BNC BANCORP - FORM 10-Q

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

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 March 31, 2017
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 x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

The number of shares outstanding of the registrant's common stock at May 3, 2017 was 52,259,375.

BNC BANCORP

TABLE OF CONTENTS



		Page No.
PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets at March 31, 2017 and December 31, 2016		3

Consolidated Statements of Income for the three months ended March 31, 2017 and 2016		4

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016		5

Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2017 and 2016		6

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016		7

Notes to Consolidated Financial Statements		9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		38

Item 3. Quantitative and Qualitative Disclosures About Market Risk		55

Item 4. Controls and Procedures		55

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		56

Item 1A. Risk Factors		56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		56

Item 3. Defaults Upon Senior Securities		56

Item 4. Mine Safety Disclosures		56

Item 5. Other Information		56

Item 6. Exhibits		56

SIGNATURES		57

EXHIBIT INDEX		58

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	March 31, 2017 (Unaudited)			December 31, 2016
Assets
Cash and due from banks	$	82,437		$	79,815
Interest-earning deposits in other banks	213,570			180,367
Investment securities available-for-sale, at fair value	579,882			579,124
Investment securities held-to-maturity, at amortized cost (fair value of $310,947 and $312,808 at March 31, 2017 and December 31, 2016, respectively)	313,118			317,662
Federal Home Loan Bank stock, at cost	11,187			13,180
Loans held for sale	23,453			43,731
Loans:
Originated loans	3,921,065			3,645,687
Acquired loans	1,699,802			1,810,023
Less allowance for loan losses	(39,365		)	(37,501		)
Net loans	5,581,502			5,418,209
Accrued interest receivable	19,595			22,020
Premises and equipment, net	170,632			166,496
Other real estate owned	24,984			26,489
Investment in bank-owned life insurance	203,470			202,005
Goodwill and other intangible assets, net	259,141			260,680
Other assets	92,371			91,913
Total assets	$	7,575,342		$	7,401,691

Liabilities and shareholders' equity
Deposits:
Non-interest bearing demand	$	1,191,024		$	1,113,878
Interest-bearing demand	3,527,613			3,405,036
Time deposits	1,597,254			1,564,063
Total deposits	6,315,891			6,082,977
Short-term borrowings	96,068			168,304
Long-term debt	191,448			201,648
Accrued expenses and other liabilities	55,297			46,880
Total liabilities	6,658,704			6,499,809

Shareholders' equity:
Preferred stock, no par value; authorized 20,000,000 shares; 0 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively	—			—
Common stock, no par value; authorized 60,000,000 shares; 47,400,889 and 47,356,229 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively	711,452			709,935
Common stock, non-voting, no par value; authorized 20,000,000 shares; 4,820,844 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively	33,507			33,507
Retained earnings	168,221			156,602
Stock in directors rabbi trust	(4,737		)	(4,737		)
Directors deferred fees obligation	4,737			4,737
Accumulated other comprehensive income	3,458			1,838
Total shareholders' equity	916,638			901,882
Total liabilities and shareholders' equity	$	7,575,342		$	7,401,691

See accompanying notes to Consolidated Financial Statements.

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BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)



	Three Months Ended March 31,
	2017		2016
Interest income:
Loans, including fees	$	62,901	$	50,302
Investment securities:
Taxable	3,144		2,720
Tax-exempt	3,805		3,245
Interest-earning balances and other	321		214
Total interest income	70,171		56,481
Interest expense:
Demand deposits	4,946		2,968
Time deposits	3,322		3,273
Short-term borrowings	138		166
Long-term debt	1,797		1,584
Total interest expense	10,203		7,991
Net interest income	59,968		48,490
Provision for loan losses	1,222		647
Net interest income after provision for loan losses	58,746		47,843
Non-interest income:
Mortgage lending income	2,221		2,681
Service charges	2,874		2,321
Earnings on bank-owned life insurance	1,453		758
Loss on sale of investment securities, net	—		(39		)
Other	7,918		2,241
Total non-interest income	14,466		7,962
Non-interest expense:
Salaries and employee benefits	28,487		18,413
Occupancy	3,327		3,252
Furniture and equipment	2,457		2,077
Data processing and supplies	2,067		1,438
Advertising and business development	879		684
Insurance, professional and other services	7,181		2,274
FDIC insurance assessments	766		900
Loan, foreclosure and other real estate owned expenses	1,939		1,376
Other	5,695		4,472
Total non-interest expense	52,798		34,886
Income before income tax expense	20,414		20,919
Income tax expense	5,983		6,484
Net income	$	14,431	$	14,435

Basic earnings per common share	$	0.28	$	0.35
Diluted earnings per common share	$	0.28	$	0.35
Dividends declared and paid per common share	$	0.05	$	0.05

See accompanying notes to Consolidated Financial Statements.

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BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)



	Three Months Ended March 31,
	2017			2016
Net income	$	14,431		$	14,435
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on investments securities available-for-sale	2,429			(1,006		)
Tax effect	(899		)	373
Reclassification of losses recognized in net income on sale of investment securities available-for-sale	—			39
Tax effect	—			(14		)
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity	(302		)	(492		)
Tax effect	112			182
Net of tax amount	1,340			(918		)
Cash flow hedging activities:
Unrealized holding gains (losses)	444			(1,612		)
Tax effect	(164		)	596
Net of tax amount	280			(1,016		)
Total other comprehensive income (loss)	1,620			(1,934		)
Total comprehensive income	$	16,051		$	12,501

See accompanying notes to Consolidated Financial Statements.

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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, 2015	—	$	—	35,952,883		$	448,728		4,820,844	$	33,507	$	102,583		$	(4,753	)	$	4,753	$	7,329		$	592,147
Net income	—	—		—		—			—	—		14,435			—			—		—			14,435
Directors deferred fees	—	—		—		—			—	—		—			(205		)	205		—			—
Other comprehensive loss, net of tax	—	—		—		—			—	—		—			—			—		(1,934		)	(1,934		)
Common stock issued pursuant to:
Stock-based compensation	—	—		16,319		720			—	—		—			—			—		—			720
Dividend reinvestment plan	—	—		3,427		70			—	—		—			—			—		—			70
Stock options exercised	—	—		13,275		127			—	—		—			—			—		—			127
Shares withheld for payment of taxes	—	—		(678	)	(15		)	—	—		—			—			—		—			(15		)
Excess income tax benefit	—	—		—		43			—	—		—			—			—		—			43
Cash dividends:
Common stock, $0.05 per share	—	—		—		—			—	—		(2,040		)	—			—		—			(2,040		)
Balance, March 31, 2016	—	$	—	35,985,226		$	449,673		4,820,844	$	33,507	$	114,978		$	(4,958	)	$	4,958	$	5,395		$	603,553

Balance, December 31, 2016	—	$	—	47,356,229		$	709,935		4,820,844	$	33,507	$	156,602		$	(4,737	)	$	4,737	$	1,838		$	901,882
Net income	—	—		—		—			—	—		14,431			—			—		—			14,431
Other comprehensive income, net of tax	—	—		—		—			—	—		—			—			—		1,620			1,620
Common stock issued pursuant to:
Stock-based compensation	—	—		151,982		5,494			—	—		—			—			—		—			5,494
Dividend reinvestment plan	—	—		1,827		67			—	—		—			—			—		—			67
Stock options exercised	—	—		17,661		189			—	—		—			—			—		—			189
Shares withheld for payment of taxes	—	—		(126,810	)	(4,233		)	—	—		—			—			—		—			(4,233		)
Cash dividends:
Common stock, $0.05 per share	—	—		—		—			—	—		(2,812		)	—			—		—			(2,812		)
Balance, March 31, 2017	—	$	—	47,400,889		$	711,452		4,820,844	$	33,507	$	168,221		$	(4,737	)	$	4,737	$	3,458		$	916,638

See accompanying notes to Consolidated Financial Statements.

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BNC BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)



	Three Months Ended March 31,
	2017			2016
Operating activities
Net income	$	14,431		$	14,435
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,222			647
Depreciation and amortization	1,988			1,732
Amortization of premiums, net	1,160			1,108
Amortization of intangible assets	1,539			1,156
Accretion of fair value purchase accounting adjustments, net	(6,578		)	(6,044		)
Stock-based compensation	5,494			720
Excess income tax benefit of share-based compensation	395			43
Deferred compensation	440			161
Earnings on bank-owned life insurance	(1,453		)	(758		)
Loss on sale of investment securities, net	—			39
Loss on disposal of premises and equipment	423			9
Losses on other real estate owned	491			587
Gain on sale of loans, net	(2,532		)	(3,423		)
Origination of loans held for sale	(75,730		)	(77,206		)
Proceeds from sales of loans held for sale	95,855			84,088
Decrease in accrued interest receivable	2,425			1,337
Payments received from FDIC under loss-share agreements	—			823
(Increase) decrease in other assets	(1,402		)	2,034
Increase in accrued expenses and other liabilities	8,019			3,652
Net cash provided by operating activities	46,187			25,140
Investing activities
Purchases of investment securities available-for-sale	(33,695		)	(24,156		)
Purchases of investment securities held-to-maturity	(5,130		)	(15,936		)
Proceeds from sales of investment securities available-for-sale	—			5,368
Proceeds from maturities and payments of investment securities available-for-sale	34,848			5,893
Proceeds from maturities and payments of investment securities held-to-maturity	8,730			3,535
Redemption (purchase) of Federal Home Loan Bank stock	1,993			(541		)
Net increase in loans	(156,847		)	(30,973		)
Purchases of premises and equipment	(6,615		)	(3,442		)
Proceeds from disposal of premises and equipment	151			—
Investment in bank-owned life insurance	(12		)	(40,183		)
Investment in other real estate owned	(336		)	(266		)
Proceeds from sales of other real estate owned	2,636			2,530
Net cash used in investing activities	(154,277		)	(98,171		)

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Financing activities
Net increase in deposits	232,970			21,930
Net decrease in short-term borrowings	(72,236		)	(8,587		)
Net decrease in long-term-debt	(10,030		)	—
Common stock issued from exercise of stock options, net of taxes	189			127
Common stock issued pursuant to dividend reinvestment plan	67			70
Common stock repurchased in lieu of income taxes	(4,233		)	(15		)
Cash dividends paid	(2,812		)	(2,040		)
Net cash provided by financing activities	143,915			11,485
Net increase (decrease) in cash and cash equivalents	35,825			(61,546		)
Cash and cash equivalents, beginning of period	260,182			204,238
Cash and cash equivalents, end of period	$	296,007		$	142,692

Supplemental Statement of Cash Flows Disclosure
Interest paid	$	9,561		$	7,192
Income taxes paid	—			1,116
Summary of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	1,286		$	1,060
Transfer of loans held for sale to portfolio loans	2,190			1,676
FDIC indemnification asset decrease (increase), net	—			27

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 d/b/a BNC Bank (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 76 full-service banking offices, including 41 branches in North Carolina, 26 branches in South Carolina and nine branches in Virginia.

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.

On January 22, 2017, the Company and Pinnacle Financial Partners, Inc. ("Pinnacle") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Pinnacle will acquire the Company. Under the Merger Agreement, a wholly owned subsidiary of Pinnacle will merge with and into the Company, with the Company remaining as the surviving entity and becoming a wholly owned subsidiary of Pinnacle (the "merger"). Such surviving entity will, as soon as reasonably practicable following the merger and as part of a single integrated transaction, merge with and into Pinnacle, with Pinnacle remaining as the surviving entity (the “second step merger”). Immediately following the completion of the second step merger, the Bank will merge with and into Pinnacle Bank, a Tennessee state bank and wholly owned subsidiary of Pinnacle, with Pinnacle Bank as the surviving bank. In the merger, each outstanding share of the Company's common stock will convert to the right to receive 0.5235 shares of Pinnacle’s common stock. The transaction is expected to close late in the second quarter or early in the third quarter of 2017, subject to shareholder approval and other customary closing conditions.

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, 2016 should be referred to in connection with these unaudited interim consolidated financial statements.

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 March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. ASU 2017-08 is effective for public business entities beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. As the Company is currently amortizing the premium on these securities to the earliest call date, the adoption of this ASU will not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public business entities that are SEC filers for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

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In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU clarifies certain existing principles in ASC Topic 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. For public companies, ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued 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 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 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 High Point Bank Corporation

On November 1, 2016, the Company completed the acquisition of High Point Bank Corporation ("High Point"), pursuant to the terms of the Agreement and Plan of Merger dated November 13, 2015.

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



	As Recorded by High Point			Fair Value Adjustments				As Recorded by BNC
Assets	(Dollars in thousands)
Cash	$	100,457		$	—			$	100,457
Investment securities available-for-sale	147,723			1,965			(1)	149,688
Loans	467,953			(8,392		)	(2)	459,561
Premises and equipment	20,691			3,338			(3)	24,029
Other real estate owned	176			—				176
Core deposit and other intangible assets	—			9,469			(4)	9,469
Other assets	59,476			—				59,476
Total assets acquired	796,476			6,380				802,856
Liabilities
Deposits	(667,791		)	(112		)	(5)	(667,903		)
Borrowings	(18,664		)	(138		)	(6)	(18,802		)
Other liabilities	(15,875		)	(2,765		)	(7)	(18,640		)
Total liabilities assumed	(702,330		)	(3,015		)		(705,345		)
Net assets acquired	$	94,146		$	3,365			97,511
Total consideration paid								141,264
Goodwill								$	43,753

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 estimated fair value of core deposit and other intangible assets.


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


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


(7)	Adjustment to reflect the estimated fair market value of certain leases, deferred income taxes, and other assumed liabilities.

A summary of the consideration paid is as follows:



	(Dollars in thousands)
Common stock issued (4,034,743 shares)	$	98,882
Cash payments to common shareholders	42,382
Total consideration paid	$	141,264

This acquisition expanded and further strengthened the Company's presence in the Greensboro, Winston-Salem, and High Point, North Carolina area and expanded the Company's product offerings to include trust and insurance services. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the banking operations reporting unit.

Acquisition of Southcoast Financial Corporation

On June 17, 2016, the Company completed the acquisition of Southcoast Financial Corporation ("Southcoast") pursuant to the terms of the Agreement and Plan of Merger dated August 14, 2015, as amended.

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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				Recast Adjustments			As Recorded by BNC
Assets	(Dollars in thousands)
Cash	$	24,019		$	—			$	—		$	24,019
Investment securities available-for-sale	30,607			(1,094		)	(1)	692			30,205
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)	(256		)	23,671
Total assets acquired	462,831			(4,120		)		436			459,147
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	)		$	436		47,613
Total consideration paid											98,970
Goodwill											$	51,357

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 and provided a low-cost base of core deposits. 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 third quarter of 2016, the Company revised its initial estimates and assumptions regarding the valuation of certain acquired investment securities 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 Southcoast acquisition by $0.4 million to reflect this change in estimate.

The Company incurred total transaction-related costs of $13.3 million and $1.4 million during the three months ended March 31, 2017 and 2016, 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 ASC Topic 805, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the

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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:



	Three Months Ended March 31,
	2017		2016
	(Dollars in thousands, except per share amounts)
Net income	$	14,431	$	14,435

Weighted average common shares - basic	52,204,933		40,789,597
Add: Effect of dilutive Stock Rights	151,764		95,671
Weighted average common shares - diluted	52,356,697		40,885,268

Basic earnings per common share	$	0.28	$	0.35
Diluted earnings per common share	$	0.28	$	0.35

For the three months ended March 31, 2017 and 2016, 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
March 31, 2017	(Dollars in thousands)
Available-for-sale:
U.S. Government agencies	$	24,249	$	85	$	308	$	24,026
State and municipals	202,149		4,907		746		206,310
Corporate debt securities	49,871		608		4		50,475
Asset-backed debt securities	152,486		658		463		152,681
Equity securities	35,406		454		459		35,401
Mortgage-backed securities:
Residential government sponsored	111,776		277		1,818		110,235
Other government sponsored	735		19		—		754
	$	576,672	$	7,008	$	3,798	$	579,882
Held-to-maturity:
State and municipals	$	295,039	$	3,089	$	5,867	$	292,261
Corporate debt securities	18,079		607		—		18,686
	$	313,118	$	3,696	$	5,867	$	310,947



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2016	(Dollars in thousands)
Available-for-sale:
U.S. Government agencies	$	25,610	$	118	$	334	$	25,394
State and municipals	205,488		4,574		1,357		208,705
Corporate debt securities	50,440		523		125		50,838
Asset-backed debt securities	164,497		342		1,088		163,751
Equity securities	15,448		87		—		15,535
Mortgage-backed securities:
Residential government sponsored	115,933		241		2,225		113,949
Other government sponsored	927		25		—		952
	$	578,343	$	5,910	$	5,129	$	579,124
Held-to-maturity:
State and municipals	$	295,573	$	2,613	$	8,064	$	290,122
Corporate debt securities	22,089		597		—		22,686
	$	317,662	$	3,210	$	8,064	$	312,808

The amortized cost and estimated fair value of investment securities at March 31, 2017, 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 after one through five years	$	30,255	$	30,342
Due after five through ten years	115,596		115,940
Due after ten years	395,415		398,199
Total debt securities	541,266		544,481
Equity securities	35,406		35,401
	$	576,672	$	579,882
Held-to-maturity:
Due after one year through five years	$	10,760	$	10,770
Due after five through ten years	41,460		42,013
Due after ten years	260,898		258,164
	$	313,118	$	310,947

At March 31, 2017 and December 31, 2016, respectively, investment securities with an estimated fair value of approximately $348.5 million and $372.4 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 March 31,
	2017		2016
	(Dollars in thousands)
Proceeds from sales	$	—	$	5,368

Gross realized gains on sales	$	—	$	130
Gross realized losses on sales	—		(169		)
Total realized losses, net	$	—	$	(39	)

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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
March 31, 2017	(Dollars in thousands)
Available-for-sale:
State and municipals	110	$	60,044	$	746	—	$	—	$	—	$	60,044	$	746
Mortgage-backed securities	50	96,380		1,684		4	3,911		134		100,291		1,818
U.S. Government agencies	8	14,516		308		—	—		—		14,516		308
Asset-backed debt securities	3	12,573		43		9	32,789		420		45,362		463
Equity securities	1	23,981		116		1	636		343		24,617		459
Corporate debt securities	1	400		4		—	—		—		400		4
	173	$	207,894	$	2,901	14	$	37,336	$	897	$	245,230	$	3,798

Held-to-maturity:
State and municipals	136	$	158,504	$	5,638	6	$	4,769	$	229	$	163,273	$	5,867



	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, 2016	(Dollars in thousands)
Available-for-sale:
State and municipals	134	$	89,604	$	1,357	—	$	—	$	—	$	89,604	$	1,357
Mortgage-backed securities	58	102,459		2,123		2	2,519		102		104,978		2,225
Asset-backed debt securities	9	33,888		119		17	60,255		969		94,143		1,088
U.S. Government agencies	8	14,830		334		—	—		—		14,830		334
Corporate debt securities	3	16,755		121		1	4,325		4		21,080		125
	212	$	257,536	$	4,054	20	$	67,099	$	1,075	$	324,635	$	5,129

Held-to-maturity:
State and municipals	145	$	169,782	$	7,767	7	$	5,645	$	297	$	175,427	$	8,064

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 March 31, 2017 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:



	March 31, 2017						December 31, 2016
	Originated		Acquired		Total		Originated		Acquired		Total
	(Dollars in thousands)
Commercial real estate	$	2,202,342	$	761,742	$	2,964,084	$	2,076,834	$	820,886	$	2,897,720
Commercial construction	531,308		103,800		635,108		459,398		103,821		563,219
Commercial and industrial	384,887		127,191		512,078		369,287		131,974		501,261
Leases	30,553		—		30,553		29,529		—		29,529
Total commercial	3,149,090		992,733		4,141,823		2,935,048		1,056,681		3,991,729
Residential construction	109,317		16,076		125,393		93,202		21,613		114,815
Residential mortgage	644,646		685,839		1,330,485		599,666		725,774		1,325,440
Consumer and other	18,012		5,154		23,166		17,771		5,955		23,726
Total portfolio loans	$	3,921,065	$	1,699,802	$	5,620,867	$	3,645,687	$	1,810,023	$	5,455,710

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



	Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Balance at beginning of period	$	127,559		$	142,671
Accretion	2,288			1,157
Transfer to other real estate owned	—			(745		)
Net payments received	(8,528		)	(8,245		)
Net charge-offs	(80		)	(517		)
Other activity, net	21			383
Balance at end of period	$	121,260		$	134,704

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



	Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Balance at beginning of period	$	3,060		$	2,853
Accretion	(2,288		)	(1,157		)
Adjustment due to changes in expected future cash flows	1,053			889
Balance at end of period	$	1,825		$	2,585

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 March 31, 2017 and December 31, 2016, commercial and real estate loans with carrying values of $2.35 billion and $2.25 billion, respectively, were pledged to secure borrowing facilities from these institutions.

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



For the three months ended March 31, 2017	Commercial real estate		Commercial construction			Commercial and industrial			Leases		Residential construction			Residential mortgage			Consumer and other			Total
	(Dollars in thousands)
Balance December 31, 2016	$	15,641	$	5,921		$	5,490		$	255	$	767		$	9,123		$	304		$	37,501
Charge-offs	—		(145		)	—			—		(160		)	(46		)				(351		)
Recoveries	82		132			323			—		5			412			39			993
Provision	1,094		392			(55		)	10		253			(417		)	(55		)	1,222
Balance March 31, 2017	$	16,817	$	6,300		$	5,758		$	265	$	865		$	9,072		$	288		$	39,365



For the three months ended March 31, 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	(188		)	—			(3		)	—		—		(216		)	(9		)	(416		)
Recoveries	53			204			154			—		7		142			58			618
Provision⁽¹⁾	589			591			(238		)	29		79		(323		)	(80		)	647
Change in FDIC indemnification asset ⁽¹⁾	(4		)	(106		)	(31		)	—		—		216			(23		)	52
Balance March 31, 2016	$	13,921		$	5,214		$	4,468		$	107	$	552	$	8,020		$	266		$	32,548

⁽¹⁾

The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(0.4) million for the three months ended March 31, 2016. For the three months ended March 31, 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.

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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 March 31, 2017:	(Dollars in thousands)
Specific reserves:
Impaired loans	$	766	$	73	$	466	$	—	$	—	$	1,631	$	1	$	2,937
Purchase credit impaired loans	1,157		263		33		—		149		1,022		1		2,625
Total specific reserves	1,923		336		499		—		149		2,653		2		5,562
General reserves	14,894		5,964		5,259		265		716		6,419		286		33,803
Total	$	16,817	$	6,300	$	5,758	$	265	$	865	$	9,072	$	288	$	39,365

Loans:
Individually evaluated for impairment	$	19,576	$	2,248	$	2,487	$	—	$	—	$	16,505	$	11	$	40,827
Purchase credit impaired loans	70,284		10,692		1,655		—		312		38,218		99		121,260
Loans collectively evaluated for impairment	2,874,224		622,168		507,936		30,553		125,081		1,275,762		23,056		5,458,780
Total	$	2,964,084	$	635,108	$	512,078	$	30,553	$	125,393	$	1,330,485	$	23,166	$	5,620,867

Balances at December 31, 2016:
Specific reserves:
Impaired loans	$	607	$	147	$	365	$	—	$	—	$	1,255	$	1	$	2,375
Purchase credit impaired loans	811		321		37		—		146		1,084		2		2,401
Total specific reserves	1,418		468		402		—		146		2,339		3		4,776
General reserves	14,223		5,453		5,088		255		621		6,784		301		32,725
Total	$	15,641	$	5,921	$	5,490	$	255	$	767	$	9,123	$	304	$	37,501

Loans:
Individually evaluated for impairment	$	19,602	$	3,145	$	1,844	$	—	$	—	$	14,738	$	9	$	39,338
Purchase credit impaired loans	73,515		11,556		1,999		—		501		39,881		107		127,559
Loans collectively evaluated for impairment	2,804,603		548,518		497,418		29,529		114,314		1,270,821		23,610		5,288,813
Total	$	2,897,720	$	563,219	$	501,261	$	29,529	$	114,815	$	1,325,440	$	23,726	$	5,455,710

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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
March 31, 2017	(Dollars in thousands)
Originated:
Commercial real estate	$	4,155	$	4,141	$	608	$	12,787	$	12,744
Commercial construction	811		807		46		1,264		1,262
Commercial and industrial	1,566		1,559		290		390		389
Residential mortgage	5,604		5,576		581		3,998		3,992
Consumer and other	8		8		1		—		—
Total originated	12,144		12,091		1,526		18,439		18,387
Acquired:
Commercial real estate	1,212		1,220		158		1,487		1,486
Commercial construction	176		175		27		—		—
Commercial and industrial	533		631		176		—		—
Residential mortgage	5,263		5,736		1,050		1,642		1,670
Consumer and other	3		5		—		—		—
Total acquired	7,187		7,767		1,411		3,129		3,156
Total impaired loans	$	19,331	$	19,858	$	2,937	$	21,568	$	21,543



	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, 2016	(Dollars in thousands)
Originated:
Commercial real estate	$	7,230	$	7,208	$	448	$	10,040	$	9,993
Commercial construction	1,247		1,244		102		1,295		1,293
Commercial and industrial	1,214		1,209		265		397		396
Residential mortgage	4,921		4,885		482		4,275		4,271
Consumer and other	8		8		1		—		—
Total originated	14,620		14,554		1,298		16,007		15,953
Acquired:
Commercial real estate	1,179		1,192		159		1,224		1,236
Commercial construction	264		278		45		343		343
Commercial and industrial	235		392		100		1		—
Residential mortgage	3,913		4,396		773		1,649		1,677
Consumer and other	—		6		—		—		—
Total acquired	5,591		6,264		1,077		3,217		3,256
Total impaired loans	$	20,211	$	20,818	$	2,375	$	19,224	$	19,209

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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 March 31,
	2017				2016
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Impaired loans with allowance:	(Dollars in thousands)
Commercial real estate	$	6,681	$	46	$	12,909	$	103
Commercial construction	1,197		13		1,670		15
Commercial and industrial	1,659		53		1,654		34
Residential construction	—		—		378		4
Residential mortgage	9,159		74		13,246		61
Consumer and other	9		4		33		—
Total impaired loans with allowance	$	18,705	$	190	$	29,890	$	217
Impaired loans with no allowance:
Commercial real estate	$	12,721	$	83	$	13,805	$	129
Commercial construction	1,389		14		1,739		189
Commercial and industrial	493		—		126		—
Residential construction	—		—		68		—
Residential mortgage	6,622		—		5,646		23
Total impaired loans with no allowance	$	21,225	$	97	$	21,384	$	341

For the three months ended March 31, 2017 and 2016, 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 March 31, 2017 and December 31, 2016, respectively, the Company had $2.6 million and $1.3 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
March 31, 2017	(Dollars in thousands)
Originated:
Commercial real estate	$	2,193,873	$	4,962	$	—	$	—	$	3,507	$	2,202,342
Commercial construction	531,191		23		—		—		94		531,308
Commercial and industrial	383,076		466		—		—		1,345		384,887
Leases	30,553		—		—		—		—		30,553
Residential construction	109,135		182		—		—		—		109,317
Residential mortgage	638,025		1,534		718		—		4,369		644,646
Consumer and other	17,982		15		15		—		—		18,012
Total originated	3,903,835		7,182		733		—		9,315		3,921,065
Acquired:
Commercial real estate	756,988		1,791		443		—		2,520		761,742
Commercial construction	103,182		338		—		—		280		103,800
Commercial and industrial	126,046		439		249		—		457		127,191
Residential construction	15,659		417		—		—		—		16,076
Residential mortgage	674,368		5,029		238		—		6,204		685,839
Consumer and other	5,097		44		10		—		3		5,154
Total acquired	1,681,340		8,058		940		—		9,464		1,699,802
Total loans	$	5,585,175	$	15,240	$	1,673	$	—	$	18,779	$	5,620,867



	Current		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-Accrual		Total Loans
December 31, 2016	(Dollars in thousands)
Originated:
Commercial real estate	$	2,074,100	$	573	$	504	$	—	$	1,657	$	2,076,834
Commercial construction	458,576		387		—		—		435		459,398
Commercial and industrial	368,025		490		—		—		772		369,287
Leases	29,529		—		—		—		—		29,529
Residential construction	92,784		418		—		—		—		93,202
Residential mortgage	592,975		2,368		425		115		3,783		599,666
Consumer and other	17,644		102		25		—		—		17,771
Total originated	3,633,633		4,338		954		115		6,647		3,645,687
Acquired:
Commercial real estate	814,277		2,816		1,556		—		2,237		820,886
Commercial construction	102,727		294		90		—		710		103,821
Commercial and industrial	130,937		713		161		—		163		131,974
Residential construction	21,613		—		—		—		—		21,613
Residential mortgage	714,386		5,473		1,036		—		4,879		725,774
Consumer and other	5,903		47		5		—		—		5,955
Total acquired	1,789,843		9,343		2,848		—		7,989		1,810,023
Total loans	$	5,423,476	$	13,681	$	3,802	$	115	$	14,636	$	5,455,710

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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
March 31, 2017	(Dollars in thousands)
Originated:
Commercial real estate	$	2,133,061	$	52,514	$	16,767	$	—	$	—	$	2,202,342
Commercial construction	524,874		4,892		1,542		—		—		531,308
Commercial and industrial	378,155		3,407		3,325		—		—		384,887
Leases	30,512		41		—		—		—		30,553
Residential construction	109,013		304		—		—		—		109,317
Residential mortgage	613,064		22,043		9,539		—		—		644,646
Consumer and other	17,692		312		8		—		—		18,012
Total originated	3,806,371		83,513		31,181		—		—		3,921,065
Acquired:
Commercial real estate	699,784		27,309		34,448		201		—		761,742
Commercial construction	90,486		5,292		7,919		103		—		103,800
Commercial and industrial	117,708		2,436		7,047		—		—		127,191
Residential construction	15,637		127		312		—		—		16,076
Residential mortgage	631,728		35,402		18,552		157		—		685,839
Consumer and other	5,043		108		3		—		—		5,154
Total acquired	1,560,386		70,674		68,281		461		—		1,699,802
Total loans	$	5,366,757	$	154,187	$	99,462	$	461	$	—	$	5,620,867

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	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2016	(Dollars in thousands)
Originated:
Commercial real estate	$	2,004,386	$	55,028	$	17,420	$	—	$	—	$	2,076,834
Commercial construction	451,314		5,354		2,730		—		—		459,398
Commercial and industrial	363,028		3,209		3,050		—		—		369,287
Leases	29,486		43		—		—		—		29,529
Residential construction	92,831		371		—		—		—		93,202
Residential mortgage	568,875		21,669		9,122		—		—		599,666
Consumer and other	17,426		336		9		—		—		17,771
Total originated	3,527,346		86,010		32,331		—		—		3,645,687
Acquired:
Commercial real estate	755,908		31,145		33,629		204		—		820,886
Commercial construction	87,857		6,867		8,994		103		—		103,821
Commercial and industrial	122,637		3,170		6,167		—		—		131,974
Residential construction	20,912		—		701		—		—		21,613
Residential mortgage	670,683		37,181		17,747		163		—		725,774
Consumer and other	5,875		80		—		—		—		5,955
Total acquired	1,663,872		78,443		67,238		470		—		1,810,023
Total loans	$	5,191,218	$	164,453	$	99,569	$	470	$	—	$	5,455,710

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
March 31, 2017	(Dollars in thousands)
Commercial real estate	$	2,024	$	167	$	2,191	$	176
Commercial construction	765		—		765		—
Commercial and industrial	141		—		141		14
Residential mortgage	4,477		—		4,477		260
Consumer and other	8		—		8		1
Total modifications	$	7,415	$	167	$	7,582	$	451
Number of contracts	23		4		27



	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
December 31, 2016	(Dollars in thousands)
Commercial real estate	$	2,048	$	173	$	2,221	$	125
Commercial construction	765		—		765		—
Commercial and industrial	379		—		379		37
Residential mortgage	4,492		—		4,492		286
Consumer and other	9		—		9		1
Total modifications	$	7,693	$	173	$	7,866	$	449
Number of contracts	25		4		29

At March 31, 2017 and December 31, 2016, respectively, 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.

There were no new TDRs during the three months ended March 31, 2017, while the amount of new TDRs during the three months ended March 31, 2016 was immaterial.

The amount of loans modified and classified as TDRs in the previous twelve months that defaulted during the three months ended March 31, 2017 was immaterial. No loans modified and classified as TDRs in the previous twelve months defaulted during the three months ended March 31, 2016. The Company defines payment default as movement of the restructuring to nonaccrual status, foreclosure or charge-off, whichever occurs first.

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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 March 31,
	2017		2016
	(Dollars in thousands)
Loans held for sale at period end	$	23,453	$	33,455
Proceeds from sales of mortgage loans originated for sale	95,855		84,088
Gain on sales of mortgage loans originated for sale	2,037		2,543

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.

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 is party to 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.

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



	March 31, 2017					December 31, 2016
	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	$	79,183	Other assets	$	1,217	$	70,777	Other assets	$	1,224

Derivative liabilities:
Derivatives designated as hedging instruments:
Interest rate swap	$	125,000	Accrued expenses and other liabilities	$	113	$	125,000	Accrued expenses and other liabilities	$	557
Derivatives not designated as hedging instruments:
Interest rate swaps	$	79,183	Accrued expenses and other liabilities	$	1,217	$	70,777	Accrued expenses and other liabilities	$	1,224

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

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



							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amount Recognized		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments		Collateral Held/Pledged		Net
March 31, 2017	(Dollars in thousands)
Derivative assets	$	1,217	$	—	$	1,217	$	—	$	—	$	2,679
Derivative liabilities	1,330		—		1,330		—		1,330		—
Total derivative instruments	$	2,547	$	—	$	2,547	$	—	$	1,330	$	2,679

December 31, 2016
Derivative assets	$	1,224	$	—	$	1,224	$	—	$	—	$	2,679
Derivative liabilities	1,781		—		1,781		—		1,781		—
Total derivative instruments	$	3,005	$	—	$	3,005	$	—	$	1,781	$	2,679

The Company has recorded a loss of $0.1 million, net of tax, as component of accumulated other comprehensive income at March 31, 2017 associated with the cash flow hedging instrument and expects $0.4 million, net of tax, to be reclassified as an increase to interest expense during the next 12 months.

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



	Three Months Ended March 31,
	2017		2016
	(Dollars in thousands)
Amount of net gains (losses) recorded in OCI (effective portion)	$	280	$	(1,016	)

No amount of net gains or losses were reclassified to earnings during the three months ended March 31, 2017 and 2016, respectively.

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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 months ended March 31, 2017 and 2016, 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 March 31, 2017, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $1.3 million, for which the Company has posted collateral with a fair value of $6.0 million.

NOTE 7 – BORROWINGS

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



	March 31, 2017		December 31, 2016
	(Dollars in thousands)
Repurchase agreements ⁽¹⁾	$	65,468	$	70,704
Federal funds purchased	—		20,000
Advances from FHLB	30,600		77,600
Total short-term borrowings	$	96,068	$	168,304

⁽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 $155.0 million at March 31, 2017. 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.

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 11, 2017 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 March 31, 2017.

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



	March 31, 2017		December 31, 2016
	(Dollars in thousands)
Advances from FHLB, net⁽¹⁾	$	76,379	$	86,626
Subordinated notes, net ⁽¹⁾	70,613		70,648
Junior subordinated debentures, net ⁽¹⁾	44,456		44,374
Total long-term debt	$	191,448	$	201,648

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

The Company has $74.0 million of long-term advances outstanding with the FHLB as of March 31, 2017, with maturity dates ranging from 2018 to 2021 and an average interest rate of 2.21%. At March 31, 2017, commercial and real estate loans and investment securities with carrying values of $1.88 billion and $5.6 million, respectively, were assigned under this arrangement.

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The Parent Company has issued $60.0 million of 5.50% Fixed to Floating Rate Subordinated Notes (the "Subordinated Notes"), all of which are outstanding at March 31, 2017. The Subordinated Notes bear interest at a fixed rate of 5.50% 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 previously assumed a junior subordinated note with an outstanding balance of $10.6 million at March 31, 2017. The junior subordinated note bears interest at a variable rate of 30-day 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 5.78% at March 31, 2017.

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 March 31, 2017, commercial and real estate loans and investment securities with carrying values of $463.5 million and $2.8 million, respectively, were assigned under these arrangements. The Company had no outstanding borrowings with the Federal Reserve at March 31, 2017.

The following table details the junior subordinated debentures outstanding:



	Shares issued	Interest rate	Maturity date	March 31, 2017		December 31, 2016
				(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		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		50,519
Unamortized discount				5,891		5,970
Unamortized debt issuance costs				172		175
				$	44,456	$	44,374

The Company was not aware of any violations of loan covenants at March 31, 2017.

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NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME

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



	Unrealized Holding Gains on Investment Securities Available-For-Sale			Unrealized Holding Gains on Investment Securities Transferred from Available-For-Sale to Held-to-Maturity			Unrealized Holding Losses on Cash Flow Hedging Activities			Total Accumulated Other Comprehensive Income
	(Dollars in thousands)
Balance at December 31, 2016	$	492		$	1,698		$	(352	)	$	1,838
Other comprehensive income before reclassifications	1,530			—			280			1,810
Reclassifications from accumulated other comprehensive income	—			(190		)	—			(190		)
Net current period other comprehensive income (loss)	1,530			(190		)	280			1,620
Balance at March 31, 2017	$	2,022		$	1,508		$	(72	)	$	3,458

Balance at December 31, 2015	$	5,227		$	2,787		$	(685	)	$	7,329
Other comprehensive loss before reclassifications	(633		)	—			(1,016		)	(1,649		)
Reclassifications from accumulated other comprehensive income	25			(310		)	—			(285		)
Net current period other comprehensive loss	(608		)	(310		)	(1,016		)	(1,934		)
Balance at March 31, 2016	$	4,619		$	2,477		$	(1,701	)	$	5,395

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



	Three Months Ended March 31,
Component of Accumulated Other Comprehensive Income	2017			2016			Affected Line Item in the Consolidated Statement of Income
	(Dollars in thousands)
Unrealized holding gains on investment securities available-for-sale	$	—		$	(39	)	Loss on sale of investment securities, net
	—			14			Income tax expense
	—			(25		)	Total, net of tax

Unrealized holding gains on investment securities transferred from available-for-sale to held-to-maturity ⁽¹⁾	302			492			Interest income - investment securities
	(112		)	(182		)	Income tax expense
	190			310			Total, net of tax
Total reclassifications for the period	$	190		$	285


⁽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.

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NOTE 9 - 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.

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

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

Investment securities available-for-sale – The Company's equity securities available-for-sale are valued using Level 1 inputs in the fair value hierarchy, as there is an active market for determining the fair value of identical securities. The remainder of the investment securities available-for-sale are valued by a third-party pricing service which normally derive security prices from recently reported trades for similar securities, making adjustments based on significant observable transactions. At each balance sheet date, observable market inputs may include trade information, broker or dealer quotes, bids, offers or a combination of these data sources. The Company has determined the remainder of the investment securities available-for-sale portfolio are valued using Level 2 inputs.

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 has determined the fair value of derivative instruments utilize Level 2 inputs.

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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
March 31, 2017	(Dollars in thousands)
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	24,026	$	—	$	24,026	$	—
State and municipals	206,310		—		206,310		—
Corporate debt securities	50,475		—		50,475		—
Asset backed securities	152,681		—		152,681		—
Equity securities	35,401		30,176		5,225		—
Mortgage-backed securities:
Residential government sponsored	110,235		—		110,235		—
Other government sponsored	754		—		754		—
Total investment securities available-for-sale	579,882		30,176		549,706		—
Derivative instruments:
Interest rate swaps - not designated	1,217		—		1,217		—
Total derivative instruments	1,217		—		1,217		—
Total assets measured at fair value on a recurring basis	$	581,099	$	30,176	$	550,923	$	—
Liabilities:
Interest rate swap - cash flow hedge	$	113	$	—	$	113	$	—
Interest rate swaps - not designated	1,217		—		1,217		—
Total liabilities measured at fair value on a recurring basis	$	1,330	$	—	$	1,330	$	—



	Total Measured at Fair Value		Fair Value Measured Using
Description	Total Measured at Fair Value		Level 1		Level 2		Level 3
December 31, 2016	(Dollars in thousands)
Assets:
Investment securities available-for-sale:
U.S. Government agencies	$	25,394	$	—	$	25,394	$	—
State and municipals	208,705		—		208,705		—
Corporate debt securities	50,838		—		50,838		—
Other debt securities	163,751		—		163,751		—
Equity securities	15,535		10,272		5,263		—
Mortgage-backed securities:
Residential government sponsored	113,949		—		113,949		—
Other government sponsored	952		—		952		—
Total investment securities available-for-sale	579,124		10,272		568,852		—
Derivative instruments:
Interest rate swap - not designated	1,224		—		1,224		—
Total derivative instruments	1,224		—		1,224		—
Total assets measured at fair value on a recurring basis	$	580,348	$	10,272	$	570,076	$	—
Liabilities:
Interest rate swap - cash flow hedge	$	557	$	—	$	557	$	—
Interest rate swap - not designated	1,224		—		1,224		—
Total liabilities measured at fair value on a recurring basis	$	1,781	$	—	$	1,781	$	—

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

Loans held for sale – Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. The Company has determined loans held for sale are valued using Level 2 inputs.

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. The Company has determined impaired loans are valued using Level 3 inputs.

Other Real Estate Owned – Other real estate owned ("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. The Company has determined OREO is valued using Level 3 inputs.

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
March 31, 2017	(Dollars in thousands)
Loans held for sale	$	23,453	$	—	$	23,453	$	—
Impaired loans	156,525		—		—		156,525
OREO	24,984		—		—		24,984
Total assets measured at fair value on a nonrecurring basis	$	204,962	$	—	$	23,453	$	181,509

December 31, 2016
Loans held for sale	$	43,731	$	—	$	43,731	$	—
Impaired loans	162,121		—		—		162,121
OREO	26,489		—		—		26,489
Total assets measured at fair value on a nonrecurring basis	$	232,341	$	—	$	43,731	$	188,610

The following table presents the valuation and unobservable inputs for Level 3 assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2017:



Description	Fair Value (in thousands)		Valuation Methodology	Unobservable Inputs	Range of Inputs
Impaired loans	$	156,525	Appraised value	Discount to reflect current market conditions and ultimate collectability	0% - 20%
OREO	24,984		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
March 31, 2017	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	296,007	$	296,007	$	296,007	$	—	$	—
Investment securities available-for-sale	579,882		579,882		30,176		549,706		—
Investment securities held-to-maturity	313,118		310,947		—		310,947		—
Federal Home Loan Bank stock	11,187		11,187		—		11,187		—
Loans held for sale	23,453		23,453		—		23,453		—
Loans receivable, net	5,581,502		5,612,539		—		5,456,014		156,525
Accrued interest receivable	19,595		19,595		—		19,595		—
Investment in bank-owned life insurance	203,470		203,470		—		203,470		—
Interest rate swaps - not designated	1,217		1,217		—		1,217		—
Financial liabilities:
Demand deposits and savings	4,718,637		4,718,637		—		4,718,637		—
Time deposits	1,597,254		1,609,140		—		1,609,140		—
Short-term borrowings	96,068		96,068		—		96,068		—
Long-term debt	191,448		180,729		—		180,729		—
Accrued interest payable	2,915		2,915		—		2,915		—
Interest rate swap - cash flow hedge	113		113		—		113		—
Interest rate swaps - not designated	1,217		1,217		—		1,217		—



	Carrying Value		Fair Value		Level 1		Level 2		Level 3
December 31, 2016	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	260,182	$	260,182	$	260,182	$	—	$	—
Investment securities available-for-sale	579,124		579,124		10,272		568,852		—
Investment securities held-to-maturity	317,662		312,808		—		312,808		—
Federal Home Loan Bank stock	13,180		13,180		—		13,180		—
Loans held for sale	43,731		43,731		—		43,731		—
Loans receivable, net	5,418,209		5,444,530		—		5,282,409		162,121
Accrued interest receivable	22,020		22,020		—		22,020		—
Investment in bank-owned life insurance	202,005		202,005		—		202,005		—
Interest rate swaps - not designated	1,224		1,224		—		1,224		—
Financial liabilities:
Demand deposits and savings	4,518,914		4,518,914		—		4,518,914		—
Time deposits	1,564,063		1,575,697		—		1,575,697		—
Short-term borrowings	168,304		168,304		—		168,304		—
Long-term debt	201,648		190,851		—		190,851		—
Accrued interest payable	2,273		2,273		—		2,273		—
Interest rate swap - cash flow hedge	557		557		—		557		—
Interest rate swaps - not designated	1,224		1,224		—		1,224		—

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

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

Investment securities held-to-maturity - The Company utilizes a third-party pricing service which normally derive security prices from recently reported trades for similar securities, making adjustments based on significant observable transactions. At each balance sheet date, observable market inputs may include trade information, broker or dealer quotes, bids, offers, or a combination of these data sources.

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.

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 10 – 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.

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



	March 31, 2017		December 31, 2016
	(Dollars in thousands)
Commitments under unfunded loans and lines of credit	$	1,506,702	$	1,448,453
Letters of credit	13,373		14,611

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In addition, 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 $20.1 million in these VIEs, of which $13.1 million was unfunded at March 31, 2017. At March 31, 2017, our maximum exposure to loss was our $7.0 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 11 – 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 December 31, 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 66,000 Rights issued under the 2006 Omnibus Plan, 738,023 Rights issued and 323,705 Rights available for grants or awards under the 2013 Omnibus Plan, and 28,903 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 three months ended March 31, 2017 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, 2016	70,446	$	9.82
Issued	—	—
Exercised	17,661	10.69
Forfeited or expired	—	—
Outstanding at March 31, 2017	52,785	$	9.53	1.38	$	1,347
Exercisable at March 31, 2017	52,761	$	9.53	1.39	$	1,346

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 three months ended March 31, 2017 and 2016, respectively.

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Restricted Stock Awards. A summary of the activity of the Company’s unvested restricted stock awards for the three months ended March 31, 2017 is presented below:



	Number of Shares		Weighted Average Grant-Date Fair Value per Share
Unvested at December 31, 2016	900,726		$	23.80
Granted	30,650		36.51
Vested	(151,982	)	29.16
Forfeited	(250	)	20.58
Unvested at March 31, 2017	779,144		$	23.25

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 $5.5 million and $0.7 million for restricted stock awards for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, there was $13.2 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 1.56 years. The grant-date fair value of restricted stock grants vested was $4.4 million and $0.3 million during the three months ended March 31, 2017 and 2016, respectively.

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 BNC Bancorp that are based on the beliefs and assumptions of the management and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” and other similar expressions are intended to identify these forward-looking statements. In addition, forward-looking statements in this Quarterly Report on Form 10-Q include information regarding our proposed acquisition by Pinnacle, the potential effects of the pending acquisition on our business and operations prior to the consummation thereof, the effects on the Company if the acquisition is not consummated, and information regarding the combined operations and business of Pinnacle and the Company following the acquisition, if consummated. 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:


•	Pinnacle and the Company’s businesses may not be combined successfully, or such combination may take longer to accomplish than expected;


•	other closing conditions may not be satisfied on the expected terms, schedule, or at all, including approval by the Company’s and Pinnacle's shareholders, respectively, and other delays in closing the merger may occur;


•	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; and


•	other risks and factors identified in the December 31, 2016 Form 10-K under the heading "Risk Factors" contained in Item 1A.

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, 2016. 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, 2016. There have been no changes to the Company’s significant accounting policies during the three months ended March 31, 2017. 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, which operated 10 full-service branches in the Piedmont-Triad area of North Carolina.

On January 22, 2017, the Company entered into Merger Agreement with Pinnacle. Pursuant to the Merger Agreement, the Company will merge with and into Pinnacle and the Bank will merge with and into Pinnacle’s wholly-owned bank subsidiary, Pinnacle Bank. The transaction is expected to close at the end of the second quarter or early in the third quarter of 2017, subject to shareholder approval and other customary closing conditions.

Table 1

Financial Highlights



	For the Three Months Ended March 31,
	2017			2016
Operating data:	(Dollars in thousands, except per share information, shares in thousands)
Total interest income	$	70,171		$	56,481
Total interest expense	10,203			7,991
Net interest income	59,968			48,490
Provision for loan losses	1,222			647
Non-interest income	14,466			7,962
Non-interest expense	52,798			34,886
Net income	14,431			14,435

Common share and per common share data:
Diluted earnings per share	$	0.28		$	0.35
Dividends declared and paid	0.05			0.05
Book value	17.55			14.79
Tangible book value ⁽¹⁾	12.59			11.07
Weighted average diluted shares outstanding	52,357			40,885
End of period shares outstanding	52,222			40,806

Balance sheet data at period end:
Total assets	$	7,575,342		$	5,699,573
Originated loans	3,921,065			2,847,466
Acquired loans	1,699,802			1,390,688
Allowance for loan and lease losses	39,365			32,548
Goodwill and other intangible assets, net	259,141			151,829
Deposits	6,315,891			4,763,776
Shareholders' equity	916,638			603,553

Selected performance ratios (annualized):
Return on average assets	0.79		%	1.03		%
Return on average common equity	6.46		%	9.72		%
Return on average tangible common equity ⁽²⁾	9.66		%	13.71		%
Net interest margin ⁽³⁾	3.81		%	3.96		%

Asset quality ratios:
Net recoveries to average portfolio loans (annualized)	0.05		%	0.02		%
Allowance for loan losses to portfolio loans	0.70		%	0.77		%
Nonperforming assets to total assets	0.58		%	0.87		%
Nonperforming loans to portfolio loans	0.33		%	0.45		%
Excluding acquired:
Allowance for loan losses to originated loans	0.93		%	1.03		%
Nonperforming assets to originated loans and OREO	0.55		%	0.74		%
Nonperforming loans to originated loans	0.24		%	0.22		%

Capital ratios at period end ⁽⁴⁾:
Total risk-based capital	12.83		%	12.10		%
Tier 1 risk-based capital	11.10		%	10.00		%
Common equity tier 1	10.34		%	9.25		%
Tier 1 leverage	9.82		%	8.91		%


⁽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⁾	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.


⁽³⁾	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 March 31, 2017 and 2016, respectively.


⁽⁴⁾	Capital ratios are for the Company.

Management’s computation of the Company’s non-GAAP tangible common book value per share and non-GAAP return on average tangible common equity are included herein because management believes it may be useful for investors to have access to the same analytical tools used by management so that investors may assess the Company’s overall financial health and identify business and performance trends that may be more difficult to identify and evaluate when non-core items are included and to assess the relative strength of the Company's capital position. Management also believes that the computation of such non-GAAP financial measures may facilitate the comparison of the Company to other companies in the financial services industry.

We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition and results of operations computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP. The Company’s non-GAAP tangible common book value per share and non-GAAP return on average tangible common equity set forth are not necessarily comparable to non-GAAP information which may be presented by other companies. An item which management excludes when computing non-GAAP financial measures can be of substantial importance to the Company’s results for any particular quarter or year.

The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:

Table 2

Reconciliation of Non-GAAP Financial Measures



	For the Three Months Ended March 31,
	2017			2016
Tangible Common Book Value per Share:	(Dollars in thousands)
Shareholders' equity (GAAP)	$	916,638		$	603,553
Intangible assets	259,141			151,829
Tangible common shareholders equity (non-GAAP)	657,497			451,724
Common shares outstanding	52,222			40,806
Tangible common book value per share (non-GAAP)	$	12.59		$	11.07

Return on Average Tangible Common Equity:
Net income (GAAP)	$	14,431		$	14,435
Plus: Amortization of intangibles, net of tax	963			728
Tangible net income available to common shareholders (non-GAAP)	15,394			15,163
Average common shareholders' equity	905,594			597,127
Less: Average intangible assets	259,466			152,379
Average tangible common shareholders' equity (non-GAAP)	646,128			444,748
Return on average tangible common equity (non-GAAP)	9.66		%	13.71		%

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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 first quarter of 2017 was $62.2 million, an increase of $11.8 million from $50.4 million for the first quarter of 2016. The increase was primarily driven by a $1.50 billion increase in average interest-earning assets, primarily due to the acquisitions of Southcoast and High Point, respectively, as well as continued organic loan growth in our markets. Average total loans for the first quarter of 2017 were $5.58 billion, an increase of $1.33 billion, from average total loans of $4.24 billion for the first quarter of 2016.

Net interest margin for the first quarter of 2017 was 3.81%, a decrease of 15 basis points from 3.96% for the first quarter of 2016. The Company’s average yield on interest-earning assets for the first quarter of 2017 was 4.43%, a decrease of 16 basis points from 4.59% for the first quarter of 2016. The decrease was primarily due to a decrease in the yield earned on total loans, which was 4.57% for the first quarter of 2017, as compared to 4.77% for the first quarter of 2016. The decrease in yield on total loans was due to continued pricing pressure on new and renewed portfolio loans. This reduction in interest rates was partially mitigated by an increase in accretion income on the acquired loan portfolio. The Company recorded accretion income of $6.3 million during the first quarter of 2017, compared to $5.5 million of accretion income during the first quarter of 2016.

Average interest-bearing liabilities were $5.31 billion for the first quarter of 2017, an increase of $1.09 billion compared to $4.22 billion for the first quarter of 2016. The increase was primarily attributable to growth in interest-bearing deposits, which increased by $1.05 billion as compared to the first quarter of 2016. This increase was due to our recent acquisitions, as well as further market penetration in our key metropolitan areas. The Company’s average cost of interest-bearing liabilities was 0.78% for the first quarter of 2017, a slight increase compared to 0.76% for the first quarter of 2016. The average cost of the Company's interest-bearing deposits was 0.67% for the first quarter of 2017, an increase compared to 0.63% for the first quarter of 2016.

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The following table details the major components of net interest income and the related yields and rates:

Table 3

Average Balance and Net Interest Income (FTE)



	Three Months Ended March 31,
	2017						2016
	Average balance		Interest		Average Rate		Average balance		Interest		Average rate
Interest-earning assets:	(Dollars in thousands)
Loans and leases ⁽¹⁾	$	5,546,783	$	62,633	4.58	%	$	4,204,767	$	49,931	4.78	%
Loans held for sale	29,893		268		3.64	%	37,203		371		4.01	%
Investment securities, taxable	424,259		3,144		3.01	%	372,583		2,720		2.94	%
Investment securities, tax-exempt⁽²⁾	467,832		6,040		5.16	%	364,778		5,151		5.68	%
Interest-earning balances and other	153,225		321		0.85	%	139,367		214		0.62	%
Total interest-earning assets	6,621,992		72,406		4.43	%	5,118,698		58,387		4.59	%
Other assets	769,239						516,439
Total assets	$	7,391,231					$	5,635,137
Interest-bearing liabilities:
Demand deposits	$	3,210,592	4,859		0.61	%	$	2,193,939	2,902		0.53	%
Savings deposits	253,135		87		0.14	%	178,893		66		0.15	%
Time deposits	1,541,275		3,322		0.87	%	1,580,836		3,273		0.83	%
Borrowings	302,798		1,935		2.59	%	262,880		1,750		2.68	%
Total interest-bearing liabilities	5,307,800		10,203		0.78	%	4,216,548		7,991		0.76	%
Non-interest-bearing deposits	1,126,691						778,114
Other liabilities	51,146						43,348
Shareholders' equity	905,594						597,127
Total liabilities and shareholder's equity	$	7,391,231					$	5,635,137
Net interest income and interest rate spread			$	62,203	3.65	%			$	50,396	3.83	%
Net interest margin					3.81	%					3.96	%


⁽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 tax equivalent adjustment was $2.2 million and $1.9 million for the three months ended March 31, 2017 and 2016, respectively.

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The following table details the variances in net interest income caused by changes in interest rates and changes in volumes:

Table 4

Volume and Rate Variance Analysis (FTE)



	2017 vs. 2016
	Increase (decrease) due to
	Volume			Rate			Total
Interest income:	(Dollars in thousands)
Loans and leases	$	15,106		$	(2,404	)	$	12,702
Loans held for sale	(72		)	(31		)	(103		)
Investment securities, taxable	355			69			424
Investment securities, tax-exempt ⁽¹⁾	1,423			(534		)	889
Interest-earning balances and other	24			83			107
Total interest income	16,836			(2,817		)	14,019

Interest expense:
Deposits:
Demand deposits	1,424			533			1,957
Savings deposits	26			(5		)	21
Time deposits	(105		)	154			49
Borrowings	248			(63		)	185
Total interest expense	1,593			619			2,212
Net interest income increase (decrease)	$	15,243		$	(3,436	)	$	11,807


⁽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 $1.2 million for the first quarter of 2017, an increase compared to $0.6 million recorded for the first quarter of 2016. The provision for loan losses recorded during the first quarter of 2017 included $1.0 million for originated loans and $0.2 million for acquired loans, as compared to $1.0 million of provision for originated loans and $(0.4) million for acquired loans recorded during the first quarter of 2016. The increase in the provision for acquired loans was primarily due to a large relationship that experienced credit deterioration subsequent to the acquisition date.

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

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Non-Interest Income

Table 5

Non-Interest Income



	Three Months Ended March 31,
	2017		2016
	(Dollars in thousands)
Mortgage lending income	$	2,221	$	2,681
Service charges	2,874		2,321
Earnings on bank-owned life insurance	1,453		758
Loss on sale of investment securities, net	—		(39		)
Other	7,918		2,241
Total non-interest income	$	14,466	$	7,962

Mortgage lending income was $2.2 million for the first quarter of 2017, a decrease compared to $2.7 million earned during the first quarter of 2016. This decrease is primarily due to a reduction in our locked mortgage pipeline, which was partially offset by a higher volume of sales activity in the secondary market. During the first quarter of 2017, the Company sold $93.6 million of mortgage loans in the secondary market, compared with $81.8 million sold during the first quarter of 2016.

Income from service charges was $2.9 million for the first quarter of 2017, an increase from $2.3 million earned during the first quarter of 2016. 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 first quarter of 2017 was $7.9 million, an increase compared to $2.2 million earned during the first quarter of 2016. The Company recorded $1.6 million in trust and wealth services revenue during the first quarter of 2017, as compared to $0.4 million recorded during the first quarter of 2016. The Company also recorded $1.1 million of insurance services revenue during the first quarter of 2017. The trust and insurance services businesses were acquired as part of the acquisition of High Point during the fourth quarter of 2016. Many of the other non-interest income sources, such as income from recoveries on acquired loans, are volatile and can vary significantly from period to period.

Non-Interest Expense

Table 6

Non-Interest Expense



	Three Months Ended March 31,
	2017		2016
	(Dollars in thousands)
Salaries and employee benefits	$	28,487	$	18,413
Occupancy	3,327		3,252
Furniture and equipment	2,457		2,077
Data processing and supplies	2,067		1,438
Advertising and business development	879		684
Insurance, professional and other services	7,181		2,274
FDIC insurance assessments	766		900
Loan, foreclosure and other real estate owned	1,939		1,376
Other	5,695		4,472
Total non-interest expense	$	52,798	$	34,886

Non-interest expense for the first quarter of 2017 included $13.3 million of transaction-related expenses, compared to $1.4 million for first quarter of 2016. Excluding these transaction-related expenses, the overall increase in non-interest expense for the first quarter of 2017, as compared to the first quarter of 2016, was directly attributable to increased headcount and facilities expenses from our recent acquisitions.

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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 $0.5 million for the first quarter of 2017, compared to $0.3 million for the first quarter of 2016. The increase in expense was also due to the fact the Company received reimbursements from the FDIC during the first quarter of 2016 for certain OREO expenses under loss-share agreements. The Company exited these loss-share agreements during the second quarter of 2016.

Other non-interest expenses totaled $5.7 million for the first quarter of 2017, an increase compared to $4.5 million for the first quarter of 2016. The increase was primarily due to increased amortization expense on acquired intangible assets and losses incurred on the disposal of fixed assets related to the Company's unified corporate branding initiative.

Income Taxes

Income tax expense was $6.0 million for the first quarter of 2017, a decrease from $6.5 million for the first quarter of 2016. 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 first quarter of 2017 was 29.3%, compared to an effective tax rate of 31.0% for the first quarter of 2016. This decrease was primarily due to an increase in our level of taxable income relative to non-taxable income.

Analysis of Financial Condition

Investment Securities

Our investment securities portfolio, which is structured with minimum credit exposure, is intended to provide us with adequate liquidity, flexibility in asset/liability management, and a source of stable income. 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 $893.0 million at March 31, 2017, as compared to $896.8 million at December 31, 2016.

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 $10.7 million and gross unrealized losses of $9.7 million at March 31, 2017, compared to gross unrealized gains of $9.1 million and gross unrealized losses of $13.2 million at December 31, 2016. Management believes that all of its unrealized losses on individual investment securities 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 March 31, 2017, our investment securities portfolio included 497 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.

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The following table is a summary, by U.S. state, of our investment in the obligations of state and political subdivisions:

Table 7

Obligations of State and Political Subdivisions



		Amortized Cost		Fair Value
		(Dollars in thousands)
General obligation bonds:
	Texas	$	133,153	$	133,899
	North Carolina	33,490		33,392
	Pennsylvania	33,293		32,045
	Ohio	31,549		31,837
	Washington	29,137		29,555
	South Carolina	19,181		19,087
	Other (21 states)	104,595		104,403
Total general obligation bonds		384,398		384,218
Revenue bonds:
	North Carolina	32,649		32,993
	Indiana	16,697		17,174
	Florida	11,001		11,178
	Other (16 states)	52,443		53,008
Total revenue bonds		112,790		114,353
Total obligations of state and political subdivisions		$	497,188	$	498,571

Our largest exposure in general obligation bonds was 83 bonds issued by various school districts in Texas with a total amortized cost basis of $95.2 million and total fair value of $96.2 million at March 31, 2017. Of this total, $77.8 million in amortized cost and $78.5 million in fair value are guaranteed by the Permanent School Fund of the State of Texas.

Our investments in revenue bonds are summarized in the following table:

Table 8

Revenue Bonds by Source



	Amortized Cost		Fair Value
	(Dollars in thousands)
Water and sewer	$	23,885	$	23,817
College and university	19,761		19,912
Health, hospitality and nursing home	19,690		20,385
Power and electricity	7,557		7,722
Lease (abatement)	7,016		7,392
Other	34,881		35,125
Total revenue bonds	$	112,790	$	114,353

Our largest individual exposures in revenue bonds at March 31, 2017 were three bonds to be repaid by future pledged water and sewer 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 $15.2 million and the total fair value was $15.6 million at March 31, 2017.

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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 March 31, 2017 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 38 asset-backed securities, which are collateralizations of student loan pools, securitizations of cash flows derived from single family rental properties, and collateralized loan obligations, which are pools of non-investment grade corporate loans. Our investments in asset-backed securities 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	$	90,168	$	90,421
Collateralized loan obligations	57,470		57,760
Collateralized by pools of student loans	4,848		4,500
Total asset-backed securities	$	152,486	$	152,681

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 March 31, 2017 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 $5.62 billion at March 31, 2017, an increase of $165.2 million from $5.46 billion at December 31, 2016. 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



	March 31, 2017				December 31, 2016
	Amount		% of Total		Amount		% of Total
	(Dollars in thousands)
Commercial real estate - non-owner occupied	$	1,863,001	33.1	%	$	1,812,601	33.2	%
Commercial real estate - owner occupied	873,850		15.5	%	868,438		15.9	%
Multifamily	223,515		4.0	%	213,184		3.9	%
Farmland	3,718		0.1	%	3,497		0.1	%
Total commercial real estate	2,964,084		52.7	%	2,897,720		53.1	%
Commercial construction	467,174		8.3	%	401,120		7.4	%
Acquisition and development	50,782		0.9	%	42,384		0.8	%
Lots and land	117,152		2.1	%	119,715		2.2	%
Total commercial construction	635,108		11.3	%	563,219		10.3	%
Commercial and industrial	512,078		9.1	%	501,261		9.2	%
Leases	30,553		0.5	%	29,529		0.5	%
Total commercial loans	4,141,823		73.6	%	3,991,729		73.2	%
Residential mortgage	1,330,485		23.8	%	1,325,440		24.3	%
Residential construction - presold	67,518		1.2	%	58,045		1.1	%
Residential construction - speculative	57,875		1.0	%	56,770		1.0	%
Consumer	23,166		0.4	%	23,726		0.4	%
Total consumer loans	1,479,044		26.4	%	1,463,981		26.8	%
Total portfolio loans	$	5,620,867	100.0	%	$	5,455,710	100.0	%

Notable contributions to the change in loan balances during the first quarter of 2017 were as follows:


•	Total acquired loans totaled $1.70 billion at March 31, 2017, a decrease of $110.2 million from December 31, 2016.

•

The commercial real estate portfolio, which consists of multi-family residential property and owner and non-owner occupied nonresidential properties, totaled $2.96 billion at March 31, 2017, an increase of $66.4 million from December 31, 2016. Excluding loans acquired in business combinations, commercial real estate loans were $2.20 billion at March 31, 2017, an increase of $125.5 million from December 31, 2016. At March 31, 2017, the largest industry group within the commercial real estate category was for office and warehouse buildings, including both investment and owner occupied locations. Office and warehouse buildings represented 24.8% of the total commercial real estate portfolio and 13.1% of total portfolio loans. The next largest industry groups within the commercial real estate category were shopping centers/retail stores and hotels/motels, which each represented 18.8% and 10.5%, respectively, of the total commercial real estate portfolio and 9.9% and 5.5%, respectively, of total portfolio loans. The remaining commercial and business lending portfolio is spread over a diverse range of industries, none of which exceed 4% of total portfolio loans.

•

The commercial construction portfolio totaled $635.1 million at March 31, 2017, an increase of $71.9 million from December 31, 2016. Excluding loans acquired in business combinations, commercial construction loans were $531.3 million at March 31, 2017, an increase of $71.9 million from December 31, 2016. This portfolio includes projects that span multiple industries and locations within our footprint, with the primary components being homebuilder loans, shopping center construction projects, and hotel/motel constructions projects. The residential home builder segment continues to experience strong demand in the metropolitan markets. The Company actively manages the inventory of pre-sold and speculative loans and believes the home builder loan portfolio is well balanced, with a focus on regional builders with strong financial performance and proven track records. The growth in this portfolio during the first quarter of 2017 was primarily driven by increased funding of existing construction projects.

•

The commercial and industrial portfolio totaled $512.1 million at March 31, 2017, an increase of $10.8 million from December 31, 2016. Excluding loans acquired in business combinations, commercial and industrial loans were $384.9 million at March 31, 2017, an increase of $15.6 million from December 31, 2016. The Company's dedicated middle-market lending group has focused on growing this portfolio with the primary driver for growth being loans to owner-managed operating companies.

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•	Residential mortgage loans totaled $1.33 billion at March 31, 2017, an increase of $5.0 million from December 31, 2016. Excluding loans acquired in business combinations, residential mortgage loans were $644.6 million at March 31, 2017, an increase of $45.0 million from December 31, 2016.

At March 31, 2017, 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 $266.8 million, which represented approximately 96% 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 March 31, 2017, approximately 96% of the home equity lines of credit were paying scheduled monthly interest-only payments. At maturity, home equity loans are re-underwritten based on our current underwriting standards and updated appraisals are obtained. Our underwriting criteria 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:

Table 11

Home Equity Line of Credit Maturities



	(Dollars in thousands)
2017	$	9,296
2018	9,404
2019	12,497
2020	12,868
2021	13,466
Thereafter	383,285
	$	440,816

Deposits

We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source.

Total deposits at December 31, 2016 were $6.32 billion, an increase of $232.9 million from total deposits of $6.08 billion at December 31, 2016. While the majority of the increase was in transactional deposits, the Company increased wholesale funding and used the proceeds to repay short-term debt during the first quarter of 2017. Wholesale deposits comprised 21.3% of total deposits at March 31, 2017, which is consistent with the funding mix as of December 31, 2016.

Borrowings

The total carrying value of our borrowings was $287.5 million at March 31, 2017, a decrease of $82.5 million from $370.0 million at December 31, 2016. As noted above, during the first quarter of 2017 the Company utilized additional wholesale funding to repay $72.2 million of short-term borrowings. 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, subordinated notes and junior subordinated debentures. The Company will prepay FHLB advances from time to time as funding needs change.

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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 $43.8 million, or 0.58% of total assets, at March 31, 2017, an increase compared to $41.2 million, or 0.56% of total assets, at December 31, 2016. Nonperforming assets that were not acquired by the Company totaled $21.7 million at March 31, 2017, compared to $19.9 million at December 31, 2016.

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

Table 12

Nonperforming Assets



	March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			March 31, 2016
	(Dollars in thousands)
Nonaccrual loans - non-acquired	$	9,315		$	6,647		$	7,662		$	5,407		$	6,228
Nonaccrual loans - acquired	9,464			7,989			9,347			11,756			12,706
OREO - non-acquired	12,397			13,109			13,352			15,806			14,987
OREO - acquired	12,587			13,380			14,696			14,708			15,783
90 days past due - non-acquired	—			115			10			10			—
90 days past due - acquired	—			—			—			—			—
Total nonperforming assets	$	43,763		$	41,240		$	45,067		$	47,687		$	49,704
Total nonperforming assets - non-acquired	$	21,712		$	19,871		$	21,024		$	21,223		$	21,215

Loans restructured/modified not included in above,
(not 90 days past due or on nonaccrual)	$	7,415		$	7,693		$	7,878		$	9,839		$	14,984

Ratio of total nonperforming assets to total assets	0.58		%	0.56		%	0.66		%	0.74		%	0.87		%
Ratio of total nonperforming loans to total portfolio loans	0.33		%	0.27		%	0.34		%	0.36		%	0.45		%

Excluding acquired:
Ratio of nonperforming assets to originated loans and OREO	0.55		%	0.54		%	0.61		%	0.67		%	0.74		%
Ratio of nonperforming loans to originated loans	0.24		%	0.19		%	0.22		%	0.17		%	0.22		%

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Total nonaccrual loans were $18.8 million at March 31, 2017, an increase from total nonaccrual loans of $14.6 million at December 31, 2016. Nonaccrual loans that were not acquired by the Company were $9.3 million at March 31, 2017, an increase compared to $6.6 million at December 31, 2016. The increase in non-accrual loans that were not acquired by the Company was primarily due to a larger quantity of smaller dollar loans being reclassified to non-accrual.

Total OREO was $25.0 million at March 31, 2017, a decrease from total OREO of $26.5 million at December 31, 2016. OREO properties that were not acquired by the Company were $12.4 million at March 31, 2017, a decrease compared to $13.1 million at December 31, 2016. 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 $39.4 million at March 31, 2017, an increase from $37.5 million at December 31, 2016. The ratio of the allowance for loan losses to total portfolio loans was 0.70% at March 31, 2017, compared to 0.69% at December 31, 2016. Excluding loans acquired by the Company, the ratio of the allowance for loans to portfolio loans was 0.93% at March 31, 2017. compared to 0.95% at December 31, 2016.

The Company experienced $0.6 million in net recoveries of previously charged-off loans during the first quarter of 2017, compared to net recoveries of $0.2 million during the first quarter of 2016. Gross charge-offs were $0.4 million during the first quarter of 2017 and first quarter of 2016, respectively.

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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 March 31,
	2017			2016
	(Dollars in thousands)
Beginning balance	$	37,501		$	31,647
Provision for credit losses:
Loan not covered under loss-share⁽¹⁾	1,222			1,059
Loan covered under loss-share⁽¹⁾	—			(412		)
Change in FDIC indemnification asset	—			52
Net recoveries on loans covered under loss-share⁽¹⁾	—			189
Charge-offs on loans not covered under loss-share⁽¹⁾:
Commercial real estate	—			(141		)
Commercial construction	(145		)	—
Residential mortgage	(160		)	(154		)
Consumer and other	(46		)	(9		)
Total charge-offs	(351		)	(304		)

Recoveries on loans not covered under loss-share⁽¹⁾:
Commercial real estate	82			46
Commercial construction	132			9
Commercial and industrial	322			123
Residential construction	6			7
Residential mortgage	412			106
Consumer and other	39			26
Total recoveries	993			317
Net recoveries on loans not covered under loss-share⁽¹⁾	642			13
Ending balance	$	39,365		$	32,548

Total
Ratio of allowance for loan losses to total portfolio loans	0.70		%	0.77		%
Excluding acquired
Ratio of allowance for loan losses to originated loans	0.93		%	1.03		%

⁽¹⁾The Bank terminated all loss-share agreements with the FDIC during the second quarter of 2016.

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 $916.6 million at March 31, 2017, an increase from shareholders’ equity of $901.9 million at December 31, 2016.

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 the Bank and the Company are set forth below:

Table 14

Capital Adequacy Ratios



Bank of North Carolina:	Well-Capitalized Regulatory Threshold		March 31, 2017		December 31, 2016
Total risk-based capital	10.00	%	12.35	%	12.37	%
Tier 1 risk-based capital	8.00	%	11.72	%	11.75	%
Common equity tier 1	6.50	%	11.72	%	11.75	%
Tier 1 leverage	5.00	%	10.37	%	10.45	%
BNC Bancorp:
Total risk-based capital	10.00	%	12.83	%	13.03	%
Tier 1 risk-based capital	8.00	%	11.10	%	11.28	%
Common equity tier 1	6.50	%	10.34	%	10.54	%
Tier 1 leverage	5.00	%	9.82	%	10.03	%

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. The Company has 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.

While dividends from the Bank 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 first quarter of 2017.

The Bank has $180.0 million of borrowing capacity from established federal funds and other unsecured lines with counterparty banks. The Bank also has the ability to borrow from the FHLB and the Federal Reserve Bank, with $1.37 billion and $383.1 million, respectively, in available credit at March 31, 2017. The Bank 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 $893.0 million in the Company's investment securities portfolio at March 31, 2017, $579.9 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 first quarter of 2017, net cash provided by operating activities and financing activities was $46.2 million and $143.9 million, respectively, while net cash used in investing activities was $154.3 million, for a net increase in cash and cash equivalents of $35.8 million from December 31, 2016. The primary cash outflows during the first quarter of 2017 related to funding the Company's continued organic loan growth and the repayment of outstanding debt. The primary cash inflows related to cash received from core operations and increased deposits.

For the first quarter of 2016, net cash provided by operating activities and financing activities was $25.1 million and $11.5 million, respectively, while net cash used in investing activities was $98.2 million, for a net decrease in cash and cash equivalents of $61.5 million from December 31, 2015. The primary cash outflows during the first quarter of 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 and increased deposits.

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, 2016, 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, 2016 to March 31, 2017. 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 March 31, 2017, 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 March 31, 2017.

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 10 “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, 2016, which could materially affect our business, financial condition or future results of operations. 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, 2016.

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 Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



			BNC BANCORP



Date:	May 8, 2017	By: /s/ Richard D. Callicutt II
		Richard D. Callicutt II
		President and Chief Executive Officer (Principal Executive Officer)



Date:	May 8, 2017	By: /s/ David B. Spencer
		David B. Spencer
		Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX



Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of January 22, 2017, by and among Pinnacle Financial Partners, Inc., BNC Bancorp and Blue Merger Sub, Inc., incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on January 23, 2017.
3.1	Amendment of the Amended and Restated Bylaws of BNC Bancorp, dated January 22, 2017, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on January 23, 2017.
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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