BNC BANCORP - FORM 10-Q - November 8, 2016

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - BNC BANCORP	exhibit3210q.htm
EX-31.2 - EXHIBIT 31.2 - BNC BANCORP	exhibit31210q.htm
EX-31.1 - EXHIBIT 31.1 - BNC BANCORP	exhibit31110q.htm
EX-10.1 - EXHIBIT 10.1 - BNC BANCORP	exhibit101directorrsu.htm

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________to ________

Commission File Number 000-50128

BNC Bancorp

(Exact name of registrant as specified in its charter)



	North Carolina		47-0898685
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	3980 Premier Drive, Suite 210
	High Point, North Carolina		27265
	(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such

files). Yes x No o

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



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

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

The number of shares outstanding of the registrant's common stock at November 4, 2016 was 52,149,127.

BNC BANCORP

TABLE OF CONTENTS



		Page No.
PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets at September 30, 2016 and December 31, 2015		3

Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015		4

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015		5

Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2016 and 2015		6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015		7

Notes to Consolidated Financial Statements		9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		42

Item 3. Quantitative and Qualitative Disclosures About Market Risk		61

Item 4. Controls and Procedures		61

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		62

Item 1A. Risk Factors		62

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		62

Item 3. Defaults Upon Senior Securities		62

Item 4. Mine Safety Disclosures		62

Item 5. Other Information		62

Item 6. Exhibits		62

SIGNATURES		63

EXHIBIT INDEX		64

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	September 30, 2016 (Unaudited)			December 31, 2015
Assets
Cash and due from banks	$	70,576		$	54,319
Interest-earning deposits in other banks	242,762			149,919
Investment securities available-for-sale, at fair value	543,013			490,140
Investment securities held-to-maturity, at amortized cost (fair value of $304,124 and $249,679 at September 30, 2016 and December 31, 2015, respectively)	295,276			244,417
Federal Home Loan Bank stock, at cost	11,115			8,171
Loans held for sale	40,441			39,470
Loans:
Originated loans	3,455,677			2,721,216
Acquired loans	1,540,270			1,478,655
Less allowance for loan losses	(36,366		)	(31,647		)
Net loans	4,959,581			4,168,224
Accrued interest receivable	17,078			18,055
Premises and equipment, net	140,220			112,968
Other real estate owned	28,048			32,561
FDIC indemnification asset	—			1,909
Investment in bank-owned life insurance	172,611			116,806
Goodwill and other intangible assets, net	207,820			152,985
Other assets	73,021			77,012
Total assets	$	6,801,562		$	5,666,956

Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand	$	917,521		$	776,479
Interest-bearing demand	3,080,479			2,366,890
Time deposits	1,652,123			1,598,838
Total deposits	5,650,123			4,742,207
Short-term borrowings	65,095			103,212
Long-term debt	245,514			188,351
Accrued expenses and other liabilities	45,618			41,039
Total liabilities	6,006,350			5,074,809

Shareholders' equity:
Preferred stock, no par value; authorized 20,000,000 shares; 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	—			—
Common stock, no par value; authorized 60,000,000 shares; 43,289,596 and 35,952,883 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	609,801			448,728
Common stock, non-voting, no par value; authorized 20,000,000 shares; 4,820,844 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	33,507			33,507
Retained earnings	143,317			102,583
Stock in directors rabbi trust	(4,958		)	(4,753		)
Directors deferred fees obligation	4,958			4,753
Accumulated other comprehensive income	8,587			7,329
Total shareholders' equity	795,212			592,147
Total liabilities and shareholders' equity	$	6,801,562		$	5,666,956

See accompanying notes to Consolidated Financial Statements.

Table of Contents

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
Interest income:
Loans, including fees	$	57,824	$	48,050	$	160,104		$	127,964
Investment securities:
Taxable	3,113		1,842		8,741			4,269
Tax-exempt	3,797		3,259		10,336			9,600
Interest-earning balances and other	291		162		733			414
Total interest income	65,025		53,313		179,914			142,247
Interest expense:
Demand deposits	3,826		2,168		10,065			5,575
Time deposits	3,793		3,097		10,499			9,020
Short-term borrowings	159		156		487			422
Long-term debt	1,830		1,633		5,026			4,168
Total interest expense	9,608		7,054		26,077			19,185
Net interest income	55,417		46,259		153,837			123,062
Provision for loan losses	1,865		198		3,210			609
Net interest income after provision for loan losses	53,552		46,061		150,627			122,453
Non-interest income:
Mortgage lending income	3,134		3,031		8,486			8,307
Service charges	2,644		2,284		7,387			5,738
Earnings on bank-owned life insurance	1,254		705		3,172			1,960
Gain (loss) on sale of investment securities, net	34		794		(1		)	839
Other	2,745		2,355		7,744			7,318
Total non-interest income	9,811		9,169		26,788			24,162
Non-interest expense:
Salaries and employee benefits	19,947		20,114		58,026			53,726
Occupancy	3,182		3,211		9,942			8,410
Furniture and equipment	2,300		1,655		6,371			4,880
Data processing and supplies	1,766		1,268		4,748			3,502
Advertising and business development	680		493		2,287			1,756
Insurance, professional and other services	2,277		3,155		7,738			7,256
FDIC insurance assessments	1,071		824		2,871			2,261
Loan, foreclosure and other real estate owned expenses	1,562		2,352		3,808			8,213
Other	5,050		5,113		13,770			11,571
Total non-interest expense	37,835		38,185		109,561			101,575
Income before income tax expense	25,528		17,045		67,854			45,040
Income tax expense	7,388		5,106		20,632			13,329
Net income	$	18,140	$	11,939	$	47,222		$	31,711

Basic earnings per common share	$	0.38	$	0.31	$	1.09		$	0.92
Diluted earnings per common share	$	0.38	$	0.31	$	1.09		$	0.92
Dividends declared and paid per common share	$	0.05	$	0.05	$	0.15		$	0.15

See accompanying notes to Consolidated Financial Statements.

Table of Contents

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income	$	18,140		$	11,939		$	47,222		$	31,711
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on investments securities available-for-sale	2,451			908			4,259			(827		)
Tax effect	(908		)	(336		)	(1,577		)	306
Reclassification of (gains) losses recognized in net income on sale of investment securities available-for-sale	(34		)	(794		)	1			(839		)
Tax effect	13			293			—			310
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity	(416		)	(204		)	(1,188		)	(561		)
Tax effect	155			76			440			208
Net of tax amount	1,261			(57		)	1,935			(1,403		)
Cash flow hedging activities:
Unrealized holding gains (losses)	897			(1,390		)	(1,075		)	(2,134		)
Tax effect	(332		)	514			398			790
Net of tax amount	565			(876		)	(677		)	(1,344		)
Total other comprehensive income (loss)	1,826			(933		)	1,258			(2,747		)
Total comprehensive income	$	19,966		$	11,006		$	48,480		$	28,964

See accompanying notes to Consolidated Financial Statements.

Table of Contents

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share data)



	Preferred Stock			Common stock					Common stock - nonvoting			Retained earnings			Stock in directors rabbi trust			Directors deferred fees obligation		Accumulated other comprehensive income			Total
	Shares	Amount		Shares		Amount			Shares	Amount		Retained earnings			Stock in directors rabbi trust			Directors deferred fees obligation		Accumulated other comprehensive income			Total
Balance, December 31, 2014	—	$	—	27,777,737		$	281,488		4,820,844	$	33,507	$	65,211		$	(3,429	)	$	3,429	$	10,182		390,388
Net income	—	—		—		—			—	—		31,711			—			—		—			31,711
Directors deferred fees	—	—		—		—			—	—		—			(1,535		)	1,535		—			—
Other comprehensive loss, net of tax	—	—		—		—			—	—		—			—			—		(2,747		)	(2,747		)
Common stock repurchased	—	—		(200,000	)	(3,622		)	—	—		—			—			—		—			(3,622		)
Common stock issued pursuant to:
Acquisition of Valley Financial Corporation	—	—		5,500,697		108,700			—	—		—			—			—		—			108,700
Stock-based compensation	—	—		111,413		1,994			—	—		—			—			—		—			1,994
Dividend reinvestment plan	—	—		12,673		231			—	—		—			—			—		—			231
Stock options exercised	—	—		206,140		2,440			—	—		—			—			—		—			2,440
Shares withheld for payment of taxes	—	—		(31,385	)	(576		)	—	—		—			—			—		—			(576		)
Shares traded to exercise stock options	—	—		(60,187	)	(1,047		)	—	—		—			—			—		—			(1,047		)
Excess income tax benefit	—	—		—		194			—	—		—			—			—		—			194
Cash dividends:
Common stock, $0.15 per share	—	—		—		—			—	—		(5,169		)	—			—		—			(5,169		)
Balance, September 30, 2015	—	$	—	33,317,088		$	389,802		4,820,844	$	33,507	$	91,753		$	(4,964	)	$	4,964	$	7,435		$	522,497

Balance, December 31, 2015	—	$	—	35,952,883		$	448,728		4,820,844	$	33,507	$	102,583		$	(4,753	)	$	4,753	$	7,329		$	592,147
Net income				—		—			—	—		47,222			—			—		—			47,222
Directors deferred fees	—	—		—		—			—	—		—			(205		)	205		—			—
Other comprehensive income, net of tax	—	—		—		—			—	—		—			—			—		1,258			1,258
Common stock issued pursuant to:
Acquisition of Southcoast Financial Corporation	—	—		4,310,445		98,968			—	—		—			—			—		—			98,968
Public offering	—	—		2,875,000		59,843			—	—		—			—			—		—			59,843
Stock-based compensation	—	—		121,353		2,382			—	—		—			—			—		—			2,382
Dividend reinvestment plan	—	—		9,305		208			—	—		—			—			—		—			208
Stock options exercised	—	—		59,617		555			—	—		—			—			—		—			555
Shares withheld for payment of taxes	—	—		(39,007	)	(883		)	—	—		—			—			—		—			(883		)
Cash dividends:
Common stock, $0.15 per share	—	—		—		—			—	—		(6,488		)	—			—		—			(6,488		)
Balance, September 30, 2016	—	$	—	43,289,596		$	609,801		4,820,844	$	33,507	$	143,317		$	(4,958	)	$	4,958	$	8,587		$	795,212

See accompanying notes to Consolidated Financial Statements.

Table of Contents

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)



	Nine Months Ended September 30,
	2016			2015
Operating activities
Net income	$	47,222		$	31,711
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	3,210			609
Impairment of premises and equipment	417			—
Depreciation and amortization	4,851			4,792
Amortization of premiums, net	4,094			3,048
Amortization of intangible assets	3,505			2,782
Accretion of fair value purchase accounting adjustments, net	(18,383		)	(16,621		)
Stock-based compensation	2,382			1,994
Excess income tax benefit of share-based compensation	—			194
Deferred compensation	1,144			265
Earnings on bank-owned life insurance	(3,172		)	(1,960		)
Loss (gain) on sale of investment securities, net	1			(839		)
Gain on disposal of premises and equipment	(17		)	(382		)
Losses on other real estate owned	764			4,359
Gain on sale of loans, net	(10,688		)	(9,228		)
Origination of loans held for sale	(263,829		)	(274,734		)
Proceeds from sales of loans held for sale	266,879			280,822
Decrease in accrued interest receivable	977			1,249
Payments received from FDIC under loss-share agreements	823			4,758
Payments received from FDIC upon termination of loss-share agreements	2,110			—
(Increase) decrease in other assets	(4,714		)	1,084
Increase in accrued expenses and other liabilities	12,874			12,382
Net cash provided by operating activities	50,450			46,285
Investing activities
Purchases of investment securities available-for-sale	(50,977		)	(137,909		)
Purchases of investment securities held-to-maturity	(44,270		)	(17,910		)
Proceeds from sales of investment securities available-for-sale	6,603			118,709
Proceeds from maturities and payments of investment securities available-for-sale	28,974			32,865
Proceeds from maturities and payments of investment securities held-to-maturity	5,137			11,788
Purchase of Federal Home Loan Bank stock	(74		)	6,389
Net increase in loans	(443,801		)	(284,428		)
Purchases of premises and equipment	(10,684		)	(7,801		)
Proceeds from disposal of premises and equipment	70			1,416
Investment in bank-owned life insurance	(39,196		)	(674		)
Investment in other real estate owned	(2,049		)	(1,414		)
Proceeds from sales of other real estate owned	10,265			15,503
Net cash received from acquisition	24,017			13,263
Net cash used in investing activities	(515,985		)	(250,203		)

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Financing activities
Net increase in deposits	572,629			332,088
Net decrease in short-term borrowings	(51,139		)	(136,316		)
Net (decrease) increase in long-term-debt	(90		)	1,202
Common stock repurchased	—			(3,622		)
Issuance of common stock	59,843			—
Common stock issued from exercise of stock options, net of taxes	555			2,440
Common stock issued pursuant to dividend reinvestment plan	208			231
Common stock repurchased in lieu of income taxes	(883		)	(1,623		)
Cash dividends paid	(6,488		)	(5,169		)
Net cash provided by financing activities	574,635			189,231
Net increase (decrease) in cash and cash equivalents	109,100			(14,687		)
Cash and cash equivalents, beginning of period	204,238			85,194
Cash and cash equivalents, end of period	$	313,338		$	70,507

Supplemental Statement of Cash Flows Disclosure
Interest paid	$	25,052		$	18,379
Income taxes paid	13,106			1,785
Summary of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	5,061		$	7,205
Transfer of loans held for sale to portfolio loans	4,543			2,405
FDIC indemnification asset decrease, net	27			2,026

See accompanying notes to Consolidated Financial Statements.

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BNC BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Organization

BNC Bancorp (the "Company") was formed in 2002 to serve as a one-bank holding company for Bank of North Carolina (the "Bank"). The Bank is incorporated under the laws of the State of North Carolina and provides a wide range of banking services tailored to the particular banking needs of the communities we serve. The Bank is 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 commercial and consumer loans. The Bank also offers a wide range of banking services, including traditional products such as checking and savings accounts. The Bank conducts operations through 71 full-service banking offices, including 36 branches in North Carolina, 26 branches in South Carolina and nine branches in Virginia. The branches in Virginia and South Carolina operate as BNC Bank.

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

These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The information contained in the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 should be referred to in connection with these unaudited interim consolidated financial statements.

Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation. The reclassifications had no effect on net income or shareholders' equity as previously reported.

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

Recently Adopted and Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this ASU will be effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The Company elected to early adopt ASU 2016-09 in the second quarter of 2016 with an effective date of January 1, 2016. As a result of the adoption, the Company recognized excess tax benefits of $0.3 million in the Consolidated Statements of Income for the three months ended September 30, 2016, and excess tax benefits of $0.5 million were recognized in the Consolidated Statements of Income and Consolidated Statements of Cash Flows, respectively, for the nine months ended September 30, 2016. Prior periods have not been adjusted.

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require lessees to record an asset on the balance sheet for the right to use the leased asset and a liability for the corresponding lease obligation for leases with terms of more than 12 months. The accounting treatment for lessors will remain relatively unchanged. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the accounting treatment related to classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured as fair value. Upon adoption, investments in equity securities, except those accounted for under the equity method or that result in the consolidation of the investee, will be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost minus impairment, plus or minus changes from observable price changes in an orderly transaction. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of certain provisions is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805), which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize measurement period adjustments during the period in which it determines the amount of the adjustment. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2015-16 on January 1, 2016 and the adoption did not have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30), which amends the presentation of debt issuance costs in the balance sheet as a direct deduction from the related debt liability. This update affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015. Prior to the adoption of ASU 2015-03 on January 1, 2016, the Company recorded debt issuance costs as other assets in the consolidated balance sheet. The Consolidated Balance Sheet as of December 31, 2015 reflects a reduction in other assets and long-term debt of $1.2 million related to the reclassification of debt issuance costs.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810), which amends the consolidation analysis required under GAAP. The revised guidance amends the consolidation analysis based on certain fee arrangements or relationships to the reporting entity and, for limited partnerships, requires entities to consider the limited partner’s rights relative to the general partner. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015. The Company adopted ASU 2015-02 on January 1, 2016 and the adoption did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU was developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. The ASU’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The ASU may be adopted using either a modified retrospective method or a full retrospective method. The Company intends to adopt the ASU during the first quarter of 2018, as required, using a modified retrospective approach. The Company's preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company's consolidated financial statements. The FASB continues to release new accounting guidance related to the adoption of this ASU and the results of the Company's materiality analysis may change based on conclusions reached as to the application of this new guidance.

NOTE 2 – ACQUISITIONS

Acquisition of Southcoast Financial Corporation

On June 17, 2016, the Company completed the acquisition of Southcoast Financial Corporation ("Southcoast"), the holding company for Southcoast Community Bank, pursuant to the terms of the Agreement and Plan of Merger dated August 14, 2015, as amended. Under the merger agreement, Southcoast's shareholders received 0.6068 shares of the Company's voting common stock for each share of Southcoast common stock owned.

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A summary of the fair value of assets received and liabilities assumed are as follows:



	As Recorded by Southcoast			Fair Value Adjustments				As Recorded by BNC
Assets	(Dollars in thousands)
Cash	$	24,019		$	—			$	24,019
Investment securities available-for-sale	30,607			(1,094		)	(1)	29,513
Loans	365,232			(9,233		)	(2)	355,999
Premises and equipment	19,585			2,304			(3)	21,889
Other real estate owned	306			—				306
Core deposit intangible	—			3,058			(4)	3,058
Other assets	23,082			845			(5)	23,927
Total assets acquired	462,831			(4,120		)		458,711
Liabilities
Deposits	(335,924		)	(175		)	(6)	(336,099		)
Borrowings	(69,300		)	(1,255		)	(7)	(70,555		)
Other liabilities	(4,789		)	(91		)	(8)	(4,880		)
Total liabilities assumed	(410,013		)	(1,521		)		(411,534		)
Net assets acquired	$	52,818		$	(5,641	)		47,177
Total consideration paid								98,970
Goodwill								$	51,793

Explanation of fair value adjustments:


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


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


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


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


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


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


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


(8)	Adjustment to reflect the estimated fair market value of certain leases and other assumed liabilities.

A summary of the consideration paid is as follows:



	(Dollars in thousands)
Common stock issued (4,310,445 shares)	$	98,968
Cash payments to common shareholders	2
Total consideration paid	$	98,970

This acquisition expanded and further strengthened the Company's presence in the Charleston, South Carolina metropolitan area, provided a low-cost base of core deposits, and expanded our presence in this key market. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

The following table presents unaudited pro-forma information as if the acquisition of Southcoast had occurred on January 1, 2016 under the “Pro-forma” columns. In addition, the following table presents unaudited pro-forma information as if the acquisition of Southcoast and Valley Financial Corporation ("Valley") had occurred on January 1, 2015 under the “Pro-forma” columns. This pro-forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects and is based on our historical results for the periods presented. Transaction-related costs related to each acquisition are not reflected in the pro-forma amounts. The pro-forma information does not necessarily reflect the results of operations that would have occurred had the Company acquired Valley or Southcoast at the beginning of 2016 or 2015. Cost savings are also not reflected in the unaudited pro-forma amounts.

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			Pro-forma for nine months ended September 30,
	Actual from acquisition date through September 30, 2016		2016		2015
	(Dollars in thousands, except per share data)
Net interest income	$	4,671	$	161,495	$	152,167
Non-interest income	233		27,941		29,377
Net income	618		53,848		36,328

Pro-forma earnings per share:
Basic			$	1.17	$	0.86
Diluted			$	1.17	$	0.85

Acquisition of Branches from CertusBank, N.A.

On October 16, 2015, the Company completed the acquisition of seven branches from CertusBank, N.A. (the "Certus branches"), pursuant to the terms of the Purchase and Assumption Agreement dated June 1, 2015.

A summary of the fair value of assets received and liabilities assumed are as follows:



	As Recorded by Certus			Fair Value Adjustments					Recast Adjustments			As Recorded by BNC
Assets	(Dollars in thousands)
Cash	$	1,297		$	—				$	—		$	1,297
Loans	186,354			(3,283		)	(1)		(2,774		)	180,297
Premises and equipment	8,542			698			(2)		—			9,240
Accrued interest receivable	443			—					—			443
Core deposit intangible	—			1,348			(3)		—			1,348
Other assets	11			734			(4)		1,026			1,771
Total assets acquired	196,647			(503		)			(1,748		)	194,396
Liabilities
Deposits	(175,783		)	(260		)	(5	)	—			(176,043		)
Other liabilities	(119		)	(487		)	(6	)	—			(606		)
Total liabilities assumed	(175,902		)	(747		)			—			(176,649		)
Net assets acquired	$	20,745		$	(1,250	)			$	(1,748	)	17,747
Cash consideration paid												25,692
Goodwill												$	7,945

Explanation of fair value adjustments:


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


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


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


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


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


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

This acquisition expanded and further strengthened the Company's presence in upstate South Carolina, provided a low-cost base of core deposits and provided an experienced in-market team that enhances our ability to grow in that market. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

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During the third quarter of 2016, the Company revised its initial estimates and assumptions regarding the valuation of certain acquired loans and acquired deferred tax assets. Because such revision occurred during the first 12 months following the date of acquisition and was not the result of an event that occurred subsequent to the acquisition date, the Company has increased the goodwill recorded in the acquisition of the Certus branches by $1.7 million to reflect this change in estimate.

Acquisition of Valley

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

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



	As Recorded by Valley			Fair Value Adjustments				Recast Adjustments			As Recorded by BNC
Assets	(Dollars in thousands)
Cash and due from banks	$	13,263		$	—			$	—		$	13,263
Investment securities available-for-sale	152,125			(796		)	(1)	—			151,329
Federal Home Loan Bank stock, at cost	4,338			—				—			4,338
Loans	624,006			(15,973		)	(2)	(616		)	607,417
Premises and equipment	8,934			892			(3)	—			9,826
Accrued interest receivable	2,263			—				—			2,263
Other real estate owned	8,114			—				(900		)	7,214
Core deposit intangible	—			6,964			(4)	—			6,964
Other assets	31,297			3,641			(5)	(225		)	34,713
Total assets acquired	844,340			(5,272		)		(1,741		)	837,327
Liabilities
Deposits	(646,053		)	$	(1,086	)	(6)	—			(647,139		)
Borrowings	(141,087		)	548			(7)	—			(140,539		)
Other liabilities	(972		)	(458		)	(8)	—			(1,430		)
Total liabilities assumed	(788,112		)	(996		)		—			(789,108		)
Net assets acquired	$	56,228		$	(6,268	)		$	(1,741	)	48,219
Total consideration paid											108,700
Goodwill											$	60,481

Explanation of fair value adjustments:


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


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


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


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


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


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


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


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

A summary of the consideration paid is as follows:



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

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With this acquisition, the Company expanded its footprint into Roanoke, Virginia with the addition of nine branches and an experienced in-market team that enhances the Company’s ability to compete in that market. The Company projects cost savings will be recognized in future periods through the elimination of redundant operations. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

During the second quarter of 2016, the Company revised its initial estimates and assumptions regarding the valuation of certain acquired loans, acquired other real estate owned, acquired other assets, and acquired deferred tax assets. Because such revision occurred during the first 12 months following the date of acquisition and was not the result of an event that occurred subsequent to the acquisition date, the Company has increased the goodwill recorded in the acquisition of Valley by $1.7 million to reflect this change in estimate.

The Company incurred total transaction-related costs of $2.6 million and $4.9 million during the three months ended September 30, 2016 and 2015, respectively, and total transaction-related costs of $7.8 million and $9.0 million during the nine months ended September 30, 2016 and 2015, respectively. Transaction-related costs, which are expensed as incurred as a component of non-interest expense, primarily include, but are not limited to, severance costs, professional services, data processing fees, and marketing and advertising expenses.

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

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

NOTE 3 - EARNINGS PER SHARE

Basic earnings per common share is computed using the weighted average number of common shares and participating securities outstanding during the reporting period. Diluted earnings per common share is the amount of earnings available to each share of common stock during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options and restricted stock awards (collectively referred to herein as “Stock Rights”). Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in the periods in which the effect would be anti-dilutive.

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



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
	(Dollars in thousands, except per share amounts)
Net income	$	18,140	$	11,939	$	47,222	$	31,711

Weighted average common shares - basic	47,281,192		38,057,633		43,194,871		34,460,987
Add: Effect of dilutive Stock Rights	78,435		107,448		91,703		83,925
Weighted average common shares - diluted	47,359,627		38,165,081		43,286,574		34,544,912

Basic earnings per common share	$	0.38	$	0.31	$	1.09	$	0.92
Diluted earnings per common share	$	0.38	$	0.31	$	1.09	$	0.92

For the three and nine months ended September 30, 2016 and 2015, respectively, there were no shares of Stock Rights excluded in computing diluted common shares outstanding.

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NOTE 4 – INVESTMENT SECURITIES

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



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2016	(Dollars in thousands)
Available-for-sale:
U.S. Government agencies	$	10,445	$	451	$	—	$	10,896
State and municipals	166,486		9,942		5		176,423
Corporate debt securities	51,648		975		303		52,320
Asset-backed debt securities	174,412		738		834		174,316
Equity securities	17,929		355		334		17,950
Mortgage-backed securities:
Residential government sponsored	108,367		1,591		61		109,897
Other government sponsored	1,170		41		—		1,211
	$	530,457	$	14,093	$	1,537	$	543,013
Held-to-maturity:
State and municipals	$	273,178	$	8,860	$	489	$	281,549
Corporate debt securities	22,098		997		520		22,575
	$	295,276	$	9,857	$	1,009	$	304,124



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2015	(Dollars in thousands)
Available-for-sale:
U.S. Government agencies	$	12,025	$	302	$	—	$	12,327
State and municipals	169,907		10,711		—		180,618
Corporate debt securities	48,392		—		689		47,703
Asset-backed debt securities	140,773		15		2,041		138,747
Equity securities	11,520		270		517		11,273
Mortgage-backed securities:
Residential government sponsored	97,611		562		396		97,777
Other government sponsored	1,616		79		—		1,695
	$	481,844	$	11,939	$	3,643	$	490,140
Held-to-maturity:
State and municipals	$	228,417	$	6,698	$	477	$	234,638
Corporate debt securities	16,000		1		960		15,041
	$	244,417	$	6,699	$	1,437	$	249,679

The amortized cost and estimated fair value of investment securities at September 30, 2016, by contractual maturity, are shown below. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities have been included in maturity groupings based on the contractual maturity.

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	Amortized Cost		Fair Value
Available-for-sale:	(Dollars in thousands)
Due within one year	$	5,740	$	5,870
Due after one through five years	73,580		76,990
Due after five through ten years	85,963		86,819
Due after ten years	347,245		355,384
Total debt securities	512,528		525,063
Equity securities	17,929		17,950
	$	530,457	$	543,013
Held-to-maturity:
Due within one year	$	7,904	$	8,006
Due after one year through five years	81,913		84,782
Due after five through ten years	27,127		28,449
Due after ten years	178,332		182,887
	$	295,276	$	304,124

At September 30, 2016 and December 31, 2015, respectively, investment securities with an estimated fair value of approximately $352.2 million and $371.8 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015
	(Dollars in thousands)
Proceeds from sales	$	687	$	99,626		$	6,603		$	118,709

Gross realized gains on sales	$	34	$	812		$	168		$	894
Gross realized losses on sales	—		(18		)	(169		)	(55		)
Total realized gains (losses), net	$	34	$	794		$	(1	)	$	839

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The following tables detail gross unrealized losses and fair values of investment securities aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2016	(Dollars in thousands)
Available-for-sale:
State and municipals	3	$	1,254	$	5	—	$	—	$	—	$	1,254	$	5
Corporate debt securities	2	15,745		88		2	4,597		215		20,342		303
Asset-backed debt securities	10	51,263		246		10	31,111		588		82,374		834
Equity securities	1	4,090		8		2	5,900		326		9,990		334
Mortgage-backed securities	7	7,458		43		1	1,871		18		9,329		61
	23	$	79,810	$	390	15	$	43,479	$	1,147	$	123,289	$	1,537

Held-to-maturity:
State and municipals	21	$	21,979	$	252	12	$	9,307	$	237	$	31,286	$	489
Corporate debt securities	—	—		—		1	3,480		520		3,480		520
	21	$	21,979	$	252	13	$	12,787	$	757	$	34,766	$	1,009



	Less Than 12 Months					12 Months or More					Total
	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2015	(Dollars in thousands)
Available-for-sale:
Corporate debt securities	6	$	29,015	$	658	1	$	2,969	$	31	$	31,984	$	689
Asset-backed debt securities	29	114,305		1,726		1	4,486		315		118,791		2,041
Equity securities	1	5,200		175		1	637		342		5,837		517
Mortgage-backed securities	20	66,175		327		3	3,432		69		69,607		396
	56	$	214,695	$	2,886	6	$	11,524	$	757	$	226,219	$	3,643

Held-to-maturity:
State and municipals	13	$	20,658	$	210	20	$	17,072	$	267	$	37,730	$	477
Corporate debt securities	—	—		—		1	3,040		960		3,040		960
	13	$	20,658	$	210	21	$	20,112	$	1,227	$	40,770	$	1,437

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

Based on this evaluation, the Company does not believe any unrealized loss at September 30, 2016 represents an other-than-temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and the current market conditions, and not credit deterioration. The Company has concluded there are no concerns about the long-term viability of the issuers of these securities and the Company currently does not intend to sell, nor does it believe that it will be required to sell, these securities before recovery of their amortized cost basis.

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major categories of loans are presented below:



	September 30, 2016						December 31, 2015
	Originated		Acquired ⁽¹⁾		Total		Originated		Acquired ⁽¹⁾		Total
	(Dollars in thousands)
Commercial real estate	$	2,059,196	$	645,697	$	2,704,893	$	1,575,555	$	670,460	$	2,246,015
Commercial construction	355,025		87,218		442,243		281,591		83,418		365,009
Commercial and industrial	333,590		109,726		443,316		279,495		139,621		419,116
Leases	29,524		—		29,524		26,773		—		26,773
Total commercial	2,777,335		842,641		3,619,976		2,163,414		893,499		3,056,913
Residential construction	91,470		12,161		103,631		59,937		16,084		76,021
Residential mortgage	570,565		680,120		1,250,685		484,895		563,563		1,048,458
Consumer and other	16,307		5,348		21,655		12,970		5,509		18,479
Total portfolio loans	$	3,455,677	$	1,540,270	$	4,995,947	$	2,721,216	$	1,478,655	$	4,199,871


⁽¹⁾	Amount includes $0 and $40.9 million of acquired loans covered under FDIC loss-share agreements at September 30, 2016 and December 31, 2015, respectively. The unpaid principal balance for acquired loans covered under FDIC loss-share agreements was $0 and $41.4 million at September 30, 2016 and December 31, 2015, respectively.

On May 2, 2016, the Bank entered into an agreement with the FDIC to terminate all existing loss-share agreements with the FDIC. All rights and obligations of the Bank and the FDIC under the FDIC loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, have been resolved and terminated under such agreement.

The Company evaluates loans acquired with evidence of credit deterioration in accordance with the provisions of ASC 310-30. Credit-impaired loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, the Company will not collect all contractually required principal and interest payments. Generally, the acquired loans that meet the Company’s definition for substandard status fall within the definition of credit-impaired covered loans. The following table presents loans acquired during the nine months ended September 30, 2016, at acquisition date, accounted for under ASC 310-30:



	(Dollars in thousands)
Contractually required payments receivable	$	17,168
Contractual cash flows not expected to be collected (non-accretable)	(2,072		)
Expected cash flows	15,096
Interest component of expected cash flows	(811		)
Fair value of loans acquired	$	14,285

The acquisition date unpaid balance of loans acquired during the nine months ended September 30, 2016 that did not have credit deterioration was $348.1 million with an estimated fair value of $341.7 million. The discount will be amortized on a level-yield basis over the economic life of the loans.

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The following table presents a summary of the activity of the Company's loans accounted for under ASC 310-30:



	Nine Months Ended September 30,
	2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	142,671		$	150,382
Purchased loans acquired	14,285			35,772
Accretion	3,132			4,138
Transfer to other real estate owned	(2,695		)	(1,071		)
Net payments received	(27,959		)	(21,831		)
Net charge-offs	(986		)	(725		)
Other activity, net	792			(9,324		)
Balance at end of period	$	129,240		$	157,341

The following table presents a summary of changes in accretable difference on purchased loans accounted for under ASC 310-30:



	Nine Months Ended September 30,
	2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	2,853		$	4,418
Accretion	(3,132		)	(4,138		)
Accretable difference acquired	811			—
Adjustments to accretable difference due to changes in expected future cash flows	2,086			3,336
Balance at end of period	$	2,618		$	3,616

The Company has the ability to borrow funds from the Federal Home Loan Bank of Atlanta ("FHLB") and from the Federal Reserve Bank of Richmond (the "Federal Reserve"). At September 30, 2016 and December 31, 2015, real estate loans with carrying values of $2.09 billion and $1.68 billion, respectively, were pledged to secure borrowing facilities from these institutions.

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



For the three months ended September 30, 2016	Commercial real estate			Commercial construction			Commercial and industrial			Leases		Residential construction		Residential mortgage			Consumer and other			Total
	(Dollars in thousands)
Balance June 30, 2016	$	14,447		$	5,242		$	5,210		$	109	$	537	$	8,021		$	275		$	33,841
Charge-offs	(26		)	—			(776		)	—		—		(31		)	(68		)	(901		)
Recoveries	471			385			130			—		27		529			19			1,561
Provision⁽¹⁾	1,551			(222		)	329			101		91		(166		)	181			1,865
Balance September 30, 2016	$	16,443		$	5,405		$	4,893		$	210	$	655	$	8,353		$	407		$	36,366



For the three months ended September 30, 2015	Commercial real estate			Commercial construction			Commercial and industrial			Leases			Residential construction		Residential mortgage			Consumer and other			Total
	(Dollars in thousands)
Balance June 30, 2015	$	12,940		$	5,547		$	3,255		$	92		$	463	$	8,138		$	200		$	30,635
Charge-offs	(593		)	—			(42		)	—			—		(536		)	(36		)	(1,207		)
Recoveries	403			113			689			—			5		313			10			1,533
Provision ⁽²⁾	271			(842		)	78			(4		)	57		581			57			198
Change in FDIC indemnification asset⁽²⁾	1			157			(100		)	—			—		(386		)	2			(326		)
Balance September 30, 2015	$	13,022		$	4,975		$	3,880		$	88		$	525	$	8,110		$	233		$	30,833

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For the nine months ended September 30, 2016	Commercial real estate			Commercial construction			Commercial and industrial			Leases		Residential construction		Residential mortgage			Consumer and other			Total
	(Dollars in thousands)
Balance December 31, 2015	$	13,471		$	4,525		$	4,586		$	78	$	466	$	8,201		$	320		$	31,647
Charge-offs	(600		)	—			(830		)	—		—		(654		)	(87		)	(2,171		)
Recoveries	652			974			415			—		40		1,461			86			3,628
Provision⁽¹⁾	2,924			12			753			132		149		(871		)	111			3,210
Change in FDIC indemnification asset ⁽¹⁾	(4		)	(106		)	(31		)	—		—		216			(23		)	52
Balance September 30, 2016	$	16,443		$	5,405		$	4,893		$	210	$	655	$	8,353		$	407		$	36,366



For the nine months ended September 30, 2015	Commercial real estate			Commercial construction			Commercial and industrial			Leases			Residential construction			Residential mortgage			Consumer and other			Total
	(Dollars in thousands)
Balance December 31, 2014	$	12,685		$	4,311		$	3,226		$	103		$	570		$	9,313		$	191		$	30,399
Charge-offs	(2,153		)	(80		)	(151		)	—			—			(1,223		)	(302		)	(3,909		)
Recoveries	955			1,606			1,175			—			39			782			130			4,687
Provision⁽²⁾	1,616			(578		)	(200		)	(15		)	(87		)	(331		)	204			609
Change in FDIC indemnification asset ⁽²⁾	(81		)	(284		)	(170		)	—			3			(431		)	10			(953		)
Balance September 30, 2015	$	13,022		$	4,975		$	3,880		$	88		$	525		$	8,110		$	233		$	30,833

⁽¹⁾

The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $0 and $(0.4) million for the three and nine months ended September 30, 2016, respectively. For the nine months ended September 30, 2016, this resulted in an increase in the FDIC indemnification asset of $0.1 million, which is the difference between the net provision on covered loans and the total reduction to the allowance for loan losses allocable to the covered loan portfolio of $0.3 million.

⁽²⁾

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

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



	Commercial real estate		Commercial construction		Commercial and industrial		Leases		Residential construction		Residential mortgage		Consumer and other		Total
Balances at September 30, 2016:	(Dollars in thousands)
Specific reserves:
Impaired loans	$	423	$	160	$	565	$	—	$	—	$	1,189	$	3	$	2,340
Purchase credit impaired loans	941		289		47		—		20		951		2		2,250
Total specific reserves	1,364		449		612		—		20		2,140		5		4,590
General reserves	15,079		4,956		4,281		210		635		6,213		402		31,776
Total	$	16,443	$	5,405	$	4,893	$	210	$	655	$	8,353	$	407	$	36,366

Loans:
Individually evaluated for impairment	$	20,271	$	3,328	$	1,933	$	—	$	—	$	15,896	$	12	$	41,440
Purchase credit impaired loans	76,485		11,543		1,908		—		164		39,009		131		129,240
Loans collectively evaluated for impairment	2,608,137		427,372		439,475		29,524		103,467		1,195,780		21,512		4,825,267
Total	$	2,704,893	$	442,243	$	443,316	$	29,524	$	103,631	$	1,250,685	$	21,655	$	4,995,947

Balances at December 31, 2015:
Specific reserves:
Impaired loans	$	2,166	$	182	$	646	$	—	$	53	$	1,562	$	49	$	4,658
Purchase credit impaired loans	1,176		354		47		—		5		971		6		2,559
Total specific reserves	3,342		536		693		—		58		2,533		55		7,217
General reserves	10,129		3,989		3,893		78		408		5,668		265		24,430
Total	$	13,471	$	4,525	$	4,586	$	78	$	466	$	8,201	$	320	$	31,647

Loans:
Individually evaluated for impairment	$	26,498	$	3,223	$	1,687	$	—	$	825	$	18,158	$	129	$	50,520
Purchase credit impaired loans	85,213		12,497		2,717		—		709		41,336		199		142,671
Loans collectively evaluated for impairment	2,134,304		349,289		414,712		26,773		74,487		988,964		18,151		4,006,680
Total	$	2,246,015	$	365,009	$	419,116	$	26,773	$	76,021	$	1,048,458	$	18,479	$	4,199,871

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



	Impaired Loans - With Allowance						Impaired Loans - With No Allowance
	Recorded Investment		Unpaid Principal Balance		Allowances for Loan Losses Allocated		Recorded Investment		Unpaid Principal Balance
September 30, 2016	(Dollars in thousands)
Originated:
Commercial real estate	$	6,399	$	6,376	$	268	$	12,482	$	12,433
Commercial construction	1,078		1,074		53		1,306		1,301
Commercial and industrial	1,740		1,730		481		—		—
Residential mortgage	5,275		5,240		524		4,607		4,602
Consumer and other	9		9		1		—		—
Total originated	14,501		14,429		1,327		18,395		18,336
Acquired:
Commercial real estate	1,206		1,224		155		257		260
Commercial construction	607		633		107		343		343
Commercial and industrial	199		354		84		1		—
Residential mortgage	4,413		4,824		665		1,624		1,625
Consumer and other	3		6		2		—		—
Total acquired	6,428		7,041		1,013		2,225		2,228
Total impaired loans	$	20,929	$	21,470	$	2,340	$	20,620	$	20,564



	Impaired Loans - With Allowance						Impaired Loans - With No Allowance
	Recorded Investment		Unpaid Principal Balance		Allowances for Loan Losses Allocated		Recorded Investment		Unpaid Principal Balance
December 31, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	11,750	$	11,736	$	1,990	$	13,099	$	13,068
Commercial construction	1,537		1,533		123		1,325		1,320
Commercial and industrial	1,459		1,451		575		—		—
Residential construction	343		342		42		306		306
Residential mortgage	8,159		8,141		860		2,154		2,145
Consumer and other	10		10		1		—		—
Total originated	23,258		23,213		3,591		16,884		16,839
Acquired:
Commercial real estate	1,374		1,390		175		330		331
Commercial construction	369		370		59		—		—
Commercial and industrial	232		304		71		—		—
Residential construction	109		109		11		68		588
Residential mortgage	5,302		5,632		702		2,572		2,597
Consumer and other	119		119		49		—		—
Total acquired	7,505		7,924		1,067		2,970		3,516
Total impaired loans	$	30,763	$	31,137	$	4,658	$	19,854	$	20,355

Table of Contents

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



	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Impaired loans with allowance:	(Dollars in thousands)
Commercial real estate	$	8,886	$	80	$	11,238	$	109	$	11,272	$	286	$	12,120	$	302
Commercial construction	1,475		1		1,620		15		1,511		30		1,638		53
Commercial and industrial	1,740		—		1,487		17		1,700		40		1,456		46
Residential construction	—		—		382		4		369		5		378		11
Residential mortgage	9,829		52		7,318		46		11,759		185		7,329		105
Consumer and other	28		—		10		—		34		—		42		1
Total impaired loans with allowance	$	21,958	$	133	$	22,055	$	191	$	26,645	$	546	$	22,963	$	518
Impaired loans with no allowance:
Commercial real estate	$	13,592	$	116	$	17,621	$	147	$	13,610	$	375	$	19,766	$	386
Commercial construction	1,732		12		2,001		14		1,788		555		2,406		44
Commercial and industrial	1,139		—		281		1		470		—		316		1
Residential construction	—		—		82		—		68		—		101		—
Residential mortgage	6,141		—		12,646		43		5,909		30		12,588		89
Consumer and other	—		—		—		—		20		—		81		—
Total impaired loans with no allowance	$	22,604	$	128	$	32,631	$	205	$	21,865	$	960	$	35,258	$	520

For the three and nine months ended September 30, 2016 and 2015, the amount of interest income recognized within the period that the loans were impaired was primarily related to loans modified as a troubled debt restructuring ("TDR") that remained on accrual status. The amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

At September 30, 2016 and December 31, 2015, respectively, the Company had $0.5 million and $2.5 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in progress.

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



	Current		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-Accrual		Total Loans
September 30, 2016	(Dollars in thousands)
Originated:
Commercial real estate	$	2,050,194	$	4,507	$	1,377	$	—	$	3,118	$	2,059,196
Commercial construction	354,640		15		290		—		80		355,025
Commercial and industrial	331,882		21		1,092		—		595		333,590
Leases	29,510		4		—		10		—		29,524
Residential construction	91,470		—		—		—		—		91,470
Residential mortgage	565,629		723		344		—		3,869		570,565
Consumer and other	16,269		6		32		—		—		16,307
Total originated	3,439,594		5,276		3,135		10		7,662		3,455,677
Acquired:
Commercial real estate	642,991		262		718		—		1,726		645,697
Commercial construction	85,159		936		58		—		1,065		87,218
Commercial and industrial	109,320		20		258		—		128		109,726
Residential construction	12,161		—		—		—		—		12,161
Residential mortgage	671,877		1,074		756		—		6,413		680,120
Consumer and other	5,049		9		275		—		15		5,348
Total acquired	1,526,557		2,301		2,065		—		9,347		1,540,270
Total loans	$	4,966,151	$	7,577	$	5,200	$	10	$	17,009	$	4,995,947



	Current		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-Accrual		Total Loans
December 31, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	1,571,034	$	800	$	564	$	—	$	3,157	$	1,575,555
Commercial construction	281,345		82		—		—		164		281,591
Commercial and industrial	279,116		89		21		—		269		279,495
Leases	26,773		—		—		—		—		26,773
Residential construction	59,631		—		—		—		306		59,937
Residential mortgage	480,251		1,714		203		—		2,727		484,895
Consumer and other	12,958		12		—		—		—		12,970
Total originated	2,711,108		2,697		788		—		6,623		2,721,216
Acquired:
Commercial real estate	664,153		893		1,139		—		4,275		670,460
Commercial construction	82,994		10		20		—		394		83,418
Commercial and industrial	139,130		69		250		3		169		139,621
Residential construction	15,891		—		16		—		177		16,084
Residential mortgage	552,348		3,266		1,010		—		6,939		563,563
Consumer and other	5,295		77		5		—		132		5,509
Total acquired	1,459,811		4,315		2,440		3		12,086		1,478,655
Total loans	$	4,170,919	$	7,012	$	3,228	$	3	$	18,709	$	4,199,871

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Credit Quality Indicators

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

The Company uses the following definitions for risk ratings:

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

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

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

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

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

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



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
September 30, 2016	(Dollars in thousands)
Originated:
Commercial real estate	$	1,988,690	$	45,505	$	25,001	$	—	$	—	$	2,059,196
Commercial construction	342,497		9,787		2,741		—		—		355,025
Commercial and industrial	326,667		2,988		3,935		—		—		333,590
Leases	29,524		—		—		—		—		29,524
Residential construction	91,021		449		—		—		—		91,470
Residential mortgage	540,223		20,283		10,059		—		—		570,565
Consumer and other	15,963		335		9		—		—		16,307
Total originated	3,334,585		79,347		41,745		—		—		3,455,677
Acquired:
Commercial real estate	585,371		29,468		30,649		208		1		645,697
Commercial construction	71,678		6,579		8,847		114		—		87,218
Commercial and industrial	103,554		545		5,627		—		—		109,726
Residential construction	11,635		279		247		—		—		12,161
Residential mortgage	626,517		36,757		16,681		165		—		680,120
Consumer and other	5,226		106		16		—		—		5,348
Total acquired	1,403,981		73,734		62,067		487		1		1,540,270
Total loans	$	4,738,566	$	153,081	$	103,812	$	487	$	1	$	4,995,947

Table of Contents



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2015	(Dollars in thousands)
Originated:
Commercial real estate	$	1,499,554	$	48,775	$	27,226	$	—	$	—	$	1,575,555
Commercial construction	272,960		6,434		2,197		—		—		281,591
Commercial and industrial	270,116		4,855		4,524		—		—		279,495
Leases	26,773		—		—		—		—		26,773
Residential construction	59,265		24		648		—		—		59,937
Residential mortgage	453,544		20,440		10,911		—		—		484,895
Consumer and other	12,566		394		10		—		—		12,970
Total originated	2,594,778		80,922		45,516		—		—		2,721,216
Acquired:
Commercial real estate	596,973		31,318		42,169		—		—		670,460
Commercial construction	69,473		5,655		8,163		127		—		83,418
Commercial and industrial	127,911		3,273		8,437		—		—		139,621
Residential construction	14,541		470		1,073		—		—		16,084
Residential mortgage	504,836		38,763		19,716		248		—		563,563
Consumer and other	5,244		133		132		—		—		5,509
Total acquired	1,318,978		79,612		79,690		375		—		1,478,655
Total loans	$	3,913,756	$	160,534	$	125,206	$	375	$	—	$	4,199,871

Modifications

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

Loans modified in a TDR are, in many cases, already on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. Once we classify a loan as a TDR, the loan is only removed from TDR classification under three circumstances: (1) the loan is paid off, (2) the loan is charged off or (3) if, at the beginning of the current fiscal year, the loan has performed in accordance with the modified terms for a minimum of six consecutive months and at the time of modification the loan’s interest rate represented a then current market interest rate for a loan of similar risk.

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



	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
September 30, 2016	(Dollars in thousands)
Commercial real estate	$	1,817	$	430	$	2,247	$	183
Commercial construction	765		—		765		—
Commercial and industrial	673		199		872		249
Residential mortgage	4,614		267		4,881		386
Consumer and other	9		—		9		1
Total modifications	$	7,878	$	896	$	8,774	$	819
Number of contracts	23		7		30



	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
December 31, 2015	(Dollars in thousands)
Commercial real estate	$	5,938	$	720	$	6,658	$	331
Commercial construction	893		46		939		16
Commercial and industrial	1,186		—		1,186		484
Residential mortgage	6,691		14		6,705		1
Consumer and other	10		—		10		564
Total modifications	$	14,718	$	780	$	15,498	$	1,396
Number of contracts	35		3		38

At September 30, 2016 and December 31, 2015, the Company had no available commitments outstanding on TDRs.

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

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

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

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

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

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

Table of Contents

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



	Three Months Ended September 30, 2016						Three Months Ended September 30, 2015
	Term		Interest Only		Total		Term		Total
	(Dollars in thousands)
Commercial real estate	$	—	$	—	$	—	$	1,403	$	1,403
Residential mortgage	—		—		—		149		149
Total modifications	$	—	$	—	$	—	$	1,552	$	1,552



	Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2015
	Term		Payment		Interest Only		Total		Term		Payment		Interest Only		Combination		Total
	(Dollars in thousands)
Commercial real estate	$	—	$	314	$	261	$	575	$	1,820	$	—	$	358	$	863	$	3,041
Commercial and industrial	433		—		—		433		93		419		231		—		743
Residential mortgage	—		—		271		271		149		—		—		—		149
Total modifications	$	433	$	314	$	532	$	1,279	$	2,062	$	419	$	589	$	863	$	3,933

No loans modified and classified as TDRs in the previous twelve months defaulted during the three and nine months ended September 30, 2016, while loans modified and classified as TDRs in the previous twelve months and defaulted during the three and nine months ended September 30, 2015 were immaterial. The Company defines payment default as movement of the restructuring to nonaccrual status, foreclosure or charge-off, whichever occurs first.

Loans Held for Sale

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(Dollars in thousands)
Loans held for sale at period end	$	40,441	$	37,437	$	40,441	$	37,437
Proceeds from sales of mortgage loans originated for sale	91,434		104,851		266,879		280,822
Gain on sales of mortgage loans originated for sale	2,910		2,855		7,897		7,785

NOTE 6 – DERIVATIVES

The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The Company does not use financial instruments or derivatives for any trading or other speculative purposes.

The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned over a twelve-month period following the date of simulation. The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities during the measurement period. Based upon the outcome of the simulation analysis, the Company considers the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates. The Company also has derivatives that are a result of a service it provides to certain qualifying customers, which includes a matched book of derivative instruments offered to customers in order to minimize their interest rate risk.

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Derivatives Designated as Cash Flow Hedges of Interest Rate Risk

The Company has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. The Company entered into an interest rate swap transaction with a notional amount of $125 million. The interest rate swap was designated as a hedge against the changes in cash flows attributable to changes in one-month LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on the first $125 million of the Company's variable rate money market funding arrangement.

The Company receives interest at the one-month LIBOR rate and pays a fixed interest rate under the terms of the swap agreement. The termination date of the swap agreement is March 18, 2019.

Derivatives Not Designated as Hedges

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

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



	September 30, 2016					December 31, 2015
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
Derivative assets:	(Dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps	$	76,624	Other assets	$	2,679	$	63,320	Other assets	$	1,332

Derivative liabilities:
Derivatives designated as hedging instruments:
Interest rate swap	$	125,000	Accrued expenses and other liabilities	$	2,160	$	125,000	Accrued expenses and other liabilities	$	1,085
Derivatives not designated as hedging instruments:
Interest rate swaps	$	76,624	Accrued expenses and other liabilities	$	2,679	$	63,320	Accrued expenses and other liabilities	$	1,332

The derivative instruments held by the Company are subject to master netting arrangements which contain a legally enforceable right to offset recognized amounts and settle such amounts on a net basis. The Company has elected to present the financial assets and financial liabilities associated with these arrangements on a gross basis in the Consolidated Balance Sheets. Cash collateral is posted by the counterparty with net liability positions in accordance with contract thresholds.

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Information about financial instruments that are eligible for offset in the consolidated balance sheets is presented in the following table:



							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amount Recognized		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments		Collateral Held/Pledged		Net
September 30, 2016	(Dollars in thousands)
Derivative assets	$	2,679	$	—	$	2,679	$	—	$	—	$	2,679
Derivative liabilities	4,839		—		4,839		—		4,839		—
Total derivative instruments	$	7,518	$	—	$	7,518	$	—	$	4,839	$	2,679

December 31, 2015
Derivative assets	$	1,332	$	—	$	1,332	$	—	$	—	$	1,332
Derivative liabilities	2,417		—		2,417		—		2,417		—
Total derivative instruments	$	3,749	$	—	$	3,749	$	—	$	2,417	$	1,332

The Company has recorded a loss of $1.4 million, net of tax, as component of accumulated other comprehensive income at September 30, 2016 associated with the cash flow hedging instrument and expects $1.0 million, net of tax, to be reclassified as an increase to interest expense during the next 12 months.

The following table presents the amounts recorded in the Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges, net of tax:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015
	(Dollars in thousands)
Amount of net gains (losses) recorded in OCI (effective portion)	$	565	$	(876	)	$	(677	)	$	(1,344	)

No amount of net losses were reclassified to earnings during the three and nine months ended September 30, 2016 and 2015, respectively.

The amounts included in accumulated other comprehensive income will be reclassified to interest expense should the hedge no longer be considered effective. No amount of ineffectiveness was included in net income for the three and nine months ended September 30, 2016 and 2015, respectively. The Company will continue to assess the effectiveness of the hedge on a quarterly basis.

Counterparty Credit Risk – By entering into derivative instrument contracts, the Company exposes itself, from time to time, to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to the Company, which creates credit risk for the Company. The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings, limiting its exposure to any single counterparty and regularly monitoring its market position with each counterparty.

Credit-Risk Related Contingent Features – The Company’s derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as a default by the Company on its indebtedness or the failure to maintain its regulatory status as a well-capitalized institution. These derivative agreements also contain provisions regarding the posting of collateral by each party. At September 30, 2016, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $4.8 million, for which the Company has posted collateral with a fair value of $8.4 million.

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NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents activity for goodwill and other intangible assets:



	Goodwill		Other Intangibles			Total
	(Dollars in thousands)
Balance at December 31, 2015	$	134,686	$	18,299		$	152,985
Acquisitions	51,793		3,058			54,851
Amortization	—		(3,505		)	(3,505		)
Purchase price allocation recast - Valley	1,741		—			1,741
Purchase price allocation recast - Certus branches	1,748		—			1,748
Balance at September 30, 2016	$	189,968	$	17,852		$	207,820

The Company has identified two reporting units for purposes of testing goodwill for impairment. These reporting units are the mortgage origination unit, which originates certain single family residential first mortgage loans that are subsequently sold into the secondary market, and the banking operations unit, which contains all other activities performed by the Company. All goodwill is allocated to the banking operations reporting unit.

The Company conducted its annual impairment testing as of June 30, 2016 utilizing a qualitative assessment. Based on this assessment, management concluded that it is more likely than not that the estimated fair value of the banking operations reporting unit exceeded the carrying value (including goodwill) of this reporting unit. Therefore, a step one quantitative analysis was not required. There have been no impairment charges recorded on goodwill.

The following table presents the gross carrying amount and accumulated amortization for the Company’s core deposit intangible assets, which are the only identifiable intangible assets subject to amortization:



	September 30, 2016			December 31, 2015
	(Dollars in thousands)
Gross carrying amount	$	30,994		$	27,936
Accumulated amortization	(13,142		)	(9,637		)
Net book value	$	17,852		$	18,299

NOTE 8 – BORROWINGS

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



	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Repurchase agreements ⁽¹⁾	$	61,095	$	64,373
Federal funds purchased	—		19,839
Advances from FHLB	4,000		4,000
Revolving credit facility	—		15,000
Total short-term borrowings	$	65,095	$	103,212

⁽¹⁾Securities sold under agreements to repurchase generally mature within one day from the transaction date and are collateralized by either U.S. Government Agency obligations, government sponsored mortgage-backed securities or securities issued by local governmental municipalities.

The Company may purchase federal funds through unsecured federal funds lines of credit totaling $160.0 million at September 30, 2016. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate.

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The Company has an uncollateralized 364-day revolving credit facility (the “Credit Agreement”) for an aggregate principal amount of up to $25 million at any time outstanding. The Credit Agreement matures on November 12, 2016 with an interest rate the greater of i) 3.25%, ii) the Prime Rate, or iii) the Federal Funds rate, plus 0.50%. There were no borrowings outstanding under the Credit Agreement at September 30, 2016.

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



	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Advances from FHLB, net⁽¹⁾	$	130,540	$	81,371
Subordinated notes, net ⁽¹⁾	70,683		70,790
Junior subordinated debentures, net ⁽¹⁾	44,291		36,190
Total long-term debt	$	245,514	$	188,351

⁽¹⁾Long-term debt balances are presented net of debt issuance costs and unamortized premiums or discounts.

The Company has $127.0 million of long-term advances outstanding with the FHLB as of September 30, 2016, with maturity dates ranging from 2017 to 2021 and an average interest rate of 1.95%. At September 30, 2016, real estate loans and investment securities with carrying values of $1.23 billion and $6.0 million, respectively, were assigned under this arrangement.

The Parent Company has issued $60.0 million of 5.5% Fixed to Floating Rate Subordinated Notes (the "Subordinated Notes"), all of which are outstanding at September 30, 2016. The Subordinated Notes bear interest at a fixed rate of 5.5% per year for the first 5 years and, from October 1, 2019 to the October 1, 2024 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then current three-month LIBOR plus 359 basis points. The Subordinated Notes are redeemable by the Parent Company at any quarterly interest payment date beginning on October 1, 2019 to maturity at par, plus accrued and unpaid interest.

The Company assumed a junior subordinated note in conjunction with the Valley acquisition with an outstanding balance of $10.7 million at September 30, 2016. The junior subordinated note bears interest at a variable rate of LIBOR plus 5.00% per annum, with a floor of 5.50% and a cap of 9.50%, and has a maturity date of October 15, 2023. The interest rate for the subordinated note was 5.52% at September 30, 2016.

In addition, the Company has the ability to borrow funds from the Federal Reserve utilizing the discount window and the borrower-in-custody of collateral arrangement. At September 30, 2016, commercial loans and investment securities with carrying values of $853.9 million and $2.8 million, respectively, were assigned under these arrangements. The Company had no outstanding borrowings with the Federal Reserve at September 30, 2016.

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The following table details the junior subordinated debentures outstanding:



	Shares issued	Interest rate	Maturity date	September 30, 2016		December 31, 2015
				(Dollars in thousands)
BNC Bancorp Capital Trust I	5,000	LIBOR plus 3.25%	4/15/2033	$	5,155	$	5,155
BNC Bancorp Capital Trust II	6,000	LIBOR plus 2.80%	4/7/2034	6,186		6,186
BNC Capital Trust III	5,000	LIBOR plus 2.40%	9/23/2034	5,155		5,155
BNC Capital Trust IV	7,000	LIBOR plus 1.70%	12/31/2036	7,217		7,217
Southcoast Capital Trust III	10,000	LIBOR plus 1.50%	9/30/2035	10,310		—
Valley Financial (VA) Statutory Trust I	4,000	LIBOR plus 3.10%	6/26/2033	4,124		4,124
Valley Financial (VA) Statutory Trust II	7,000	LIBOR plus 1.49%	12/15/2035	7,217		7,217
Valley Financial Statutory Trust III	5,000	LIBOR plus 1.73%	1/30/2037	5,155		5,155
				50,519		40,209
Unamortized discount				6,050		3,833
Unamortized debt issuance costs				178		186
				$	44,291	$	36,190

The Company was not aware of any violations of loan covenants at September 30, 2016.

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME

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



	Unrealized Holding Gains (Losses) on Investment Securities Available-For-Sale			Unrealized Holding Gains on Investment Securities Transferred from Available-For-Sale to Held-to-Maturity			Unrealized Holding Gains (Losses) on Cash Flow Hedging Activities			Total Accumulated Other Comprehensive Income
	(Dollars in thousands)
Balance at June 30, 2016	$	6,388		$	2,300		$	(1,927	)	$	6,761
Other comprehensive income before reclassifications	1,543			—			565			2,108
Reclassifications from accumulated other comprehensive income	(21		)	(261		)	—			(282		)
Net current period other comprehensive income (loss)	1,522			(261		)	565			1,826
Balance at September 30, 2016	$	7,910		$	2,039		$	(1,362	)	$	8,587

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

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	Unrealized Holding Gains (Losses) on Investment Securities Available-For-Sale			Unrealized Holding Gains on Investment Securities Transferred from Available-For-Sale to Held-to-Maturity			Unrealized Holding Gains (Losses) on Cash Flow Hedging Activities			Total Accumulated Other Comprehensive Income
	(Dollars in thousands)
Balance at December 31, 2015	$	5,227		$	2,787		$	(685	)	$	7,329
Other comprehensive income (loss) before reclassifications	2,682			—			(677		)	2,005
Reclassifications from accumulated other comprehensive income	1			(748		)	—			(747		)
Net current period other comprehensive income (loss)	2,683			(748		)	(677		)	1,258
Balance at September 30, 2016	$	7,910		$	2,039		$	(1,362	)	$	8,587

Balance at December 31, 2014	$	7,089		$	3,289		$	(196	)	$	10,182
Other comprehensive loss before reclassifications	(521		)	—			(1,344		)	(1,865		)
Reclassifications from accumulated other comprehensive income	(529		)	(353		)	—			(882		)
Net current period other comprehensive loss	(1,050		)	(353		)	(1,344		)	(2,747		)
Balance at September 30, 2015	$	6,039		$	2,936		$	(1,540	)	$	7,435

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



	Three Months Ended September 30,						Nine Months Ended September 30,
Component of Accumulated Other Comprehensive Income	2016			2015			2016			2015			Affected Line Item in the Consolidated Statement of Income
	(Dollars in thousands)
Unrealized holding gains (losses) on investment securities available-for-sale	$	34		$	794		$	(1	)	$	839		Gain (loss) on sale of investment securities, net
	(13		)	(293		)	—			(310		)	Income tax expense
	21			501			(1		)	529			Total, net of tax

Unrealized holding gains on investment securities transferred from available-for-sale to held-to-maturity ⁽¹⁾	416			204			1,188			561			Interest income - investment securities
	(155		)	(76		)	(440		)	(208		)	Income tax expense
	261			128			748			353			Total, net of tax
Total reclassifications for the period	$	282		$	629		$	747		$	882


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

NOTE 10 - FAIR VALUE MEASUREMENT

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

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

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

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

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

Investment securities available-for-sale – At June 30, 2016, the Company transferred $5.4 million of equity securities available-for-sale from Level 2 of the fair value hierarchy to Level 1, as the Company concluded the trading volume for these securities has increased and the Company believes there is now an active market for determining the fair value of identical securities. The Company now classifies the entire equity securities portfolio as Level 1 valuation. The fair value of the remainder of our investment securities available-for-sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers and reference data obtained from market research publications. The valuation of mortgage-backed securities also includes new issue data, monthly payment information and “To Be Announced” prices. The valuation of state and municipal securities also include the use of material event notices. We review the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness. At least annually, we will validate prices supplied by the independent pricing service by comparing to prices obtained from a second third-party source. The Company classifies these investment securities as Level 2 valuation.

Derivative assets and liabilities – The values of derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivative instruments as Level 2 valuation.

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



	Total Measured at Fair Value		Fair Value Measured Using
Description	Total Measured at Fair Value		Level 1		Level 2		Level 3
September 30, 2016	(Dollars in thousands)
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	10,896	$	—	$	10,896	$	—
State and municipals	176,423		—		176,423		—
Corporate debt securities	52,320		—		52,320		—
Asset backed securities	174,316		—		174,316		—
Equity securities	17,950		17,950		—		—
Mortgage-backed securities:
Residential government sponsored	109,897		—		109,897		—
Other government sponsored	1,211		—		1,211		—
Total investment securities available-for-sale	543,013		17,950		525,063		—
Derivative instruments:
Interest rate swaps - not designated	2,679		—		2,679		—
Total derivative instruments	2,679		—		2,679		—
Total assets measured at fair value on a recurring basis	$	545,692	$	17,950	$	527,742	$	—
Liabilities:
Interest rate swap - cash flow hedge	$	2,160	$	—	$	2,160	$	—
Interest rate swaps - not designated	2,679		—		2,679		—
Total liabilities measured at fair value on a recurring basis	$	4,839	$	—	$	4,839	$	—

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	Total Measured at Fair Value		Fair Value Measured Using
Description	Total Measured at Fair Value		Level 1		Level 2		Level 3
December 31, 2015	(Dollars in thousands)
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	12,327	$	—	$	12,327	$	—
State and municipals	180,618		—		180,618		—
Corporate debt securities	47,703		—		47,703		—
Other debt securities	138,747		—		138,747		—
Equity securities	11,273		637		10,636		—
Mortgage-backed securities:
Residential government sponsored	97,777		—		97,777		—
Other government sponsored	1,695		—		1,695		—
Total investment securities available-for-sale	490,140		637		489,503		—
Derivative instruments:
Interest rate swap - not designated	1,332		—		1,332		—
Total derivative instruments	1,332		—		1,332		—
Total assets measured at fair value on a recurring basis	$	491,472	$	637	$	490,835	$	—
Liabilities:
Interest rate swap - cash flow hedge	$	1,085	$	—	$	1,085	$	—
Interest rate swap - not designated	1,332		—		1,332		—
Total liabilities measured at fair value on a recurring basis	$	2,417	$	—	$	2,417	$	—

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

Loans held for sale – Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2 valuation.

Impaired loans – The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual loans and loans that have had their terms restructured in a TDR meet this impaired loan definition. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

OREO – OREO is initially recorded at the lower of carrying value or fair value, less costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company classifies as a Level 3 valuation.

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



	Total Measured at Fair Value		Fair Value Measured Using
Description	Total Measured at Fair Value		Level 1		Level 2		Level 3
September 30, 2016	(Dollars in thousands)
Loans held for sale	$	40,441	$	—	$	40,441	$	—
Impaired loans	166,090		—		—		166,090
OREO	28,048		—		—		28,048
Total assets measured at fair value on a nonrecurring basis	$	234,579	$	—	$	40,441	$	194,138

December 31, 2015
Loans held for sale	$	39,470	$	—	$	39,470	$	—
Impaired loans	185,974		—		—		185,974
OREO	32,561		—		—		32,561
Total assets measured at fair value on a nonrecurring basis	$	258,005	$	—	$	39,470	$	218,535

The following table presents the valuation and unobservable inputs for Level 3 assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2016:



Description	Fair Value (in thousands)		Valuation Methodology	Unobservable Inputs	Range of Inputs
Impaired loans	$	166,090	Appraised value	Discount to reflect current market conditions and ultimate collectability	0% - 20%
OREO	28,048		Appraised value	Discount to reflect current market conditions	0% - 20%

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

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

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The following tables present the carrying value and estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis:



	Carrying Value		Fair Value		Level 1		Level 2		Level 3
September 30, 2016	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	313,338	$	313,338	$	313,338	$	—	$	—
Investment securities available-for-sale	543,013		543,013		17,950		525,063		—
Investment securities held-to-maturity	295,276		304,124		—		304,124		—
Federal Home Loan Bank stock	11,115		11,115		—		11,115		—
Loans held for sale	40,441		40,441		—		40,441		—
Loans receivable, net	4,959,581		4,986,546		—		4,820,456		166,090
Accrued interest receivable	17,078		17,078		—		17,078		—
Investment in bank-owned life insurance	172,611		172,611		—		172,611		—
Interest rate swaps - not designated	2,679		2,679		—		2,679		—
Financial liabilities:
Demand deposits and savings	3,998,000		3,998,000		—		3,998,000		—
Time deposits	1,652,123		1,662,970		—		1,662,970		—
Short-term borrowings	65,095		65,095		—		65,095		—
Long-term debt	245,514		236,764		—		236,764		—
Accrued interest payable	3,027		3,027		—		3,027		—
Interest rate swap - cash flow hedge	2,160		2,160		—		2,160		—
Interest rate swaps - not designated	2,679		2,679		—		2,679		—



	Carrying Value		Fair Value		Level 1		Level 2		Level 3
December 31, 2015	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	204,238	$	204,238	$	204,238	$	—	$	—
Investment securities available-for-sale	490,140		490,140		637		489,503		—
Investment securities held-to-maturity	244,417		249,679		—		249,679		—
Federal Home Loan Bank stock	8,171		8,171		—		8,171		—
Loans held for sale	39,470		39,470		—		39,470		—
Loans receivable, net	4,168,224		4,228,455		—		4,042,481		185,974
Accrued interest receivable	18,055		18,055		—		18,055		—
FDIC indemnification asset	1,909		1,909		—		—		1,909
Investment in bank-owned life insurance	116,806		116,806		—		116,806		—
Interest rate swaps - not designated	1,332		1,332		—		1,332		—
Financial liabilities:
Demand deposits and savings	3,143,369		3,143,369		—		3,143,369		—
Time deposits	1,598,838		1,611,707		—		1,611,707		—
Short-term borrowings	103,212		103,212		—		103,212		—
Long-term debt	189,578		184,289		—		184,289		—
Accrued interest payable	2,002		2,002		—		2,002		—
Interest rate swap - cash flow hedge	1,085		1,085		—		1,085		—
Interest rate swaps - not designated	1,332		1,332		—		1,332		—

Table of Contents

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

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

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

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

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

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

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

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

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

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

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

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

NOTE 11 – COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unfunded lines of credit, and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying consolidated financial statements.

The Company's risk of loss in the event of nonperformance by the other party to the commitment to extend credit, lines of credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management's evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent cash requirements.

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



	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Commitments under unfunded loans and lines of credit	$	1,296,321	$	1,010,497
Letters of credit	11,799		14,213

We invest as a limited partner in partnerships that operate qualified affordable housing or invest in emerging companies in our geographic region. These limited partnership structures are considered to be variable interest entities ("VIEs") because the limited partners with equity at risk do not have substantive kick-out rights through voting rights or substantive participating rights over the general partner. As a limited partner, we are not the primary beneficiary of the VIEs and do not consolidate them. Our investments in these partnerships are recorded in other assets on the Consolidated Balance Sheets. The Company has commitments to invest up to $18.3 million in these VIEs, of which $12.9 million was unfunded at September 30, 2016. At September 30, 2016, our maximum exposure to loss was our $4.5 million recorded investment.

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

NOTE 12 – EMPLOYEE BENEFITS

The Compensation Committee of the Company's Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as “Rights”). At September 30, 2016, the Company had Rights outstanding from the 2006 BNC Bancorp Omnibus Stock Ownership and Long Term Incentive Plan (the "2006 Omnibus Plan"), the BNC Bancorp 2013 Omnibus Stock Incentive Plan (the "2013 Omnibus Plan") and the KeySource Non-Statutory and Incentive Stock Option plans (the "KeySource Plans"). The 2013 Omnibus Plan and the KeySource Plans are the only plans that are available for future grants. The Company had 118,000 Rights issued under the 2006 Omnibus Plan, 457,679 Rights issued and 731,205 Rights available for grants or awards under the 2013 Omnibus Plan, and 56,537 stock options issued and 35,607 stock options available for issuance related to the KeySource Plans.

Stock Option Awards. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on the yield at the time of the option grant.

A summary of the Company’s stock option activity for the nine months ended September 30, 2016 is presented below:



	Shares	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(Dollars in thousands, except per share amounts)
Outstanding at December 31, 2015	152,571	$	9.69
Issued	—	—
Exercised	59,395	9.32
Forfeited or expired	—	—
Outstanding at September 30, 2016	93,176	$	9.93	1.96	$	1,340
Exercisable at September 30, 2016	93,176	$	9.93	1.96	$	1,340

The related compensation expense recognized for stock options, the intrinsic value of stock option exercised and the grant-date fair value of options that vested was immaterial for the nine months ended September 30, 2016 and 2015, respectively.

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Restricted Stock Awards. A summary of the activity of the Company’s unvested restricted stock awards for the nine months ended September 30, 2016 is presented below:



	Number of Shares		Weighted Average Grant-Date Fair Value per Share
Unvested at December 31, 2015	516,088		$	15.78
Granted	143,765		23.14
Vested	(119,310	)	13.95
Forfeited	(2,500	)	19.33
Unvested at September 30, 2016	538,043		$	18.13

The Company measures the fair value of restricted shares based on the price of the Company's common stock on the grant date, and compensation expense is recorded over the vesting period. The Company recognized compensation expense of $2.4 million and $2.0 million for restricted stock awards for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, there was $6.9 million of total unrecognized compensation cost related to unvested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 1.91 years. The grant-date fair value of restricted stock grants vested was $1.7 million and $1.5 million during the nine months ended September 30, 2016 and 2015, respectively.

NOTE 13 – SUBSEQUENT EVENT

On November 1, 2016, the Company completed the acquisition of High Point Bank Corporation ("High Point"), the holding company for High Point Bank and Trust Company, pursuant to the terms of the Agreement and Plan of Merger dated November 16, 2015. Under the merger agreement, High Point's shareholders received a cash value per share of $300, payable in a combination of cash and shares of the Company's common stock.

The Company is in the process of obtaining third-party valuations to determine the fair value of loans, property and equipment and intangible assets acquired from High Point. As a result, it is impracticable to disclose the preliminary purchase price allocation as of the filing date of these unaudited consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Throughout this Quarterly Report on Form 10-Q, “the Company,” “we,” “us,” or “our” refers to BNC Bancorp and our consolidated subsidiaries, including Bank of North Carolina (sometimes referred to as “BNC” as a separate legal entity), except where the context indicates otherwise. BNC Bancorp is individually referred to as the "Parent Company."

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of the Company that are based on the beliefs and assumptions of management and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:


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


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


•	the extensive and increasing regulation of the U.S. financial services industry;


•	adverse changes in credit quality trends;


•	breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;


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


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


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


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


•	increasing capital and liquidity standards under applicable regulatory rules;


•	adequacy of our risk management program;


•	increased competitive pressure due to consolidation;


•	diversion of management's time and attention to merger-related issues;


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


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


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

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. The more critical accounting and reporting policies include accounting for the allowance for loan losses, valuation of goodwill and intangible assets, and valuation of assets acquired and liabilities assumed in business combinations. Accordingly, the Company’s critical accounting policies are discussed in detail in “Management’s Discussion and Analysis of Financial Condition and

Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Company’s significant accounting policies are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to the Company’s significant accounting policies during the three months ended September 30, 2016. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 “Basis of Presentation” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report.

Overview and Executive Summary

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

During recent years, we have focused much of our growth and expansion efforts on acquisitions of community banks that align with our strategy of growth focused within existing markets. These acquisitions have allowed us to increase our presence and build scale in these key metropolitan markets and have enhanced our organic growth opportunities. In June 2016, the Company completed the previously announced acquisition of Southcoast, which operated 10 full-service branches in and around Charleston, South Carolina. In addition, on November 1, 2016, the Company completed the previously announced acquisition of High Point Bank Corporation ("HPTB"), the holding company for High Point Bank and Trust. HPTB operated 10 full-service branches in the Piedmont-Triad area of North Carolina, which is another key market for our growth strategy. As this transaction was completed subsequent to September 30, 2016, none of the assets acquired, liabilities assumed or results of operations for HPTB are included in the financial information as of and for the three and nine months ended September 30, 2016.

Table 1

Financial Highlights



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Operating data:	(Dollars in thousands, except per share information, shares in thousands)
Total interest income	$	65,025		$	53,313		$	179,914		$	142,247
Total interest expense	9,608			7,054			26,077			19,185
Net interest income	55,417			46,259			153,837			123,062
Provision for loan losses	1,865			198			3,210			609
Non-interest income	9,811			9,169			26,788			24,162
Non-interest expense	37,835			38,185			109,561			101,575
Net income	18,140			11,939			47,222			31,711

Common share and per common share data:
Diluted earnings per share	$	0.38		$	0.31		$	1.09		$	0.92
Dividends declared and paid	0.05			0.05			0.15			0.15
Book value	16.53			13.70			16.53			13.70
Tangible book value ⁽¹⁾	12.21			9.86			12.21			9.86
Weighted average diluted shares outstanding	47,360			38,165			43,287			34,545
End of period shares outstanding	48,110			38,138			48,110			38,138

Balance sheet data at period end:
Total assets ⁽²⁾	$	6,801,562		$	5,199,859		$	6,801,562		$	5,199,859
Originated loans	3,455,677			2,587,572			3,455,677			2,587,572
Acquired loans	1,540,270			1,391,061			1,540,270			1,391,061
Allowance for loan and lease losses	36,366			30,833			36,366			30,833
Goodwill and other intangible assets, net	207,820			146,623			207,820			146,623
Deposits	5,650,123			4,374,491			5,650,123			4,374,491
Shareholders' equity	795,212			522,497			795,212			522,497

Selected performance ratios:
Return on average assets	1.10		%	0.92		%	1.05		%	0.95		%
Return on average common equity	9.40		%	9.15		%	9.50		%	9.69		%
Return on average tangible common equity ⁽³⁾	13.37		%	13.52		%	13.45		%	13.43		%
Net interest margin ⁽⁴⁾	3.91		%	4.10		%	3.92		%	4.24		%
Average equity to average assets	11.76		%	10.05		%	11.01		%	9.77		%

Asset quality ratios:
Net recoveries to average portfolio loans	(0.05		)%	(0.03		)%	(0.04		)%	(0.03		)%
Allowance for loan losses to portfolio loans	0.73		%	0.77		%	0.73		%	0.77		%
Nonperforming assets to total assets	0.66		%	1.11		%	0.66		%	1.11		%
Nonperforming loans to portfolio loans	0.34		%	0.51		%	0.34		%	0.51		%
Excluding acquired:
Allowance for loan losses to originated loans	0.97		%	1.05		%	0.97		%	1.05		%
Nonperforming assets to originated loans and OREO	0.61		%	0.95		%	0.61		%	0.95		%
Nonperforming loans to originated loans	0.22		%	0.23		%	0.22		%	0.23		%

Capital ratios at period end:
Tier 1 leverage	10.00		%	8.23		%	10.00		%	8.23		%
Common equity tier 1	10.45		%	8.58		%	10.45		%	8.58		%
Tier 1 risk-based capital	11.30		%	9.36		%	11.30		%	9.36		%
Total risk-based capital	13.19		%	11.65		%	13.19		%	11.65		%


⁽¹⁾	Tangible common book value per share is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. See Table 2 for a reconciliation of non-GAAP measures to the most directly comparable GAAP measure.


⁽²⁾	Amounts reflect reclassification of debt issuance costs in accordance with the adoption of ASU 2015-03.


⁽³⁾	Return on average tangible common equity is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. See Table 2 for a reconciliation of non-GAAP measures to the most directly comparable GAAP measure.


⁽⁴⁾	Calculated by dividing tax equivalent net interest income by average interest-earning assets. The tax equivalent adjustment was $2.2 million and $1.9 million for the three months ended September 30, 2016 and 2015, respectively, and $6.1 million and $5.6 million for the nine months ended September 30, 2016 and 2015, respectively.

Table 2

Reconciliation of Non-GAAP Financial Measures



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Tangible Common Book Value per Share:	(Dollars in thousands)
Shareholders' equity (GAAP)	$	795,212		$	522,497		$	795,212		$	522,497
Intangible assets	207,820			146,623			207,820			146,623
Tangible common shareholders equity (non-GAAP)	587,392			375,874			587,392			375,874
Common shares outstanding	48,110			38,138			48,110			38,138
Tangible common book value per share (non-GAAP)	$	12.21		$	9.86		$	12.21		$	9.86

Return on Average Tangible Common Equity:
Net income (GAAP)	$	18,140		$	11,939		$	47,222		$	31,711
Plus: Amortization of intangibles, net of tax	732			694			2,208			1,752
Tangible net income available to common shareholders (non-GAAP)	18,872			12,633			49,430			33,463
Average common shareholders' equity	768,124			517,835			663,806			437,699
Less: Average intangible assets	206,653			147,143			172,835			104,519
Average tangible common shareholders' equity (non-GAAP)	561,471			370,692			490,971			333,180
Return on average tangible common equity (non-GAAP)	13.37		%	13.52		%	13.45		%	13.43		%

Analysis of Results of Operations

Net Interest Income

Net interest income is the primary source of BNC’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, and loan prepayment behavior. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt loans and investment securities is computed on a fully-taxable equivalent ("FTE") basis. Net interest income and net interest margin are discussed on a FTE basis.

Net interest income for the three months ended September 30, 2016 was $57.6 million, an increase of 19.7% from $48.2 million for the three months ended September 30, 2015. The increase was primarily driven by a $1.21 billion increase in average interest-earning assets, primarily due to the acquisition of Southcoast, as well as continued organic loan growth in our markets. The Company has also increased its on-balance sheet liquidity position, which led to an increase in average investment securities and interest-bearing deposits at other financial institutions of $196.7 million and $79.6 million, respectively.

Table of Contents

Net interest income for the nine months ended September 30, 2016 was $159.9 million, an increase of 24.2% from $128.7 million for the nine months ended September 30, 2015. Average interest-earning assets for the nine months ended September 30, 2016 were $5.44 billion, an increase of $1.38 billion from average interest-earning assets of $4.06 billion for the nine months ended September 30, 2015. This increase was due to the acquisitions of Valley, the Certus branches, and Southcoast, respectively, along with continued significant increases in loan originations.

Net interest margin was 3.91% for the three months ended September 30, 2016, a decrease of 19 basis points from 4.10% for the three months ended September 30, 2015. The Company’s average yield on interest-earning assets for the three months ended September 30, 2016 was 4.56%, a decrease of 14 basis points from 4.70% for the three months ended September 30, 2015. The decrease was primarily due to a decrease in the yield earned on portfolio loans, which was 4.71% for the three months ended September 30, 2016, as compared to 4.83% for the three months ended September 30, 2015. The decrease in yield on portfolio loans was due to continued pricing pressure on new and renewed portfolio loans. The Company recorded accretion income on the acquired loan portfolio of $5.8 million for the three months ended September 30, 2016, an increase of 20.9% compared to $4.8 million of accretion earned during the three months ended September 30, 2015. The average yield earned on the investment securities portfolio for the three months ended September 30, 2016 was 4.39%, a slight decrease from 4.46% earned for the three months ended September 30, 2015. This decrease was due to the purchase of new investment securities that have a lower yield than the current portfolio.

For the nine months ended September 30, 2016, net interest margin was 3.92%, a decrease of 32 basis points from 4.24% for the nine months ended September 30, 2015. The Company’s average yield on interest-earning assets for the nine months ended September 30, 2016 was 4.57%, a decrease of 30 basis points compared to 4.87% for the nine months ended September 30, 2015. The yield earned on portfolio loans was 4.75% for the nine months ended September 30, 2016, a decrease of 22 basis points compared to 4.97% for the nine months ended September 30, 2015. The Company recorded accretion income on the acquired loan portfolio of $16.6 million, an increase from $14.9 million recorded during the nine months ended September 30, 2015. The average yield earned on the investment securities portfolio for the nine months ended September 30, 2016 was 4.25%, a decrease of 52 basis points from 4.77% earned for the comparable period of 2015.

Average interest-bearing liabilities were $4.80 billion for the three months ended September 30, 2016, an increase of $923.1 million compared to $3.87 billion for the three months ended September 30, 2015. The increase was fully attributable to interest-bearing deposits, which have come from both acquisitions and organic growth in our markets. The Company’s average cost of interest-bearing liabilities was 0.80% for the three months ended September 30, 2016, compared to 0.72% for the three months ended September 30, 2015.

Average interest-bearing liabilities were $4.48 billion for the nine months ended September 30, 2016, an increase of $1.07 billion from $3.40 billion for the nine months ended September 30, 2015. Total interest-bearing deposits were $4.19 billion for the nine months ended September 30, 2016, an increase of $1.06 billion from $3.13 billion for the nine months ended September 30, 2015. These increases were due to the acquisitions of Valley, the Certus branches, and Southcoast, respectively. The Company’s average cost of interest-bearing liabilities was 0.78% for the nine months ended September 30, 2016, a slight increase compared to 0.75% for the nine months ended September 30, 2015.

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Table 3

Average Balance and Net Interest Income (FTE)



	For the Three Months Ended September 30,
	2016						2015
	Average balance		Interest		Average Rate		Average balance		Interest		Average rate
Interest-earning assets:	(Dollars in thousands)
Loans and leases ⁽¹⁾	$	4,855,115	$	57,459	4.71	%	$	3,915,162	$	47,621	4.83	%
Loans held for sale	38,811		365		3.74	%	42,684		429		3.99	%
Investment securities, taxable	422,195		3,113		2.93	%	267,797		1,842		2.73	%
Investment securities, tax-exempt⁽²⁾	405,950		6,027		5.91	%	363,610		5,173		5.64	%
Interest-earning balances and other	147,763		291		0.78	%	68,201		162		0.94	%
Total interest-earning assets	5,869,834		67,255		4.56	%	4,657,454		55,227		4.70	%
Other assets	662,685						497,236
Total assets	$	6,532,519					$	5,154,690
Interest-bearing liabilities:
Demand deposits	$	2,555,913	3,744		0.58	%	$	1,881,693	2,092		0.44	%
Savings deposits	215,715		82		0.15	%	177,092		76		0.17	%
Time deposits	1,704,273		3,793		0.89	%	1,480,606		3,097		0.83	%
Borrowings	321,218		1,989		2.46	%	334,584		1,789		2.12	%
Total interest-bearing liabilities	4,797,119		9,608		0.80	%	3,873,975		7,054		0.72	%
Non-interest-bearing deposits	907,344						733,659
Other liabilities	59,932						29,221
Shareholders' equity	768,124						517,835
Total liabilities and shareholder's equity	$	6,532,519					$	5,154,690
Net interest income and interest rate spread			$	57,647	3.76	%			$	48,173	3.98	%
Net interest margin					3.91	%					4.10	%

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	For the Nine Months Ended September 30,
	2016						2015
	Average balance		Interest		Average Rate		Average balance		Interest		Average rate
Interest-earning assets:	(Dollars in thousands)
Loans and leases ⁽¹⁾	$	4,474,628	$	159,031	4.75	%	$	3,420,188	$	127,025	4.97	%
Loans held for sale	36,896		1,073		3.88	%	33,093		939		3.79	%
Investment securities, taxable	394,679		8,741		2.96	%	191,838		4,269		2.98	%
Investment securities, tax-exempt⁽²⁾	395,168		16,406		5.55	%	355,483		15,238		5.73	%
Interest-earning balances and other	140,710		733		0.70	%	59,009		414		0.94	%
Total interest-earning assets	5,442,081		185,984		4.57	%	4,059,611		147,885		4.87	%
Other assets	585,102						421,789
Total assets	$	6,027,183					$	4,481,400
Interest-bearing liabilities:
Demand deposits	$	2,350,934	9,845		0.56	%	$	1,620,760	5,394		0.44	%
Savings deposits	193,434		220		0.15	%	153,548		181		0.16	%
Time deposits	1,646,023		10,499		0.85	%	1,352,145		9,020		0.89	%
Borrowings	285,621		5,513		2.58	%	277,069		4,590		2.21	%
Total interest-bearing liabilities	4,476,012		26,077		0.78	%	3,403,522		19,185		0.75	%
Non-interest-bearing deposits	837,126						613,953
Other liabilities	50,239						26,226
Shareholders' equity	663,806						437,699
Total liabilities and shareholder's equity	$	6,027,183					$	4,481,400
Net interest income and interest rate spread			$	159,907	3.79	%			$	128,700	4.12	%
Net interest margin					3.92	%					4.24	%


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


⁽²⁾	Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $2.2 million and $1.9 million for the three months ended September 30, 2016 and 2015, respectively. The taxable-equivalent adjustment was $6.1 million and $5.6 million for the nine months ended September 30, 2016 and 2015, respectively.

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The following table details the variances in net interest income between the three and nine months ended September 30, 2016 and 2015 caused by changes in interest rates and changes in volumes:

Table 4

Volume and Rate Variance Analysis (FTE)



	Three Months Ended September 30, 2016 vs. 2015									Nine Months Ended September 30, 2016 vs. 2015
	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Total			Volume		Rate			Total
Interest income:	(Dollars in thousands)
Loans and leases	$	11,162		$	(1,324	)	$	9,838		$	38,620	$	(6,614	)	$	32,006
Loans held for sale	(38		)	(26		)	(64		)	111		23			134
Investment securities, taxable	1,098			173			1,271			4,516		(44		)	4,472
Investment securities, tax-exempt ⁽¹⁾	593			261			854			1,674		(506		)	1,168
Interest-earning balances and other	172			(43		)	129			499		(180		)	319
Total interest income	12,987			(959		)	12,028			45,420		(7,321		)	38,099

Interest expense:
Deposits:
Demand deposits	871			781			1,652			2,667		1,784			4,451
Savings deposits	16			(10		)	6			51		(12		)	39
Time deposits	456			240			696			1,928		(449		)	1,479
Borrowings	(81		)	281			200			144		779			923
Total interest expense	1,262			1,292			2,554			4,790		2,102			6,892
Net interest income increase (decrease)	$	11,725		$	(2,251	)	$	9,474		$	40,630	$	(9,423	)	$	31,207


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

Provision for Loan Losses

The Company recorded a provision for loan losses of $1.9 million for the three months ended September 30, 2016, an increase compared to $0.2 million recorded for the three months ended September 30, 2015. For the nine months ended September 30, 2016, the provision for loan losses was $3.2 million, an increase compared to $0.6 million for the nine months ended September 30, 2015. The additional provision was recorded due to the continued high levels of growth in the originated loan portfolio.

The amount of provision for loan losses is based on our analysis of the adequacy of the allowance for loan and lease losses utilizing the criteria discussed in the Critical Accounting Policies section of our Annual Report on Form 10-K for the year ended December 31, 2015.

See additional discussion under "Asset Quality - Analysis of Allowance for Loan Losses” section.

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Non-Interest Income

Table 5

Non-Interest Income



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016			2015
	(Dollars in thousands)
Mortgage lending income	$	3,134	$	3,031	$	8,486		$	8,307
Service charges	2,644		2,284		7,387			5,738
Earnings on bank-owned life insurance	1,254		705		3,172			1,960
Gain (loss) on sale of investment securities, net	34		794		(1		)	839
Other	2,745		2,355		7,744			7,318
Total non-interest income	$	9,811	$	9,169	$	26,788		$	24,162

Mortgage lending income was $3.1 million for the three months ended September 30, 2016, a slight increase compared to $3.0 million earned during the three months ended September 30, 2015. During the three months ended September 30, 2016, the Company sold $84.4 million of mortgage loans in the secondary market, compared with $99.8 million for the comparable period of 2015. For the nine months ended September 30, 2016, mortgage lending income was $8.5 million, an increase compared to $8.3 million earned during the nine months ended September 30, 2015. The Company sold $254.3 million of mortgage loans in the secondary market during the nine months ended September 30, 2016, compared with $261.0 million during the nine months ended September 30, 2015.

Income from service charges was $2.6 million for the three months ended September 30, 2016, an increase from $2.3 million earned during the three months ended September 30, 2015. For the nine months ended September 30, 2016, income from service charges was $7.4 million, an increase of 28.7% from $5.7 million earned during the nine months ended September 30, 2015. The increase was directly due to the increase in deposits and volume of transactions from the Company's recent acquisitions and organic growth.

Other non-interest income for the three months ended September 30, 2016 was $2.7 million, an increase of 16.6% compared to $2.4 million earned during the three months ended September 30, 2015. Many of the non-interest income sources, such as income from recoveries on acquired loans and income derived from our investment brokerage services, are volatile and can vary significantly from period to period. Income generated from the sale of the guaranteed-portion of SBA loans was $0.8 million for the third quarter of 2016, an increase of 77.6% from $0.4 million for the third quarter of 2015. For the nine months ended September 30, 2016, SBA sale income was $2.8 million, an increase of 93.4% compared to $1.4 million for the comparable period of 2015, as the Company continues to place emphasis on expanding this business.

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Non-Interest Expense

Table 6

Non-Interest Expense



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
	(Dollars in thousands)
Salaries and employee benefits	$	19,947	$	20,114	$	58,026	$	53,726
Occupancy	3,182		3,211		9,942		8,410
Furniture and equipment	2,300		1,655		6,371		4,880
Data processing and supplies	1,766		1,268		4,748		3,502
Advertising and business development	680		493		2,287		1,756
Insurance, professional and other services	2,277		3,155		7,738		7,256
FDIC insurance assessments	1,071		824		2,871		2,261
Loan, foreclosure and other real estate owned	1,562		2,352		3,808		8,213
Other	5,050		5,113		13,770		11,571
Total non-interest expense	$	37,835	$	38,185	$	109,561	$	101,575

Non-interest expense for the three months ended September 30, 2016 includes $2.6 million of transaction-related expenses, compared to $4.9 million for the three months ended September 30, 2015. Excluding these transaction-related expenses, the overall increase in non-interest expense for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, was directly attributable to increased headcount and facilities charges from our acquisitions of Southcoast and the Certus branches, respectively.

The overall increase in non-interest expense for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, was directly attributable to increased headcount and facilities charges from our acquisitions of Valley, Southcoast and the Certus branches, respectively. Non-interest expense for the nine months ended September 30, 2016 includes $7.8 million of transaction-related expenses, compared to $9.0 million for the nine months ended September 30, 2015.

Other expenses totaled $5.1 million for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016, other non-interest expense was $13.8 million, an increase of 19.0% compared to $11.6 million for the nine months ended September 30, 2015. Non-interest expense for the three and nine months ended September 30, 2015 includes $0.8 million of loss on the early extinguishment of debt. Excluding this charge, non-interest expense for the three and nine months ended September 30, 2015 was $4.4 million and $10.8 million, respectively. The increases for both the three and nine months ended September 30, 2016, as compared to 2015, were primarily due to increased amortization expense on acquired intangible assets and miscellaneous additional increases due to the Company's growth.

Loan, foreclosure and other real estate owned ("OREO") expenses include foreclosure and carrying costs and realized losses and write-downs of foreclosed properties. Realized losses and valuation adjustments on foreclosed property totaled $0.4 million for the three months ended September 30, 2016, compared to $1.1 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, realized losses and valuation adjustments totaled $0.5 million, compared to $4.4 million recorded during the nine months ended September 30, 2015. During 2015, the Company initiated an aggressive disposition strategy by writing down targeted OREO in order to sell these properties.

Income Taxes

Income tax expense was $7.4 million for the three months ended September 30, 2016, an increase of 44.7% from $5.1 million for the three months ended September 30, 2015. We generate significant amounts of non-taxable income from tax-exempt investment securities and from investments in bank-owned life insurance, which can significantly impact our effective income tax rate. The effective income tax rate for the three months ended September 30, 2016 was 28.9%, compared to an effective tax rate of 30.0% for the three months ended September 30, 2015. This decrease was due to a decrease in our state income tax rate and income tax benefits realized from the adoption of ASU 2016-09.

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For the nine months ended September 30, 2016, our income tax expense and effective income tax rate were $20.6 million and 30.4%, respectively, compared to $13.3 million and 29.6%, respectively, for the nine months ended September 30, 2015. This increase was primarily due to an increase in our level of taxable income relative to non-taxable income, which was slightly offset by the income tax benefits realized from the adoption of ASU 2016-09.

Additional information regarding the adoption of ASU 2016-09 is included in Note 1 “Basis of Presentation” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report.

Analysis of Financial Condition

Investment Securities

Our investment securities portfolio is intended to provide us with adequate liquidity, flexibility in asset/liability management, a source of stable income, and is structured with minimum credit exposure. Investment securities classified as available for sale are carried at fair value in the consolidated balance sheet, while investment securities classified as held to maturity are shown at amortized cost in the consolidated balance sheet. Our total investment securities portfolio had a carrying value of $838.3 million at September 30, 2016, as compared to $734.6 million at December 31, 2015.

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.

Our investment securities portfolio included gross unrealized gains of $24.0 million and gross unrealized losses of $2.5 million at September 30, 2016, compared to gross unrealized gains of $18.6 million and gross unrealized losses of $5.1 million at December 31, 2015. Management believes that all of its unrealized losses on individual investment securities at September 30, 2016 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. We do not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

At September 30, 2016, our investment securities portfolio included 389 taxable and tax-exempt debt instruments issued by various U.S. states, counties, cities, municipalities and school districts. The Company continually assesses the risk of credit default for the municipal bond portfolio and believes the portfolio has a low risk of credit default. The following table is a summary, by U.S. state, of our investment in the obligations of state and political subdivisions at September 30, 2016:

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Table 7

Obligations of State and Political Subdivisions



		Amortized Cost		Fair Value
General obligation bonds:		(Dollars in thousands)
	Texas	$	126,403	$	131,670
	Washington	27,769		29,027
	Ohio	22,281		23,800
	North Carolina	21,476		22,259
	Pennsylvania	21,013		21,483
	South Carolina	18,357		18,352
	Other (22 states)	86,948		90,674
Total general obligation bonds:		324,247		337,265
Revenue bonds:
	North Carolina	33,034		34,376
	Indiana	16,819		17,782
	South Carolina	12,354		12,920
	Florida	11,095		11,597
	Texas	7,254		7,665
	Washington	6,515		6,704
	New York	5,724		5,862
	Other (12 states)	22,622		23,801
Total revenue bonds:		115,417		120,707
Total obligations of state and political subdivisions		$	439,664	$	457,972

Our largest exposure in general obligation bonds was 74 bonds issued by various school districts in Texas with a total amortized cost basis of $91.8 million and total fair value of $95.9 million at September 30, 2016. Of this total, $76.0 million in amortized cost and $79.1 million in fair value are guaranteed by the Permanent School Fund of the State of Texas.

Our investments in revenue bonds at September 30, 2016 are summarized in the following table:

Table 8

Revenue Bonds by Source



	Amortized Cost		Fair Value
	(Dollars in thousands)
Water and sewer	$	20,288	$	21,227
College and university	19,961		20,664
Health, hospitality and nursing home	19,824		21,020
Power and electricity	12,976		13,451
Lease (abatement)	7,024		7,691
Other	35,344		36,654
Total revenue bonds	$	115,417	$	120,707

Our largest individual exposures in revenue bonds at September 30, 2016 were three bonds to be repaid by future pledged power and utility revenue, and seven bonds to be repaid by future pledged revenues generated from a leading academic healthcare system. The total amortized cost for these 10 securities was $18.1 million and the total fair value was $19.1 million at September 30, 2016.

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

Our evaluation of investments in state and political subdivisions at September 30, 2016 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by nationally recognized credit ratings agencies.

The Company's investment securities portfolio also includes 42 asset-backed securities, which are collateralizations of student loan pools, securitizations of cash flows derived single family rental properties, and collateralized loan obligations, which are pools of non-investment grade corporate loans. Our investments in asset-backed securities at September 30, 2016 are summarized in the following table:

Table 9

Asset-Backed Securities



	Amortized Cost		Fair Value
	(Dollars in thousands)
Collateralized by pools of single family residential rental income	$	102,340	$	102,596
Collateralized loan obligations	67,243		67,341
Collateralized by pools of student loans	4,829		4,379
Total asset-backed securities	$	174,412	$	174,316

The Company’s investment in asset-backed securities is part of a larger balance sheet strategy to increase on-balance sheet liquidity with securities that complement the duration and interest rate risk profile of the investment securities portfolio. While we do not place sole reliance on the credit rating of a security, all of the Company's asset-backed securities are rated AA or higher by nationally recognized credit ratings agencies. Ongoing analysis of these securities is performed to monitor overall creditworthiness of the issuer and likelihood of timely principal and interest payments.

Our evaluation of investments in asset-backed securities at September 30, 2016 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by nationally recognized credit ratings agencies.

Loans

Total portfolio loans were $5.00 billion at September 30, 2016, an increase of $796.1 million from $4.20 billion at December 31, 2015. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within our core footprint. Significant loan concentrations are considered to exist when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions.

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Table 10

Loan Portfolio Composition



	September 30, 2016				December 31, 2015
	Amount		% of Total		Amount		% of Total
	(Dollars in thousands)
Commercial real estate - non-owner occupied	$	1,675,217	33.5	%	$	1,276,653	30.4	%
Commercial real estate - owner occupied	786,421		15.7	%	785,930		18.7	%
Multifamily	239,882		4.8	%	178,256		4.2	%
Farmland	3,373		0.1	%	5,176		0.1	%
Total commercial real estate	2,704,893		54.1	%	2,246,015		53.5	%
Commercial construction	284,758		5.7	%	236,683		5.6	%
Acquisition and development	39,014		0.8	%	17,724		0.4	%
Lots and land	118,471		2.4	%	110,602		2.6	%
Total commercial construction	442,243		8.9	%	365,009		8.7	%
Commercial and industrial	443,316		8.9	%	419,116		10.0	%
Leases	29,524		0.6	%	26,773		0.6	%
Total commercial loans	3,619,976		72.5	%	3,056,913		72.8	%
Residential mortgage	1,250,685		25.0	%	1,048,458		25.0	%
Residential construction - presold	61,870		1.2	%	46,078		1.1	%
Residential construction - speculative	41,761		0.8	%	29,943		0.7	%
Consumer	21,655		0.4	%	18,479		0.4	%
Total consumer loans	1,375,971		27.5	%	1,142,958		27.2	%
Total portfolio loans ⁽¹⁾	$	4,995,947	100.0	%	$	4,199,871	100.0	%

⁽¹⁾ Amount includes $0 and $40.9 million of acquired loans covered under FDIC loss-share agreements at September 30, 2016 and December 31, 2015, respectively.

Notable contributions to the change in loan balances during the nine months ended September 30, 2016 were as follows:


•	Total acquired loans totaled $1.54 billion at September 30, 2016, an increase of $61.6 million from December 31, 2015 due to the acquisition of Southcoast;

•

The commercial real estate portfolio, which consists of multi-family residential property and owner and non-owner occupied nonresidential properties, totaled $2.70 billion at September 30, 2016, an increase of $458.9 million from December 31, 2015. Excluding loans acquired in business combinations, commercial real estate loans were $2.06 billion at September 30, 2016, an increase of $483.6 million from December 31, 2015. The increase was primarily driven by increases in non-owner occupied commercial real estate, which was $1.68 billion as of September 30, 2016, an increase of 31.2% compared to $1.28 billion at December 31, 2015;

•

The commercial construction portfolio totaled $442.2 million at September 30, 2016, an increase of $77.2 million from December 31, 2015. Excluding loans acquired in business combinations, commercial construction loans were $355.0 million at September 30, 2016, an increase of $73.4 million from December 31, 2015. Fundings of commercial construction projects have increased significantly during 2016 and our portfolio includes projects that span multiple industries and locations within our footprint, with the primary components being multi-family, office buildings, and shopping center construction projects; and


•	Residential mortgage loans totaled $1.25 billion at September 30, 2016, an increase of $202.2 million from December 31, 2015. Excluding loans acquired in business combinations, residential mortgage loans were $570.6 million at September 30, 2016, an increase of $85.7 million from December 31, 2015, which was primarily driven by growth in home equity lines of credit.

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At September 30, 2016, second mortgage loans and home equity lines of credit for which the Company did not own or service the related first mortgage loans totaled approximately $251.4 million, which represented approximately 94% of the total second liens held by the Company. Since substantially all first mortgage loans originated by the Company are eligible for sale in the secondary market, and the Company typically does not service the related first mortgage loans if they are sold, the Company may be unable to track the delinquency status of the related first mortgage loans and whether such loans are at risk of foreclosure by others. The Company monitors the increased credit risk associated with second mortgage loans and home equity lines of credit for which the Company does not own or service the related first mortgage loans as part of the overall management of the relationship. If the Company identifies significant deterioration in a borrower’s credit quality, the Company may freeze the borrower’s ability to make additional principal draws under the home equity lines of credit.

Home equity lines of credit are offered as “revolving” lines of credit which have a 15-year maturity and draw period. Borrowers are able to choose scheduled monthly interest-only payments during the term of the line or monthly payments of 1.5% of the outstanding principal, along with associated interest. The full principal amount is due at maturity as a lump-sum balloon payment under the interest-only payment option. At September 30, 2016, approximately 95% of the home equity lines of credit were paying scheduled monthly interest-only payments. At maturity, home equity loans are re-underwritten based on our current underwriting standards and updated appraisals are obtained. Our underwriting criteria include analysis of the loan amount in relation to the borrower's total mortgage debt, in addition to normal credit underwriting guidelines. If the borrower qualifies under our current underwriting standards, the loans are either converted to conventional second mortgage loans that are fully amortizing or refinanced along with the existing first mortgage into a new first mortgage loan. Borrowers may be required to repay a portion of the outstanding principal balance to qualify for such renewals.

The following table summarizes the maturity dates of our home equity lines of credit at September 30, 2016:

Table 11

Home Equity Line of Credit Maturities



	(Dollars in thousands)
2016	$	4,334
2017	7,448
2018	7,076
2019	11,604
2020	12,395
Thereafter	363,376
	$	406,233

Deposits

We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source. Total deposits at September 30, 2016 were $5.65 billion, an increase of 19.1% from total deposits of $4.74 billion at December 31, 2015. Wholesale deposits comprised 27.5% of total deposits at September 30, 2016 and December 31, 2016, respectively. The increased level of wholesale funding will be used to repay term wholesale deposits that will be maturing early in the fourth quarter of 2016.

Borrowings

The total carrying value of our outstanding borrowings was $310.6 million at September 30, 2016, an increase of $19.0 million compared to total carrying value of borrowings of $291.6 million at December 31, 2015. Short-term borrowings are comprised of short-term FHLB advances, securities sold under agreements to repurchase and Federal funds purchased. Many short-term funding sources, particularly Federal funds purchased and securities sold under agreements to repurchase, are expected to be reissued and, therefore, do not represent an immediate need for cash. Long-term funding is comprised of long-term FHLB advances and subordinated notes. The additional borrowings were comprised of junior subordinated debentures and long-term advances from the FHLB assumed in the Southcoast acquisition.

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Asset Quality

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

Nonperforming Assets

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and OREO, totaled $45.1 million, or 0.66% of total assets, at September 30, 2016, a decrease compared to $51.3 million, or 0.90% of total assets, at December 31, 2015. Nonperforming assets that were not acquired by the Company totaled $21.0 million at September 30, 2016, compared to $22.2 million at December 31, 2015.

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

Table 12

Nonperforming Assets



	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015
	(Dollars in thousands)
Nonaccrual loans - non-acquired	$	7,662		$	5,407		$	6,228		$	6,623		$	5,914
Nonaccrual loans - acquired	9,347			11,756			12,706			12,086			14,322
OREO - non-acquired	13,352			15,806			14,987			15,588			18,791
OREO - acquired	14,696			14,708			15,783			16,973			18,489
90 days past due - non-acquired	10			10			—			—			—
90 days past due - acquired	—			—			—			3			—
Total nonperforming assets	$	45,067		$	47,687		$	49,704		$	51,273		$	57,516
Total nonperforming assets - non-acquired	$	21,024		$	21,223		$	21,215		$	22,211		$	24,705

Loans restructured/modified not included in above,
(not 90 days past due or on nonaccrual)	$	7,878		$	9,839		$	14,984		$	14,718		$	15,562

Ratio of total nonperforming assets to total assets	0.66		%	0.74		%	0.87		%	0.90		%	1.11		%
Ratio of total nonperforming loans to total portfolio loans	0.34		%	0.36		%	0.45		%	0.45		%	0.51		%

Excluding acquired:
Ratio of nonperforming assets to originated loans and OREO	0.61		%	0.67		%	0.74		%	0.81		%	0.95		%
Ratio of nonperforming loans to originated loans	0.22		%	0.17		%	0.22		%	0.24		%	0.23		%

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Total nonaccrual loans were $17.0 million at September 30, 2016, a decrease from total nonaccrual loans of $18.7 million at December 31, 2015. Nonaccrual loans that were not acquired by the Company increased from $6.6 million at December 31, 2015 to $7.7 million at September 30, 2016 due to a small number of larger dollar relationships being reclassified to nonaccrual.

Total OREO was $28.0 million at September 30, 2016, a decrease of $4.5 million from total OREO of $32.6 million at December 31, 2015. OREO properties that were not acquired by the Company were $13.4 million at September 30, 2016, compared to $15.6 million at December 31, 2015. The carrying values of OREO represent the lower of the carrying amount or fair value less costs to sell.

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

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

Analysis of Allowance for Loan Losses

The allowance for loan losses was $36.4 million at September 30, 2016, an increase of $4.7 million compared to $31.6 million at December 31, 2015. The ratio of the allowance for loan losses to total portfolio loans was 0.73% and 0.75% at September 30, 2016 and December 31, 2015, respectively. Excluding loans acquired by the Company, the ratio of the allowance for loans to portfolio loans was 0.97% and 1.05% at September 30, 2016 and December 31, 2015, respectively. The allowance for loan losses was equal to 213.7% of our total nonperforming loans and leases at September 30, 2016, compared to 169.1% at December 31, 2015.

The Company experienced $0.7 million of net recoveries on previous charge-offs during the three months ended September 30, 2016, compared to net recoveries of $0.3 million during the three months ended September 30, 2015. Gross charge-offs were $0.9 million during the third quarter of 2016, compared to gross charge-offs of $1.2 million for the three months ended September 30, 2015.

For the nine months ended September 30, 2016, the Company experienced $1.5 million in net recoveries of previously charged-off loans, compared to net recoveries of $0.8 million for the comparable period of 2015. Gross charge-offs were $2.2 million during the nine months ended September 30, 2016, compared to $3.9 million during the nine months ended September 30, 2015.

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

Table 13

Analysis of Allowance for Loan Losses



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Beginning balance	$	33,841		$	30,635		$	31,647		$	30,399
Provision for credit losses:
Non-covered loans	1,982			327			3,687			916
Covered loans	(117		)	(129		)	(477		)	(307		)
Change in FDIC indemnification asset	—			(326		)	52			(953		)
Net (charge-offs) recoveries on loans covered under loss-share	(48		)	325			(103		)	777
Charge-offs on loans not covered under loss-share:
Commercial real estate	—			(593		)	(527		)	(2,123		)
Commercial construction	—			(1		)	—			(9		)
Commercial and industrial	(755		)	(42		)	(806		)	(151		)
Residential mortgage	(31		)	(536		)	(324		)	(994		)
Consumer and other	(68		)	(22		)	(86		)	(252		)
Total charge-offs	(854		)	(1,194		)	(1,743		)	(3,529		)

Recoveries on loans not covered under loss-share:
Commercial real estate	471			313			645			830
Commercial construction	385			102			775			1,054
Commercial and industrial	130			627			374			1,023
Residential construction	27			6			40			40
Residential mortgage	529			138			1,415			464
Consumer and other	20			9			54			119
Total recoveries	1,562			1,195			3,303			3,530
Net recoveries on loans not covered under loss-share	708			1			1,560			1
Ending balance	$	36,366		$	30,833		$	36,366		$	30,833

Total
Ratio of allowance for loan losses to total portfolio loans	0.73		%	0.77		%	0.73		%	0.77		%
Excluding acquired
Ratio of allowance for loan losses to originated loans	0.97		%	1.05		%	0.97		%	1.05		%

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

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Capital Resources

Total shareholders’ equity was $795.2 million at September 30, 2016, an increase of 34.3% from shareholders’ equity of $592.1 million at December 31, 2015. The increase was primarily due to the issuance of 2.9 million shares of voting common stock during the third quarter of 2016, as well as 4.3 million shares issued as consideration in the acquisition of Southcoast.

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

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

Table 14

Capital Adequacy Ratios



Bank of North Carolina:	Well-Capitalized Regulatory Threshold		September 30, 2016		December 31, 2015
Tier 1 leverage	5.00	%	9.75	%	9.80	%
Common equity tier 1	6.50	%	11.02	%	10.94	%
Tier 1 risk-based capital	8.00	%	11.02	%	10.94	%
Total risk-based capital	10.00	%	11.67	%	11.61	%

BNC Bancorp:
Tier 1 leverage	5.00	%	10.00	%	9.01	%
Common equity tier 1	6.50	%	10.45	%	9.32	%
Tier 1 risk-based capital	8.00	%	11.30	%	10.05	%
Total risk-based capital	10.00	%	13.19	%	12.19	%

Liquidity

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

The Company also has multiple funding sources that could be used to increase liquidity and provide additional financial flexibility. In July 2016, the Company deregistered approximately $29.2 million in unsold securities from its prior shelf registration statement. The Company also filed a universal shelf registration statement with the SEC under which the Company may, from time to time, offer senior debt securities, subordinated debt securities, convertible debt securities, preferred stock, common stock, warrants or units. On July 26, 2016, the Company completed the issuance and sale of 2.9 million shares of voting common stock, which yielded net proceeds of $59.6 million, under the universal shelf registration statement.

While dividends from BNC and proceeds from issuance of capital are primary funding sources for the Parent Company, these sources could be limited or costly (such as by regulation or subject to the capital needs of its subsidiaries or by market appetite for bank holding company securities). The Parent Company did not receive dividends from subsidiaries during the nine months ended September 30, 2016.

BNC has $160.0 million of established federal funds and other unsecured lines with counterparty banks, with full availability to these lines at September 30, 2016. BNC also has the ability to borrow from the FHLB and the Federal Reserve Bank, with $735.9 million and $280.6 million, respectively, in available credit at September 30, 2016. BNC also has excess loan and investment securities collateral which could be pledged to secure additional deposits or to counterparty banks, the FHLB or other parties as necessary.

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Investment securities are an important tool to the Company’s liquidity objective. Of the $838.3 million in the Company's investment securities portfolio at September 30, 2016, $543.0 million are designated as available-for-sale. Some of these securities are pledged to secure collateralized deposits, borrowings and for other purposes as required or permitted by law. The remaining investment securities could be pledged or sold to enhance liquidity, if necessary. The Bank may also issue institutional certificates of deposit and brokered certificates of deposit.

For the nine months ended September 30, 2016, net cash provided by operating activities and financing activities was $50.5 million and $574.6 million, respectively, while net cash used in investing activities was $516.0 million, for a net increase in cash and cash equivalents of $109.1 million since December 31, 2015. The primary cash outflows during the nine months ended September 30, 2016 related to the funding the Company's continued organic loan growth, the purchase of investments, which includes both investment securities and bank-owned life insurance, and the repayment of short-term borrowings. The primary cash inflows related to cash received from core operations, cash received from our acquisition of Southcoast, cash received from the issuance of common stock, and increased deposits.

For the nine months ended September 30, 2015, net cash provided by operating and financing activities was $46.3 million and $189.2 million, respectively, while net cash used in investing activities was $250.2 million, for a net decrease in cash and cash equivalents of $14.7 million since December 31, 2014. The primary cash outflows during the nine months ended September 30, 2015 related to the increase in loans, purchases of investment securities, and the repayment of short-term borrowings, while the primary cash inflows related to cash received from core operations, increases in deposits, and cash received from acquisitions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As described in more detail in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015, asset/liability management involves the evaluation, monitoring and management of interest rate risk, liquidity and funding. While the Board of Directors has overall responsibility for the Company’s asset/liability management policies, BNC’s Asset and Liability Committee monitors loan, investment, and liability portfolios to ensure comprehensive management of interest rate risk and adherence to BNC’s policies.

The Company has not experienced any material change in the risk of its portfolios of interest-earning assets and interest-bearing liabilities from December 31, 2015 to September 30, 2016. See Note 6 “Derivatives” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report for more information on the Company’s strategies to hedge its interest rate risk.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 30, 2016, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016. No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 11 “Commitments and Contingencies” to the accompanying Consolidated Financial Statements in Item 1 of Part I of this report.

Item 1A. Risk Factors

In addition to the other information set forth in this report and in our other reports and statements that we file with the SEC, including our quarterly reports on Form 10-Q, careful consideration should be given to the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes in the risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed in the accompanying exhibit index are filed as part of this quarterly report.

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SIGNATURES

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



			BNC BANCORP



Date:	November 8, 2016	By: /s/ Richard D. Callicutt II
		Richard D. Callicutt II
		President and Chief Executive Officer (Principal Executive Officer)



Date:	November 8, 2016	By: /s/ David B. Spencer
		David B. Spencer
		Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX



Exhibit No.	Description
10.1	Form of Director Restricted Stock Unit Award Agreement
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley-Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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