consumer and other loans include automobile loans, boat and recreational vehicle financing and miscellaneous secured and unsecured personal loans. Consumer loans generally can carry significantly greater risks than other loans, even if secured, because the collateral often consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. We attempt to manage the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss. Consumer and other loans amounted to $13.9 million and $14.5 million at December 31, 2011 and 2010, respectively.

Asset Quality

We consider asset quality to be of primary importance, and employ a formal internal loan review process to ensure adherence to our lending policy as approved by our Board of Directors. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. Credit Administration, through the loan review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan's credit quality improves or deteriorates, it is Credit Administration's and the Lender’s responsibility to change the borrower's risk grade accordingly. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in our market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents management's estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.

Our policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a non-accrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses. Management continues to tighten underwriting guidelines and procedure and rewritten loan policies, along with an enhanced internal loan review function, to address the changing risk of our loan portfolio.

Nonperforming Assets

Our nonperforming assets, which consist of loans past due 90 days or more, real estate acquired in the settlement of loans, restructured loans in nonaccrual status and loans in nonaccrual status, increased to $161.2 million, or 6.57% of total assets, at December 31, 2011 from $135.3 million, or 6.29% of total assets, at December 31, 2010. The increase is primarily related to our acquisition of Blue Ridge. The majority of these nonperforming assets are covered under loss-share agreements totaling $120.9 million and $85.1 million at December 31, 2011 and 2010, respectively. Excluding assets covered by loss-share agreements, nonperforming assets decreased from $50.2 million at December 31, 2010 to $40.4 million, or 1.93% of assets not covered under loss-share agreements at December 31, 2011. Despite increasing levels of nonperforming assets due to loss-share acquisitions, management believes asset quality and nonperforming levels remain favorable to its peers. Our allowance for loan losses, expressed as a percentage of gross loans, was 1.81% and 1.65% at December 31, 2011 and 2010, respectively, and expressed as a percentage of gross loans less fair value loans, was 1.76% and 2.07% at December 31, 2011 and 2010, respectively.

Table 14 sets forth, for the periods indicated, information with respect to our nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans plus loans 90 days past due and still accruing), and total nonperforming assets.

Table 14

Nonperforming Assets

(dollars in thousands)

	At December 31,
	2011			2010			2009			2008			2007
Nonaccrual loans (1):
Not covered by loss-share agreements	$	19,443		$	26,224		$	19,050		$	13,319		$	3,599
Covered by loss-share agreements		67,854			64,753			-			-			-
90 days past due:
Not covered by loss-share agreements		-			44			-			-			-
Covered by loss-share agreements		5,425			4,554			-			-			-
Other real estate owned:
Not covered by loss-share agreements		20,927			23,912			14,325			5,022			2,509
Covered by loss-share agreements		47,577			15,825			-			-			-
Total nonperforming assets	$	161,226		$	135,312		$	33,375		$	18,341		$	6,108
Nonperforming assets not covered by loss-share	$	40,370		$	50,180		$	33,375		$	18,341		$	6,108

Commercial loans restructured/modified not included in categories above :	$	41,515		$	5,107		$	4,168		$	-		$	-
Allowance for loan losses		31,008			24,813			17,309			13,210			11,784
Loans outstanding, net		1,709,483			1,508,180			1,079,179			1,007,788			932,562
Not covered by loss-share agreements		1,389,451			1,198,838			1,079,179			1,007,788			932,562

Nonperforming assets to loans and other real estate		9.07	%		8.74	%		3.05	%		1.81	%		0.60	%
Not covered by loss-share agreements		2.86	%		4.10	%		3.05	%		1.81	%		0.60	%

Nonperforming assets to total assets		6.57	%		6.29	%		2.04	%		1.17	%		0.54	%
Not covered by loss-share agreements		1.93	%		2.75	%		2.04	%		1.17	%		0.54	%

Allowance for loan losses to nonperforming loans		33.44	%		25.96	%		90.86	%		99.18	%		327.42	%
Not covered by loss-share agreements		159.48	%		94.46	%		90.86	%		99.18	%		327.42	%

(1)

Includes restructured loans of $4.7 million, $3.4 million, $348,000, $665,000 and $2.6 million at December 31, 2011, 2010, 2009, 2008 and 2007, respectively.

Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans, unless we place a loan on nonaccrual basis. We account for loans on a nonaccrual basis when we have serious doubts about the ability to collect principal or interest in full. Generally, our policy is to place a loan on nonaccrual status before the loan becomes past due 90 days. Loans are also placed on nonaccrual status in cases where management is uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower's weakened financial condition. We accrue interest on restructured loans at the restructured rates when management anticipates that no loss of original principal will occur. Potential problem loans are loans which are currently performing and are not included in nonaccrual or restructured loans above, but about which management has serious doubts as to the borrower's ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or restructured loans, so they are considered by management in assessing the adequacy of our allowance for loan losses. For additional information on nonaccruals and loan restructurings/modifications, see Note D to the accompanying Consolidated Financial Statements.

At December 31, 2011, we had $87.3 million in nonaccrual and renegotiated loans in nonaccrual status, a decrease of $3.7 million from $91.0 million at the end of 2010. The amounts of nonaccrual loans covered under loss-share agreement were $67.9 million and $64.8 million at December 31, 2011 and 2010, respectively. The amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as nonaccrual was $6.2 million, $7.5 million and $476,000 for the years ended December 31, 2011, 2010 and 2009, respectively. There were $5.4 million and $4.6 million of loans 90 days past due and still accruing interest at the end of 2011 and 2010, respectively, substantially all of which were covered under loss-share agreements. Real estate acquired in the settlement of loans consists of foreclosed, repossessed and idled properties, both residential and commercial. At December 31, 2011 and 2010, there were $68.5 million and $39.7 million, respectively, in assets classified as other real estate owned, with $47.6 million and $15.8 million, respectively, covered under loss-share agreements. The carrying values of other real estate owned represent the lower of the carrying amount or fair value less costs to sell.

The following is a summary of other real estate owned at the periods presented:

Table 15

Other Real Estate Owned

(dollars in thousands)

	December 31,
	2011		2010		2009
Covered under loss-share agreements:
Residential 1-4 family properties	$	26,679	$	5,565	$	-
Multifamily properties		385		1,024		-
Commercial properties		8,812		2,949		-
Construction, land development and other land		11,701		6,287		-
		47,577		15,825		-
Not covered under loss-share agreements:
Residential 1-4 family properties		2,939		5,174		2,391
Multifamily properties		-		77		-
Commercial properties		17,984		7,808		1,743
Construction, land development and other land		4		10,853		10,191
		20,927		23,912		14,325
Total other real estate owned	$	68,504	$	39,737	$	14,325

Analysis of Allowance for Loan Losses

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management increases allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off. The allowance is reduced by loans charged off. Management evaluates the adequacy of the allowance at least monthly. In addition, on a monthly basis our Board of Directors reviews the loan portfolio, conducts an evaluation of credit quality and reviews the computation of the loan loss allowance. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors deriving from our history of operations. In addition to our history, management also considers the loss experience and allowance levels of other similar banks and the historical experience encountered by our management and senior lending officers prior to joining us. In addition, regulatory agencies, as an integral part of their examination process, periodically review allowance for loan losses and may require us to make additions for estimated losses based upon judgments different from those of management. No regulatory agency asked for a change in our allowance for loan losses during 2011 or 2010.

Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers, reviewed by Credit Administration, and tested by our internal auditor. The testing program includes an evaluation of a sample of new loans, large loans, loans that are identified as having potential credit weaknesses, loans past due 90 days or more and still accruing, and nonaccrual loans. We strive to maintain the loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs our market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. We have no foreign loans and do not engage in significant lease financing or highly leveraged transactions.

Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower's ability to repay, the borrower's payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on management's judgment and historical experience.

Loans classified as "substandard" are those loans with clear and defined weaknesses such as unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some losses if the deficiencies are not corrected. A reserve range of 5% - 45% is generally allocated to these loans, depending on credit quality. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable. A reserve of 50% or greater is generally allocated to loans classified as doubtful. Loans classified as "loss" are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future. As a practical matter, when loans are identified as loss they are charged off against the allowance for loan losses. In addition to the above classification categories, we also categorize loans based upon risk grade and loan type, assigning an allowance allocation based upon each category.

Growth in loans outstanding has, throughout our history, been the motivating factor for increases in our allowance for loan losses and the resultant provisions for loan losses necessary to provide for those increases. During 2011 and 2010, the significant weakness in the local economies had weakened many borrowers’ financial condition. During 2011, we continued to experience a significant increase in our nonperforming asset levels as our management aggressively recognized impairments on performing credits where it had become evident that the underlying collateral values would no longer support the principal repayment terms. We are actively restructuring these relationships with borrowers in an effort to restore these credits to an accruing status.

Table 16 shows the allocation of the allowance for loan losses at the dates indicated. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the categories of loans shown.

Table 16

Allocation of the Allowance for Loan Losses

(dollars in thousands)

	December 31,
	2011					2010					2009					2008					2007
			% of total					% of total					% of total					% of total					% of total
	Amount		loans (1)			Amount		loans (1)			Amount		loans (1)			Amount		loans (1)			Amount		loans (1)

Real estate loans	$	14,847		75.2	%	$	15,839		71.7	%	$	11,355		65.6	%	$	7,516		56.9	%	$	6,375		54.1	%
Real estate construction loans		11,656		15.0	%		5,207		17.6	%		3,739		21.6	%		4,029		30.5	%		3,618		30.7	%
Commercial and industrial loans		4,338		8.2	%		3,525		9.0	%		1,817		10.5	%		1,295		9.8	%		1,391		11.8	%
Consumer loans and other		149		0.8	%		209		1.0	%		208		1.2	%		172		1.3	%		223		1.9	%
Leases		18		0.8	%		33		0.7	%		190		1.1	%		198		1.5	%		177		1.5	%
	$	31,008		100.0	%	$	24,813		100.0	%	$	17,309		100.0	%	$	13,210		100.0	%	$	11,784		100.0	%

(1)

Represents total of all outstanding loans in each category as a percent of total loans outstanding, grouped by collateral type.

Table 17 sets forth for the periods indicated information regarding changes in our allowance for loan losses.

Table 17

Loan Loss and Recovery Experience

(dollars in thousands)

	At or for the Year Ended December 31,
	2011			2010			2009			2008			2007

Total loans, net outstanding at end of year	$	1,709,483		$	1,508,180		$	1,079,179		$	1,007,788		$	932,562
Average loans outstanding during the year	$	1,561,257		$	1,359,107		$	1,026,635		$	981,069		$	849,271

Allowance for loan losses at beginning of year	$	24,813		$	17,309		$	13,210		$	11,784		$	10,400
Provision for loan losses		18,214			26,382			15,750			7,075			3,090
Increase in FDIC Indemnification asset		8,708			-			-			-			-
		51,735			43,691			28,960			18,859			13,490
Loans charged off:
Commercial real estate		6,144			5,038			3,171			516			-
Commercial construction		8,123			4,330			5,046			875			1,107
Commercial and industrial		1,215			5,342			941			2,529			248
Leases		-			9			60			-			-
Residential construction		943			725			1,183			790			-
Residential mortgage		5,478			3,624			1,262			816			310
Consumer and other		60			263			204			257			90
Total charge-offs		21,963			19,331			11,867			5,783			1,755

Recoveries of loans previously charged off:
Commercial real estate		158			43			4			23			-
Commercial construction		300			37			-			-			-
Commercial and industrial		555			135			133			54			-
Leases		15			-			-			-			-
Residential construction		14			26			32			-			-
Residential mortgage		176			201			20			33			30
Consumer and other		18			11			27			24			19
Total recoveries		1,236			453			216			134			49

Net charge-offs		20,727			18,878			11,651			5,649			1,706
Allowance for loan losses at end of year	$	31,008		$	24,813		$	17,309		$	13,210		$	11,784
Ratios:
Net charge-offs as a percent of average loans		1.33	%		1.39	%		1.13	%		0.58	%		0.20	%
Allowance for loan losses as a percent of loans at end of year		1.81	%		1.65	%		1.60	%		1.31	%		1.26	%

For the fiscal years 2007 through 2010, our loan loss experience has seen net loan charge-offs in each year range from 0.20% to 1.39% of average loans outstanding. For 2011, net charge-offs were 1.33% of average loans outstanding as compared to 1.39% in the prior year. Net charge-offs for 2011 also included $3.8 million of charge-offs for covered loans that are 80% reimbursed by the FDIC. Net charge-offs continue to remain at elevated levels due primarily to a significant softening of both the local housing market and local economy.

Our allowance for loan losses at December 31, 2011 of $31.0 million represents 1.81% of total loans outstanding, excluding loans held for sale. Our allowance for loan losses at December 31, 2010 of $24.8 million represents 1.65% of total loans outstanding, excluding loans held for sale. This increase in the allowance relative to our gross loans was primarily due to a higher level of perceived risk in this environment, and a greater amount of specific credits where impairment assessments have been assigned. During 2011, we recorded a $10.9 million provision for loan losses for covered loans and had a loan loss allowance associated with our covered loan portfolio of $7.1 million at December 31, 2011. Excluding the loans acquired that are recorded at fair value, our allowance for loan losses to non-covered loans decreased from 2.07% at December 31, 2010 to 1.76% at December 31, 2011.

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

Furthermore, while management believes it has established the allowance for loan losses in conformity with U.S. generally accepted accounting principles, there can be no assurance that regulators, in reviewing our portfolio, will not require an adjustment to the allowance for loan losses. No regulatory agency asked for a change in our allowance for loan losses during 2011 or 2010. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Asset/Liability Management

Our results of operations depend substantially on its net interest income. Like most financial institutions, our interest income and cost of funds are affected by general economic conditions and by competition in the marketplace. The purpose of asset/liability management is to provide stable net interest income growth by protecting our earnings from undue interest rate risk, which arises from volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. We maintain, and have complied with, an asset/liability management policy approved by our Board of Directors that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analysis: liquidity, equity, volatile liability dependence, portfolio maturities, maturing assets and maturing liabilities, earnings at risk, and economic value at risk. This policy is to control the exposure of our earnings to changing interest rates by generally endeavoring to maintain a position within a narrow range around an "earnings neutral position," which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending opportunities are not sufficient to utilize available funds, we have generally invested such funds in investment securities, primarily U.S. Treasury securities, securities issued by governmental agencies, government agency sponsored mortgage-backed securities and securities issued by local governmental municipalities. The investment securities portfolio contributes to our profits, and plays an important part in the overall interest rate management. However, management of the investment securities portfolio alone cannot balance overall interest rate risk. The investment securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the investment securities portfolio are safety, yield, liquidity, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits or as collateral for FHLB advances or borrowings through the Federal Reserve’s Discount Window.

In reviewing our needs with regard to proper management of our asset/liability program, our management estimates its future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing), and forecasted interest rate changes. A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include prepayments on loan and loan-backed assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

Table 18 presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous rate shocks at December 31, 2011. The rate shocks are measured in 100 basis point increments from base case. Base case utilizes key assumptions for asset/liability mix, loan and deposit growth, pricing, prepayment speeds, deposit decay rates, investment securities cash flows and reinvestment strategy, and market value assumptions on certain assets under various interest rate scenarios. Should the yield curve begin to rise and fall, management has strategies available to maximize earnings opportunities or offset the negative impact to earnings. The estimated results of our income simulation model as of December 31, 2011, looking forward for 12 months, are as follows:

Table 18

Net Interest Income at Risk

	Estimated increase(decrease)
	in net interest income at
Change in interest rates (basis points)	December 31, 2011
-100		-0.06	%
+100		-2.60	%
+200		-4.30	%
+300		-5.10	%
+400		-4.60	%

The analysis of an institution's interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is another standard tool for the measurement of the exposure to interest rate risk. Management believes that because interest rate gap analysis does not address all factors that can affect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk.

The following Table 19 “Interest Rate Sensitivity Analysis” sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2011, which are projected to reprice or mature in each of the future time periods presented. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts are considered rate sensitive and are placed in the shortest period, while negotiable order of withdrawal or other transaction accounts are assumed to be more stable sources that are less price elastic and have been placed in the longest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments, which will be received throughout the lives of the loans. The interest rate sensitivity of our assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

Table 19

Interest Rate Sensitivity Analysis

(dollars in thousands)

	At December 31, 2011
	3 months			Over 3 months			Total within			Over 12
	or less			to 12 months			12 months			months			Total
Interest-earning assets:
Loans	$	798,706		$	181,577		$	980,283		$	729,200		$	1,709,483
Loans held for sale		9,159			-			9,159			-			9,159
Investment securities, amortized cost		7,974			-			7,974			357,227			365,201
Other earning assets		41,306			9,159			50,465			-			50,465
Total interest-earning assets	$	857,145		$	190,736		$	1,047,881		$	1,086,427		$	2,134,308
Interest-bearing liabilities :
Interest-bearing demand deposits	$	791,145		$	-		$	791,145		$	118,257		$	909,402
Interest rate cap		(250,000	)		-			(250,000	)		250,000			-
Time deposits and savings		349,384			381,860			731,244			331,853			1,063,097
Borrowings		97,924			4,000			101,924			62,000			163,924
Total interest-bearing liabilities	$	988,453		$	385,860		$	1,374,313		$	762,110		$	2,136,423
Interest sensitivity gap	$	(131,308	)	$	(195,124	)	$	(326,432	)	$	324,317		$	(2,115	)
Cumulative interest rate sensitivity gap		(131,308	)		(326,432	)		(326,432	)		(2,115	)		(2,115	)
Cumulative interest rate sensitivity gap as a percent of total interest-earning assets		-6.15	%		-15.29	%		-15.29	%		-0.10	%		-0.10	%
Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities		86.72	%		76.25	%		76.25	%		99.90	%		99.90	%

The interest rate sensitivity analysis indicates that if assets and liabilities reprice in the time intervals indicated in the table, we are liability sensitive within twelve months, and asset sensitive thereafter. As stated above, certain shortcomings are inherent in the method of analysis presented in the table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. For instance, while the table is based on the assumption that money market accounts are immediately sensitive to movements in rates, we expect that in a changing rate environment the amount of the adjustment in interest rates for such accounts would be less than the adjustment in categories of assets that are considered to be immediately sensitive. The same is true for all other interest bearing transaction accounts. Additionally, certain assets have features that restrict changes in the interest rates of such assets both on a short-term basis and over the lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an increase in market interest rates. Due to these shortcomings, we place primary emphasis on our income simulation model when managing our exposure to changes in interest rates.

Liquidity

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

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities, interest-earning deposits in other banks and occasional sales of various assets. These funds are used to make loans and to fund continuing operations. At December 31, 2011, liquid assets totaled $435.1 million, or 17.7% of total assets, compared to $389.0 million, or 18.1% of assets at December 31, 2010.

The liability portion of the balance sheet provides liquidity primarily through various interest-bearing and non-interest-bearing deposit accounts. We may purchase federal funds through unsecured federal funds guidance lines of credit totaling $57.0 million, with no outstanding balances at December 31, 2011. We also have an unsecured revolving line of credit of up to $10.0 million with BNC, with $6.3 million outstanding at December 31, 2011. In addition, we have credit availability with the Federal Reserve and FHLB of approximately $377.2 million, with $117.0 million outstanding. We also have access to the wholesale deposit markets for additional liquidity.

Total net cash inflows totaled $25.7 million during 2011, an increase of $43.8 million from net cash outflows of $18.1 million during 2010. For 2009, net cash inflows totaled $11.4 million. Cash flows from operations increased to $39.7 million in 2011 from $35.1 million in 2010 and from $3.3 million in 2009. Cash used in investing activities were $102.6 million in 2011, a decrease from $9.6 million in 2010 and $43.8 million in 2009. Cash provided from the 2011 acquisitions of $38.7 million was offset primarily to fund loan growth and invest in investment securities. The cash flows provided by financing activities were $88.7 million in 2011, compared to cash flows used in financing activities in 2010 of $43.7 million. The cash flows provided by financing in 2011 were from the net increase in deposits. The cash flows provided by financing activities in 2009 totaled $52.0 million. The Consolidated Statement of Cash Flows in the accompanying Consolidated Financial Statements provides a detailed analysis of cash from operating, investing and financing activities for each of the years ended December 31, 2011, 2010 and 2009.

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

In the normal course of business, we will have various outstanding contractual obligations that will require future cash outflows. In addition there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require future cash outflows. Table 20 in this Item 7, “Contractual Obligations and Commitments”, summarizes our contractual obligations and commitments as of December 31, 2011.

Market Risk

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of our loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of BNC’s asset/liability management function. See “Asset/Liability Management” section of this Item 7.

Off-Balance Sheet Risk – Contractual Obligations and Commitments

In the ordinary course of business, we enter into various types of transactions that include commitments to extend credit that are not included in loans receivable, net, presented on our consolidated balance sheets. We apply the same credit standards to these commitments as we use in all our lending activities and have included these commitments in our lending risk evaluations. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. We do not expect that all such commitments will fund. See the following Table 20 and Note P to the accompanying Consolidated Financial Statements in Item 8 of Part II of this Form 10-K.

In addition, we have entered into a number of long-term leasing arrangements to support our ongoing activities. The required payments under such commitments and other debt instruments at December 31, 2011 are shown in the following table:

Table 20

Contractual Obligations and Commitments

(dollars in thousands)

	Payments Due by Period
			On demand
			or within						After
Contractual Obligations:	Total		1 year		2-3 years		4-5 years		5 years
Short-term borrowings	$	70,211	$	70,211		-		-		-
Long-term debt		93,713		-		17,000		-		76,713
Deposits		2,118,187		1,786,335		239,468		82,812		9,572
Operating leases		15,866		1,968		3,676		2,981		7,241
Total contractual cash obligations	$	2,297,977	$	1,858,514	$	260,144	$	85,793	$	93,526

	Amount of Commitment Expiration Per Period
	Total
	amounts		Within						After
Commitments:	committed		1 year		2-3 years		4-5 years		5 years
Lines of credit and loan commitments	$	205,257	$	115,023	$	3,783	$	7,651	$	78,800
Letters of credit		13,122		12,872		250		-		-
Commitments to sell loans held for sale		9,596		9,596		-		-		-
Total commitments	$	227,975	$	137,491	$	4,033	$	7,651	$	78,800

Derivative Financial Instruments

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

We utilize interest rate swaps and caps in the management of interest rate risk. Interest rate swaps are contractual agreements between two parties to exchange a series of cash flows representing interest payments. A swap allows both parties to alter the repricing characteristics of assets or liabilities without affecting the underlying principal positions. Through the use of a swap, assets and liabilities may be transformed from fixed to floating rates, from floating rates to fixed rates, or from one type of floating rate to another. We have previously entered into interest rate swaps designated as cash flow hedges to fix the interest rate received on certain variable rate loans. These loans exposed us to variability in cash flows, primarily from interest receipts due to changes to interest rates. During the year ended December 31, 2011, all of the interest rate swaps had matured.

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

Although off-balance sheet derivative financial instruments do not expose us to credit risk equal to the notional amount, such agreements generate credit risk to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. We minimize such risk by evaluating the creditworthiness of the counterparties and consistently monitoring these agreements. The counterparties to these agreements are primarily large commercial banks and investment banks. Where appropriate, master netting agreements are arranged or collateral is obtained in the form of rights to securities. At December 31, 2011, our derivatives reflected a $10.7 million loss, net of tax, of accumulated other comprehensive income.

Other risks associated with interest-sensitive derivatives include the effect on fixed rate positions during periods of changing interest rates. Indexed amortizing swaps' notional amounts and maturities change based on certain interest rate indices. Generally, as rates fall the notional amounts decline more rapidly, and as rates increase notional amounts decline more slowly. As of December 31, 2011, we had no indexed amortizing swaps outstanding. Under unusual circumstances, financial derivatives also increase liquidity risk, which could result from an environment of rising interest rates in which derivatives produce negative cash flows while being offset by increased cash flows from variable rate loans. We consider such risk to be insignificant due to the relatively small derivative positions we hold. A discussion of derivatives is presented in Note O to the accompanying Consolidated Financial Statements, which are presented under Item 8 of Part II in this Form 10-K.

Quarterly Financial Information

Table 21 sets forth, for the periods indicated, certain of our consolidated quarterly financial information. This information is derived from our unaudited financial statements, which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with the accompanying Consolidated Financial Statements in Item 8 of Part II of this Form 10-K. The results for any quarter are not necessarily indicative of results for any future period.

Table 21

Quarterly Financial Data

(dollars in thousands, except per share data)

	Year Ended December 31, 2011												Year Ended December 31, 2010
	Fourth quarter			Third quarter			Second quarter			First quarter			Fourth quarter			Third quarter			Second quarter			First quarter
Operating data:
Total interest income	$	28,449		$	25,065		$	24,787		$	25,042		$	25,329		$	25,580		$	24,829		$	19,272
Total interest expense		8,338			8,197			8,021			8,364			9,051			8,734			9,234			7,728
Net interest income		20,111			16,868			16,766			16,678			16,278			16,846			15,595			11,544
Provision for loan losses		8,158			3,524			3,032			3,500			12,000			5,436			6,000			2,946
Net interest income after provision		11,953			13,344			13,734			13,178			4,278			11,410			9,595			8,598
Non-interest income		12,168			3,839			2,371			2,425			1,847			3,906			21,698			1,362
Non-interest expense		23,525			14,715			14,893			14,732			17,202			15,479			13,604			8,887
Income (loss) before income taxes		596			2,468			1,212			871			(11,077	)		(163	)		17,689			1,073
Income tax expense (benefit)		(801	)		46			(381	)		(647	)		(5,021	)		(823	)		5,956			(316	)
Net income (loss)		1,397			2,422			1,593			1,518			(6,056	)		660			11,733			1,389
Less preferred stock dividends and
discount accretion		601			601			601			601			600			591			502			503
Net income (loss) available to common
shareholders	$	796		$	1,821		$	992		$	917		$	(6,656	)	$	69		$	11,231		$	886
Per share data:
Earnings per share - basic	$	0.08		$	0.18		$	0.10		$	0.09		$	(0.61	)	$	0.01		$	1.42		$	0.12
Earnings per share - diluted		0.08			0.18			0.10			0.09			(0.61	)		0.01			1.41			0.12
Cash dividends paid		0.05			0.05			0.05			0.05			0.05			0.05			0.05			0.05
Common stock price:
High		8.34			7.42			8.63			9.10			10.00			10.50			10.66			8.25
Low		6.16			6.10			6.52			7.53			8.29			9.50			7.81			6.81
Balance sheet data:
Loans:
Loans not covered by loss-share	$	1,389,451		$	1,309,893		$	1,244,862		$	1,227,553		$	1,198,838		$	1,144,974		$	1,123,803		$	1,088,620
Loans covered by loss-share		320,032			262,673			283,685			301,436			309,342			330,761			345,372			-
Allowance for loan losses		(31,008	)		(24,177	)		(23,373	)		(24,325	)		(24,813	)		(18,819	)		(19,038	)		(17,395	)
Net loans		1,678,475			1,548,389			1,505,174			1,504,664			1,483,367			1,456,916			1,450,137			1,071,225
Loans held for sale		9,596			6,753			1,909			1,679			6,751			3,314			2,190			1,237
Investment securities		379,257			348,989			339,381			333,265			358,871			357,555			364,805			359,937
Goodwill		26,129			26,129			26,129			26,129			26,129			26,129			26,129			26,129
Total assets		2,454,930			2,197,758			2,146,745			2,157,280			2,149,932			2,180,049			2,161,991			1,628,570
Deposits:
Non-interest bearing deposits	$	145,688		$	130,978		$	128,694		$	116,286		$	107,547		$	105,197		$	104,328		$	64,983
Interest-bearing demand and savings		909,402			833,190			835,967			849,392			841,062			786,498			739,542			599,013
Time deposits		1,063,097			871,436			885,922			905,173			879,461			963,885			990,755			687,235
Total deposits		2,118,187			1,835,604			1,850,583			1,870,851			1,828,070			1,855,580			1,834,625			1,351,231
Borrowed Funds		163,924			190,172			129,833			120,939			157,920			145,720			148,898			145,919
Total interest-bearing liabilities		2,136,423			1,894,798			1,851,722			1,875,504			1,878,443			1,896,103			1,879,195			1,432,167
Total shareholders' equity		163,855			162,575			157,569			154,211			152,224			165,479			164,138			123,811

Fourth Quarter Analysis

For the quarter ended December 31, 2011, net income was $1.4 million, or $0.13 per share. Income available to common shareholders was $797,000, or $0.08 per diluted share, an increase compared to the loss of $6.7 million, or $0.61 per diluted share, reported for the same period in 2010. In the fourth quarter of 2011, we incurred $723,000 of one-time expenses associated with merger and acquisition activities, which reduced after-tax diluted earnings per share by $0.08.

Total assets at December 31, 2011 were $2.45 billion, an increase of $257.2 million, or 11.7%, compared to $2.20 billion at September 30, 2011. The increase was due to strong organic growth in our North Carolina franchise, along with $160 million in assets from the acquisition of Blue Ridge and $53 million from the acquisition of Regent.

Net interest income for the fourth quarter of 2011 was $20.1 million, an increase of $3.8 million from the comparable period last year and an increase of $3.2 million from the prior quarter. Taxable-equivalent net interest margin increased 47 basis points from the fourth quarter of 2010 to 4.18%. Compared to the third quarter of 2011, taxable-equivalent net interest margin increased 39 basis points from 3.79%.

During the fourth quarter of 2011, our average yield on interest-earning assets increased 20 basis points while the average rate on interest-bearing liabilities decreased 31 basis points when compared to the fourth quarter of 2010. When compared to the third quarter of 2011, our yield on average earning assets increased by 32 basis points, while the cost of average interest-bearing liabilities decreased 11 basis points.

Net interest income in the fourth quarter was impacted by the accretion of yield and fair value discounts on the acquired loan portfolios. During the fourth quarter of 2011, accretion totaled $3.1 million, compared to $1.2 million in the fourth quarter of 2010, and $1.0 million in the third quarter of 2011. The additional accretion was due to accelerated cash flows on the Beach First loan portfolio, and accretion on the performing Blue Ridge loan portfolio utilizing a level-yield basis over the economic life of the loans.

During the fourth quarter of 2011, we recorded a provision for loan losses of $8.2 million, an increase from the $3.5 million recorded during the third quarter of 2011. Of the $8.2 million in provision expense, $6.0 million related to legacy non-covered loans and $2.2 million related to loss-share loans. We recorded a $10.9 million provision for loan losses for loss-share loans, of which $8.7 million was recorded through a FDIC indemnification asset. The remaining $2.2 million, representing 20% of the provision, was charged through our provision for loan losses. The allowance for loan losses was $31.0 million at December 31, 2011, and $24.2 million at September 30, 2011. Loan loss reserves to total period-end loans were 1.81% and 1.54% at December 31, 2011 and September 30, 2011, respectively, compared to 1.65% reported at December 31, 2010. Excluding the loans acquired that are marked to fair value, loan loss reserves to period-end loans not covered by loss-share decreased from 1.85% and 2.07% reported at September 30, 2011 and December 31, 2010, respectively, to 1.76% at December 31, 2011.

OREO not covered by loss-share agreements totaled $20.9 million at December 30, 2011, a decrease of $1.8 million from the $22.7 million reported at September 30, 2011. The change primarily consisted of $9.5 million in additions at fair value, $6.6 million in valuation adjustments, and $5.2 million in sales.

Net charge-offs for the fourth quarter of 2011 were $10.0 million, which included $3.8 million of loans covered under loss-share agreements where our cost was 20% or $760,000. Combined with the $6.2 million of non-covered charge-offs, we incurred $7.0 million in charge-off losses, or 1.79% of average loans annualized compared to $2.7 million, or 0.70% reported for the third quarter of 2011. Nonperforming assets not covered by loss-share were 1.93% of total assets and 6.57% including covered assets at December 31, 2011, compared to 2.75% and 6.24%, respectively, at September 30, 2011. The covered assets are covered by FDIC loss-share agreements that provide 80% protection on those assets and are being carried at estimated fair value.

Nonaccrual loans not covered by loss-share agreements totaled $19.4 million at December 31, 2011, a decrease of $10.4 million compared to $29.8 million at September 30, 2011. Loans migrating into nonaccrual status during the quarter totaled $8.1 million. Nonaccrual loans covered by loss-share agreements totaled $67.8 million, an increase of $6.1 million compared to $61.7 million at September 30, 2011. The increase primarily resulted from the additional $12.1 million of nonaccrual loans acquired from the Blue Ridge acquisition.

Performing TDRs increased $9.2 million during the quarter to $41.5 million, of which $1.9 million is covered under loss-share. The increase in TDRs during the quarter consists of performing loans that were renewed at rates or terms in line with current market transactions, but cautiously deemed as concessionary due to elevated risk in the specific loan sectors.

Non-interest income was $12.2 million and $3.8 million for the fourth and third quarters of 2011, compared to $1.8 million for the prior year fourth quarter. Included in non-interest income for the fourth quarter of 2011 was $7.8 million of acquisition gain from a FDIC-assisted transaction, $34,000 of net gains on sales of investments, and $1.3 million of income associated with FDIC receivable and related loss-share receipts. Excluding the FDIC related income and the sales of investment securities, non-interest income was $3.0 million for the current quarter, an increase of 42.7% from the $2.1 million reported for the fourth quarter of 2010 and 20.1% from the $2.5 million in the third quarter of 2011. When compared to the fourth quarter of 2010, increases were primarily due to growth in earnings on bank-owned life insurance of $137,000 and increases in mortgage fee income of $474,000. During the second quarter of 2011, our original mortgage origination platform was terminated and replaced with a more robust platform that is expected to drive increases in mortgage origination volume and fee income in future periods. In addition, our new SBA division became operational during 2011, with $333,000 of SBA fee income recorded during the fourth quarter of 2011.

Non-interest expenses for the fourth quarter of 2011 increased $6.3 million compared to the same quarter a year ago, and were $8.8 million higher than the third quarter of 2011. Loan, foreclosure and collection expenses increased by $3.9 million during the fourth quarter of 2011 when compared to the same quarter in 2010, primarily from valuation adjustments of OREO properties, and were $6.1 million higher than the third quarter of 2011. During the fourth quarter of 2011, there was $1.2 million of additional non-interest expense associated with the Blue Ridge acquisition.

Our personnel costs have increased $1.4 million, or 19.5%, during the fourth quarter of 2011 when compared to the same quarter a year ago, and were $644,000 higher than the previous quarter. All of the increases in personnel costs are attributable to investments in the new mortgage and SBA lending platforms, as well as additions to our personnel from our acquisitions and our new offices in the Charlotte and Raleigh markets. All of these additions are expected to contribute to our long-term focus on driving both top line and fee income growth. Professional and other services and Other expenses increased by $655,000 and $789,000, respectively, when compared to the same quarter a year ago, primarily from costs associated with the acquisition during the fourth quarter of 2011 and related franchise growth. Specific acquisition related costs totaled $723,000 during the fourth quarter of 2011. All other non-interest expense categories have seen nominal increases when compared to the same quarter a year ago.

Recent Accounting Pronouncements

See Note A to the accompanying Consolidated Financial Statements presented under Item 8 of Part II of this Form 10-K for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

Critical Accounting Estimates and Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note A to the accompanying Consolidated Financial Statements for a summary of significant accounting policies.

Critical accounting estimates and policies are those management believes are both most important to the portrayal of our financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. The allowance for loan losses represents a particularly sensitive accounting estimate. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the maturity of the loan portfolio, credit concentration, trends in historical loss experience, specific impaired loans and general economic conditions. For further discussion of the allowance for loan losses and a detailed description of the methodology used in determining the adequacy of the allowance, see the sections of this Item 7 titled “Asset Quality” and “Analysis of Allowance for Loan Losses” and Note D to the accompanying Consolidated Financial Statements contained in Item 8 of Part II of this Annual Report.

Additionally, intangible assets are subject to sensitive accounting estimate. Intangible assets include goodwill and other identifiable assets, such as core deposit premiums, resulting from acquisitions. Core deposit premiums are amortized primarily on a straight-line basis over a ten-year life based upon historical studies of core deposits. Goodwill is not amortized but is tested annually for impairment or at any time an event occurs or circumstances change that may trigger a decline in the value of the reporting unit. Examples of such events or circumstances include a decline in the value of our common stock below book value, adverse changes in legal factors, business climate, unanticipated competition, change in regulatory environment, or loss of key personnel.

We test for impairment in accordance with Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other. Potential impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value. Management first estimates our fair value in a business combination using one of two approaches. The Comparable Transaction Approach utilizes a regional transaction group and a national transaction group. For each group, average and median pricing ratios were applied to provide a range of values along with several qualitative factors being considered. The Discounted Cash Flow Approach is derived from the present value of future dividends over a five year time horizon and the projected terminal value at the end of the fifth year. The goodwill that would arise from this estimate is compared to the carrying value of the goodwill currently on the books to determine impairment. See Note G to the accompanying Consolidated Financial Statements contained in Item 8 of Part II of this Annual Report for information on goodwill.

To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and a second step of impairment testing will be performed. In the second step, the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test, will be determined. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value. The loss recognized is limited to the carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair value will not result in the reversal of previously recognized losses.

We account for our acquisitions under ASC Topic No. 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic No. 820, exclusive of the loss-share agreements with the FDIC. These fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

For an FDIC-assisted acquisition, the FDIC will reimburse us for certain acquired assets should we experience a loss; an indemnification asset is established and is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified asset, and measured on the same basis, subject to collectability or contractual limitations. The loss-share agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties. Because the acquired loans are subject to the accounting prescribed by ASC Topic 310, subsequent changes to the basis of the loss-share agreements also follow that model. Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the loss-share agreements, with the offset recorded through the consolidated statement of income. Improvements in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the loss-share agreements, with such decrease being amortized into income over 1) the same period or 2) the life of the loss-share agreements, whichever is shorter. For further discussion of our acquisitions and related FDIC indemnification assets, see Note B and Note E to the accompanying Consolidated Financial Statements contained in Item 8 of Part II in this Form 10-K.

Off-Balance Sheet Arrangements

Information about our off-balance sheet risk exposure is presented this Item 7 “Off-Balance Sheet Risk – Contractual Obligations and Commitments”. As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2011, our SPE activity is limited to our capital trust subsidiaries: BNC Bancorp Capital Trust I, BNC Bancorp Capital Trust II, BNC Bancorp Capital Trust III and BNC Bancorp Capital Trust IV, which in aggregate issued 23,000,000 Trust Preferred Securities.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Asset/Liability Management” and “Market Risk” under Item 7, which are incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The quarterly financial data required by Item 8 is included in Item 7 under “Quarterly Financial Information”.

Management’s Report on Internal Control Over Financial Reporting

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

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

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Management concluded that our internal control over financial reporting was effective as of December 31, 2011, based on the evaluation under the framework in Internal Control – Integrated Framework.

W. Swope Montgomery, Jr.	David B. Spencer
President and Chief Executive Officer	Chief Financial Officer

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

BNC Bancorp and SubsidiarY

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

	Page No.

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets As of December 31, 2011 and 2010	F-3

Consolidated Statements of Income For the years ended December 31, 2011, 2010 and 2009	F-4

Consolidated Statements of Comprehensive Income For the years ended December 31, 2011, 2010 and 2009	F-5

Consolidated Statements of Shareholders’ Equity For the years ended December 31, 2011, 2010 and 2009	F-6

Consolidated Statements of Cash Flows For the years ended December 31, 2011, 2010 and 2009	F-8

Notes to Consolidated Financial Statements	F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Shareholders of BNC Bancorp

We have audited the accompanying consolidated balance sheets of BNC Bancorp and subsidiary (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011. We also have audited the Company’s internal control over financial reporting as of December 31, 2011 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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

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

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BNC Bancorp and subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, BNC Bancorp and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Cherry, Bekaert & Holland, L.L.P.

Raleigh, North Carolina

March 15, 2012

F-2

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010

	2011			2010
	(In thousands, except share data)
Assets
Cash and due from banks	$	14,523		$	7,812
Interest-earning deposits in other banks		41,306			22,275
Investment securities available for sale, at fair value		282,221			352,871
Investment securities held to maturity, at amortized cost		97,036			6,000
Federal Home Loan Bank stock, at cost		9,159			9,146
Loans held for sale		9,596			6,751
Loans:
Covered under loss-share agreements		320,033			309,342
Not covered under loss-share agreements		1,389,450			1,198,838
Less allowance for loan losses		(31,008	)		(24,813	)
Net loans		1,678,475			1,483,367
Accrued interest receivable		10,174			10,363
Premises and equipment, net		43,220			30,550
Other real estate owned:
Covered under loss-share agreements		47,577			15,825
Not covered under loss-share agreements		20,927			23,912
FDIC indemnification asset		91,851			69,493
Investment in bank-owned life insurance		48,294			46,607
Goodwill		26,129			26,129
Other intangible assets, net		2,986			2,316
Other assets		31,456			36,515
Total assets	$	2,454,930		$	2,149,932

Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing demand	$	145,688		$	107,547
Interest-bearing demand		909,402			841,062
Time deposits		1,063,097			879,461
Total deposits		2,118,187			1,828,070
Short-term borrowings		70,211			60,207
Long-term debt		93,713			97,713
Accrued expenses and other liabilities		8,964			11,718
Total liabilities		2,291,075			1,997,708

Shareholders’ Equity
Preferred stock, no par value, authorized 20,000,000 shares;
Series A, Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation value per share, 31,260 shares issued and outstanding, net of discount		30,237			29,757
Series B, Mandatorily Convertible Non-Voting Preferred Stock, $10 stated value, 1,804,566 shares issued and outstanding		17,161			17,161
Common stock, no par value; authorized 80,000,000 shares; 9,100,890 and 9,053,360 issued and outstanding at December 31, 2011 and 2010, respectively		87,421			86,791
Common stock warrants		2,412			2,412
Retained earnings		25,614			22,901
Stock in directors rabbi trust		(2,505	)		(1,729	)
Directors deferred fees obligation		2,505			1,729
Accumulated other comprehensive income (loss)		1,010			(6,798	)
Total shareholders' equity		163,855			152,224
Total liabilities and shareholders’ equity	$	2,454,930		$	2,149,932

See accompanying notes.

F-3

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
	(In thousands, except per share data)
Interest Income
Loans, including fees
Interest and fees on loans	$	87,591		$	77,788		$	57,556
Investment securities:
Taxable		5,688			7,579			13,421
Tax-exempt		9,946			9,435			8,039
Interest-earning balances and other		118			208			66
Total interest income		103,343			95,010			79,082
Interest Expense
Demand deposits		11,719			9,324			5,606
Time deposits		17,836			21,752			23,292
Short-term borrowings		489			587			627
Long-term debt		2,876			3,084			3,342
Total interest expense		32,920			34,747			32,867
Net Interest Income		70,423			60,263			46,215
Provision for loan losses, net		18,214			26,382			15,750
Net interest income after provision for loan losses		52,209			33,881			30,465
Non-Interest Income
Mortgage fees		2,230			1,583			1,108
Service charges		3,190			3,083			2,707
Investment brokerage fees		945			326			249
Earnings on bank-owned life insurance		1,688			986			931
Gain on sale of investment securities available for sale, net		1,202			535			3,610
Gain on acquisitions		7,800			19,261			-
Other		3,747			3,039			81
Total non-interest income		20,802			28,813			8,686
Non-Interest Expense
Salaries and employee benefits		31,810			25,340			17,499
Occupancy		3,859			3,218			1,913
Furniture and equipment		2,761			2,145			1,475
Data processing and supply		2,291			2,113			1,261
Advertising and business development		1,733			1,994			1,156
Insurance, professional and other services		4,166			4,012			2,452
FDIC insurance assessments		2,433			2,970			2,844
Loan, foreclosure and other real estate owned expenses		14,072			9,054			1,078
Other		4,739			4,326			3,221
Total non-interest expense		67,864			55,172			32,899
Income before income tax benefit		5,147			7,522			6,252
Income tax benefit		(1,783	)		(204	)		(285	)
Net Income		6,930			7,726			6,537
Less preferred stock dividends and discount accretion		2,404			2,196			1,984
Net Income Available to Common Shareholders	$	4,526		$	5,530		$	4,553

Basic earnings per common share	$	0.45		$	0.62		$	0.62
Diluted earnings per common share	$	0.45		$	0.61		$	0.62
Dividends paid per common share	$	0.20		$	0.20		$	0.20

See accompanying notes.

F-4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009
	(In thousands)

Net income	$	6,930		$	7,726		$	6,537

Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on investment securities available for sale		14,210			(4,014	)		13,473
Tax effect		(5,478	)		1,547			(5,194	)
Reclassification of gains recognized in net income		(1,202	)		(535	)		(3,610	)
Tax effect		463			206			1,392
Amortization of unrealized gains on investment securities transferred from available for sale to held to maturitiy		(45	)		-			-
Tax effect		18			-			-
Net of tax amount		7,966			(2,796	)		6,061

Cash flow hedging activities:
Unrealized holding losses		(5,376	)		(16,886	)		(8,150	)
Tax effect		2,072			6,509			3,142
Reclassification of losses recognized in net income		5,118			2,066			1,061
Tax effect		(1,972	)		(796	)		(409	)
Net of tax amount		(158	)		(9,107	)		(4,356	)
Total other comprehensive income (loss)		7,808			(11,903	)		1,705
Comprehensive income (loss)	$	14,738		$	(4,177	)	$	8,242

See accompanying notes.

F-5

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years Ended December 31, 2011, 2010 and 2009

																Directors		Accumulated
					Common		Preferred		Preferred				Stock in			deferred		other com-
	Common stock				stock		stock		stock		Retained		directors			fees		prehensive
	Shares		Amount		warrants		Series A		Series B		earnings		rabbi trust			obligation		income (loss)		Total
	(In thousands, except share and per share data)

Balance, December 31, 2008		7,350,029	$	70,433	$	2,412	$	28,878	$	-	$	15,557	$	(1,233	)	$	1,233	$	3,400	$	120,680
Net income		-		-		-		-		-		6,537		-			-		-		6,537
Directors deferred fees		-		-		-		-		-		-		(155	)		155		-		-
Other comprehensive income, net of tax		-		-		-		-		-		-		-			-		1,705		1,705
Common stock issued pursuant to:
Exercise of stock options		5,438		32		-		-		-		-		-			-		-		32
Current income tax benefit		-		3		-		-		-		-		-			-		-		3
Stock-based compensation: