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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20579

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission File Number: 000-50128

BNC BANCORP

(Exact name of registrant as specified in its charter)

(336) 476-9200

(Registrant’s telephone number, including area code)

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

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

(Title of Class)

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

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

Check whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).    ¨  YES    x  NO

$44,847,538

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

based on the price at which the registrant’s Common Stock, par value $1.00 per share

was sold on June 30, 2004)

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 3,491,821 shares of common stock, no par value, as of March 16, 2005.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders of BNC Bancorp, to be held on May 17, 2005 (the “Proxy Statement”), are incorporated by reference into Part III.

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PART I

ITEM 1. BUSINESS

General

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

The Bank is a full service commercial bank that was incorporated under the laws of the State of North Carolina on November 15, 1991, and opened for business on December 3, 1991. In June 2002, the Bank acquired Independence Bank located in Kernersville, N.C. The Bank concentrates its marketing and banking efforts to serve the citizens and business interests of the cities and communities located in Davidson, Randolph, Rowan, Forsyth and Guilford Counties. The Bank conducts its business in Davidson County from its corporate headquarters located in Thomasville, North Carolina, an additional branch in Thomasville, and a branch in Lexington, North Carolina. In Randolph County, the Bank has one location in the Archdale-Trinity community; in Forsyth County, the Bank has one location in Kernersville and a mortgage loan office in Winston Salem, North Carolina; in Guilford County, the Bank has one location in Oak Ridge and a commercial loan office in High Point, North Carolina; in Surry County, the Bank has a loan production office in Mt. Airy, North Carolina; and in Rowan County, the Bank has a loan production office in Salisbury, North Carolina. The Kernersville and Oak Ridge branches were acquired through a merger with Independence Bank.

The Bank operates under the rules and regulations of and is subject to examination by the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks, North Carolina Department of Commerce (the “Commissioner”). The Bank is also subject to certain regulations of the Federal Reserve governing the reserves to be maintained against deposits and other matters.

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

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

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

The Bank’s primary sources of revenue are interest and fee income from its lending activities, primarily consisting of making business loans for small to medium-sized businesses, and, to a lesser extent, from its investment portfolio. During the period 2002 to 2004, with interes147t rates being at historic lows on investment securities and other short-term liquid investments, the Bank chose to limit the investment in these short-term investments and focus

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the majority of the new investment dollars into higher yielding loans and longer term municipal securities. The interest on US Agency securities declined in 2003 and 2004, while the interest on municipal securities increased significantly in both years. The major expenses of the Bank are interest paid on deposits and general administrative expenses such as salaries, employee benefits, advertising and office occupancy.

The Bank has experienced steady growth over its thirteen-year existence. The Bank’s assets totaled $498 million and $372 million as of December 31, 2004 and 2003, respectively. Net Income for the fiscal year ended December 31, 2004 was $3.8 million, or $1.03 per diluted share, compared with $3.4 million, or $0.91 per diluted share, for the fiscal year ended December 31, 2003.

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

Competition and Market Area

Commercial banks generally compete with other financial institutions through the banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered. The Bank is locally owned and managed and its personnel have strong community ties. Management believes this strong community identity and involvement plus the Bank’s commitment to offer personalized services and attention to its customers help the Bank compete with the other financial institutions in its market area.

As of December 31, 2004, there were 34 branch offices of ten commercial banks located in Thomasville and Lexington (Davidson County); and nine offices of seven commercial banks located in the town of Archdale (Randolph County); 13 offices of 13 commercial banks located in the town of Kernersville (Forsyth County); and two offices of two commercial banks in the town of Oak Ridge (Guilford County). The Bank faces additional competition for investors’ funds from short-term money market securities and other corporate and governmental securities.

Davidson, Randolph, Guilford, Surry and Forsyth Counties are located in the diverse, growing regional of the Piedmont Triad. Lexington, Archdale and Thomasville’s traditional economic base includes furniture and textile manufacturing. Large area employers include Thomasville Furniture Industries, Lexington Furniture Industries, Thomas Built Buses, and Dar/Ran Furniture. Oak Ridge is primarily rural with the economic base consisting of farming and small business. Kernersville’s economic base consists primarily of small businesses. Large employers in Kernersville include Roadway Express, Barco Pruden, Sara Lee Sock Co., Deere Hitachi and Hooker Furniture.

Rowan County is located in the growing Piedmont region of North Carolina between the Charlotte metro market and Winston-Salem, High Point and Thomasville markets. Rowan County offers a premier location for warehouses, manufacturing and distribution facilities because the largest consolidated rail system in the country is centered in the region. Rowan County is home to over 45 freight companies.

Employees

At December 31, 2004, the Bank had 122 full-time and four part-time employees.

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Supervision and Regulation

Bank holding companies and state commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect the Company and the Bank. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company.

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

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

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

Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve System and have consolidated assets of $150 million or more. Bank holding companies subject to the Federal Reserve’s capital adequacy guidelines are required to comply with the Federal Reserve’s risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to risk-weighted assets is 8%. At least half of the total capital is required to be “Tier I capital,” principally consisting of common stockholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain intangible items. The remainder (“Tier II capital”) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and the allowance for loan losses, subject to certain restrictions. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum.

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Capital Requirements for the Bank. The Bank, as a North Carolina commercial bank, is required to maintain a surplus account equal to 50% or more of its paid-in capital stock. As a North Carolina chartered, FDIC-insured commercial bank which is not a member of the Federal Reserve System, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDIC’s regulations, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated assets; all other banks are required to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all applicable capital requirements as of December 31, 2004.

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

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

North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Dividends may be paid by the Bank from undivided profits, which are determined by deducting and charging certain items against actual profits, including any contributions to surplus required by North Carolina law. Also, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

Deposit Insurance Assessments. The Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by members of the Bank Insurance Fund, such as the Bank, shall be as specified in a schedule required to be issued by the FDIC. FDIC assessments for deposit insurance range from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors.

Federal Home Loan Bank System. Federal Home Loan Bank System. The FHLB system provides a central credit facility for member institutions. In December 2004, the FHLB of Atlanta implemented a new capital plan. As a member of the FHLB of Atlanta and under the new capital plan, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta under the new activity-based stock ownership requirement. On December 31, 2004, the Bank was in compliance with this requirement.

Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “satisfactory” rating in its last CRA examination which was conducted during December 2004.

Prompt Corrective Action. The FDIC has broad powers to take corrective action to resolve the problems of insured depository institutions. The extent of these powers will depend upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Under the regulations, an institution is considered “well capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” institution is defined as one that has (i) a total risk-based capital ratio

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of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is considered (A) “undercapitalized” if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating); (B) “significantly undercapitalized” if the institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C) “critically undercapitalized” if the institution has a ratio of tangible equity to total assets equal to or less than 2%.

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

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

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

Loans to One Borrower. The Bank is subject to the Commissioner’s loans to one borrower limits which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus.

Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act enacted in 1999 (the “GLB Act”) dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act has expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. However, this expanded authority also may present us with new challenges as our larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions. The GLB Act likely will have a significant economic impact on the banking industry and on competitive conditions in the financial services industry generally.

USA Patriot Act of 2001. The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant

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and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements.

In general, the Sarbanes-Oxley Act mandates important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It establishes new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and creates a new regulatory body to oversee auditors of public companies. It backs these requirements with new SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates new criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

The economic and operational effects of this new legislation on public companies, including us, will be significant in terms of the time, resources and costs associated with complying with the new law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, we will be presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.

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

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

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

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ITEM 2. PROPERTY

Owned properties:

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

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

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

North Thomasville Office relocation: 1323 National Highway, Thomasville, NC 27360.

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

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

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

The total net book value of the Bank’s furniture, fixtures and equipment on December 31, 2004 was $11.8 million. All properties are considered by the Bank’s management to be in good condition and adequately covered by insurance.

Any property acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as “real estate owned” until it is sold or otherwise disposed of by the Bank to recover its investment. As of December 31, 2004, the Bank had $540,000 of assets classified as real estate owned.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

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

The Company’s common stock is listed in the NASDAQ Small-Cap market under the symbol “BNCN”. Trident/McDonald Co., Ryan Beck & Co., Raymond James & Associates, Monroe Securities, Scott and Stringfellow, Inc., and Sandler O’Neill are the market makers in the Company’s stock. The following firm is not a market maker; however, they do attempt to match-up buyers and sellers through their local offices: Wachovia Securities.

Table 19 following this discussion presents the over-the-counter market quotations for the Company’s common stock for the years ended December 31, 2004 and 2003. For the periods prior to the Reorganization, the quotes relate to the Bank’s common stock. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

As of December 31, 2004, the Company had approximately 1,191 shareholders of record not including persons or entities whose stock is held in nominee or “street” name and by various banks and brokerage firms.

See “ITEM 1. DESCRIPTION OF BUSINESS — Supervision and Regulation” above for regulatory restrictions which limit the ability of the Bank to pay dividends. The Company paid a cash dividend of $0.14 and $0.11 per share of common stock on a split adjusted basis on February 26, 2004 and February 28, 2003, respectively. The Company paid a 10% stock dividend on September 15, 2003 to all holders of common stock on September 1, 2003. In addition, on December 27, 2004, the Company declared a cash dividend of $0.16 per share of common stock that was paid on March 11, 2005.

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The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended December 31, 2004.

The above includes purchases and retirement of common stock by the Company. The maximum amount of shares that may be purchased in the stock repurchase program will be limited to 10% of the outstanding common stock. As of December 31, 2004, the maximum of stock able to be purchased by the Company amounted to 348,000 shares, with 122,137 shares repurchased.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

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

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BNC Bancorp

Table 1

Selected Consolidated Financial Information and Other Data

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

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BNC Bancorp

Table 1

Selected Consolidated Financial Information and Other Data

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

(Continued)

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

Management’s discussion and analysis is intended to assist readers in understanding and evaluating of the consolidated financial condition and results of operations of the Company. It should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this annual report. Additional discussion and analysis related to fiscal 2004 is contained in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively.

FORWARD LOOKING STATEMENTS

This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company and the Bank. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the Bank’s markets, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Company’s other filings with the SEC. The Company undertakes no obligation to update any forward-looking statements.

The Company is a one-bank holding company incorporated under the laws of North Carolina to serve as the holding company for the Bank. The Company acquired all of the outstanding capital stock of the Bank on December 16, 2002. The Bank is a full service commercial bank that was incorporated under the laws of the State of North Carolina on November 15, 1991, and opened for business on December 3, 1991. The Bank concentrates its marketing and banking efforts to serve the citizens and business interests of the cities and communities located in Davidson, Randolph, Guilford, and Forsyth Counties. See “PART I, ITEM 1 — BUSINESS” for an overview of the business operations of the Company and the Bank.

EXECUTIVE SUMMARY

Growth, Expansion, and Funding Trends. In early 2003, with interest rates at historical lows and mortgage loan origination income at record highs, management adopted a twelve to twenty-four month strategy to grow net interest income sufficient to offset an expected decline in mortgage origination income.

With the leadership of our Chief Operating Officer, the company opened its first commercial loan production office in High Point, North Carolina. High Point was a natural fit for the Company, since the Company’s Chief Operating Officer was a native and current resident, and many civic and business leaders of High Point had been very instrumental to the development and success of our Bank, not only as customers, but as shareholders, directors and incorporators. The Company’s Chairman, W. Groome Fulton, Jr. is a High Point native, as are several current and former members of the board of directors, including: Dr. Lenin J. Peters, D. Vann Williford, Dr. Lloyd M. Higgins, Richard F. Wood, and Bob M. Burleson. With the help of two additional bankers with experience in the High Point market, this office, opened in June of 2003, finished 2004 with loans outstanding well ahead of our initial projections.

With the reception and success that our loan production office in High Point enjoyed, management continued its search for seasoned commercial lenders of high character in attractive, contiguous markets. In September of 2003, we introduced three bankers in the Salisbury, North Carolina market and opened our second commercial loan production office. The Salisbury loan production office ended 2004, just as in High Point, with total loans outstanding exceeding our initial projections.

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These markets posed new opportunities and challenges for the Company. With the Salisbury market being in the heart of one of the fastest growing areas in North Carolina, the growth opportunities were obvious. However, the challenges were just as ominous. This market and surrounding lending area was the first where the Company had no Board representation and the first outside of the familiar Piedmont/Triad region.

Realizing that the credit administration and risk management functions of the Bank were going to be challenged from a growing volume of loan requests from these new markets where we have limited institutional experience, management made a commitment to the staffing, technology, and reorganization of these areas in 2003 and 2004.

In addition to contributing to a 38.9% and 30.3% growth in the loan portfolio, net of allowance for loan losses, in 2004 and 2003, respectively, the expansion over the past two years also served another vital function. It provided greater diversification of our loan portfolio into markets less dependent on manufacturing.

With the large growth in the Company’s loan portfolio experienced over an 18 month period, it was imperative that the pricing characteristics of this new growth compliment that of the existing portfolio. With rates at or near historical lows, management determined that it was in the long-term best interest of our shareholders to emphasize variable rate pricing. We strategically avoided locking in a large volume of fixed rate loans at or near historically low levels. The company’s loan portfolio, net of allowance for loan losses, increased by $116.3 million and $70.6 million in 2004 and 2003, respectively, while loans having variable rate pricing increased by $212.4 million over that period compared to a $24.7 million decline in loans having fixed rate pricing. The high percentage of loans with variable rate pricing has resulted in a short-term decline in our yield on loans, and ultimate reduction in our net interest margin in both 2004 and 2003.

The loan production model also posed another major challenge to our Company. Without a retail deposit base at either of these locations, funding in our traditional manner would have been excessively expensive and virtually impossible. The Company turned to the wholesale deposit markets as its primary funding vehicle during the fourth quarter of 2003 and all of 2004. The wholesale deposit markets served two major functions for our Company: 1) Availability, and 2) Term Selection. Unlike the Company’s local markets where investors are often reluctant to invest in CD’s with terms greater than 12 months, the Company was able to obtain CD funding through the wholesale markets with terms ranging from six months to ten years at rates highly competitive with those quoted in our local markets.

With interest rates on CD’s being near historically low levels, management felt it prudent to use the wholesale market to lock in some longer term fixed rate funding for terms of 18 months to 5 years. As of December 31, 2004, the Company had $102.7 million in wholesale CD’s outstanding, of which, there is $49.3 million at an average rate of 2.09% maturing in 2005, $29.5 million with an average rate of 2.91% maturing in 2006, and $23.9 million maturing after 2006 with an average rate of 3.61%. In addition to wholesale CD’s, the Company has $29 million in long-term borrowings through the FHLB in Atlanta with maturities in 2010 to 2013 with an average rate of 4.47%. While we believe this to be a strategy that will be beneficial to our shareholders long-term, locking in longer term fixed rates on the deposit side contributed to the decline in the Company’s net interest margin in both 2004 and 2003.

Despite a decline in the Bank’s net interest margin from 4.14% in 2003 to 3.87% in 2004, the Bank’s net interest income increased 26.7%, or $3.2 million in 2004 compared to 2003. By accepting a slightly smaller net interest margin, the Bank was able to accelerate the growth of our loan portfolio, price our loans and deposits to take advantage of future rate increases, and still report record increases in our net interest income. Each of these results was expected as part of the strategic plan implemented during 2003.

With assets growing at a compounded annual rate of 33% over the past three years, it was imperative that part of our strategic plan be devoted to capital planning. As noted in prior reports, the Company has utilized alternative forms of regulatory capital to supplement our shareholders’ equity in order to remain well capitalized for regulatory purposes. The Company has issued three blocks of 30 year variable rate junior subordinated debentures to its wholly owned capital trusts: $5.2 million in April of 2003 priced at 3 month libor + 3.25%; $6.2 million in September of

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2003 priced at 3 month libor + 2.80%; and $5.2 million in September of 2004 priced at 3 month libor + 2.40%. These debentures fully and unconditionally guarantee the preferred securities issued by the trust. These debentures are classified as long-term debt on our Company’s financial statements.

During 2004, in addition to increases in long-term debt, total shareholders’ equity increased by $2.5 million, or 9.6%. The Company reported net income of $3.8 million, accrued $568,000 for cash dividends declared in December 2004 which were paid in March of 2005, and repurchased stock amounting to $752,000 as part of the stock repurchase plan approved by the Board of Directors. The Company repurchased 43,357 shares on the open market, at prices and block sizes in accordance with the provisions of the stock repurchase plan and relevant securities laws. All capital ratios continue to place the Bank in excess of the minimum required to be deemed a “well-capitalized” bank by regulatory measures.

The Bank has maintained liquidity at what it believes to be an appropriate level. Liquid assets, consisting of cash and demand balances due from banks, interest-earning deposits in other banks and investment securities available for sale, ended the year in the aggregate at $45.9 million, or 9.2% of total assets. The Bank, as a member of the FHLB, has an investment of $3.0 million in FHLB stock. The Bank’s investment in premises and equipment increased by $2.0 million as a result of the cost of building our full service office in High Point and the cost of the land for our full service office in Salisbury. As part of the acquisition of Independence Bank, the Company recorded goodwill of $3.4 million which is not amortizable. The $154,000 in core deposit intangible associated with that transaction has a carrying balance of $80,000 at December 31, 2004 The core deposit intangible asset is being amortized into expense over ten years.

Net Interest Margin Trends. With rates at historically low levels, the Bank made a conscious decision to limit the growth of our fixed rate loan portfolio. While these fixed rate credits provide short term spread, they could have a detrimental impact as the Federal Reserve increases short-term rates to levels reached during the previous interest rate cycle. In 2004, the Bank reported total loan growth of over $117.1 million. During the year, variable rate loans increased by $131.6 million, while fixed rate loans declined by $14.5 million. As would be expected, in this low interest rate environment, the market rate for variable rate loans is markedly less than the rates being charged on fixed rates loans. This has resulted in the Bank’s yield on earning assets declining as the mix of the portfolio shifts more towards the lower yielding variable rate product.

The funding for the loan growth in 2004 came primarily from one area; wholesale funding sources. On the wholesale funding side, management and the Board of Directors decided to lock in intermediate term funding costs at historically low interest rates by raising funds through the wholesale markets in terms ranging from 18 months to five years. These longer term time deposits and term borrowings from the FHLB served two purposes. One, they offset the interest rate risk associated with the fixed rate loans and long-term municipal securities that the Bank holds on its balance sheet; and two, they lengthened the average maturity of our term funding sources in anticipation of the Federal Reserve raising short-term rates consistently and aggressively. It is management and the Board’s belief that this action is in the Company’s best interest both from a prudence and strategic perspective. This longer term wholesale funding carries higher rates than that of very short term funding. This strategy has also contributed to a reduction in the Bank’s net interest margin in the short-term.

During 2004, the Company experienced an expected decline in mortgage origination income. With mortgage rates rising slightly, the refinance volume declined significantly, resulting in a decrease in mortgage fee income from $1.3 million in 2003 to $526,000 in 2004. The income derived from the mortgage department is very rate sensitive, as evidenced in 2004.

As management and the Board looks to 2005, it is uncertain how long the Federal Reserve will continue to raise short-term interest rates and at what pace. If the Federal Reserve continues on their “measured” approach, and short-term rates gradually increase 25 basis points every six weeks, the Company is well positioned to report double-digit percentage gains in net interest income in 2005.

Management and the Board remain convinced that the asset liability strategy discussed previously will benefit the Company over the next three to five year period and is consistent with proven results of the past.

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FINANCIAL CONDITION

DECEMBER 31, 2004 AND 2003

The most significant factor affecting the Bank’s growth in 2004 was the $116.3 million increase in net loans. This total increase was composed principally of an increase of $107.7 million in loans secured by real estate other than construction, an increase of $37.2 million in loans secured by construction purpose real estate and a decline of $27.6 million in commercial and industrial loans. The Bank has maintained liquidity at what it believes to be an appropriate level. Liquid assets, consisting of cash and demand balances due from banks, interest-earning deposits in other banks and investment securities available for sale, ended the year in the aggregate at $45.9 million, or 9.2% of total assets. The Bank, as a member of the FHLB, has an investment of $3.0 million in FHLB stock. The Bank’s investment in premises and equipment increased by $2.0 million as a result of the cost of building our full service office in High Point and the cost of the land for our full service office in Salisbury. As part of the acquisition of Independence Bank, the Company recorded goodwill of $3.4 million which is not amortizable. The $154,000 in core deposit intangible associated with that transaction has a carrying balance of $80,000 at December 31, 2004 The core deposit intangible asset is being amortized into expense over ten years.

Funding to support higher total assets held at year-end was provided by an increase of $94.7 million in deposit accounts, an increase of $15.7 million in short-term borrowings, and an increase of $11.5 million in long-term debt. The increase in deposit accounts was due to an increase of $92.5 million in certificates of deposit. Large denomination certificates of deposit increased by $83.4 million in 2004, and at year-end included $102.7 million in large denomination certificates of deposit obtained through the wholesale markets. These certificates had maturities ranging from six months to five years at rates at or below those being quoted in the local markets at the time of closing. Smaller denomination time deposits, which come primarily from within our local markets, increased by $9.0 million.

During 2004, total shareholders’ equity increased by $2.5 million, or 9.6%. The Company reported net income of $3.8 million, accrued $568,000 for cash dividends declared in December 2004 which were paid in March of 2005, and repurchased 43,357 shares of stock amounting to $752,000 as part of the stock repurchase plan approved by the Board of Directors. The stock was repurchased on the open market, at prices and block sizes in accordance with the provisions of the stock repurchase plan and relevant securities laws. All capital ratios continue to place the Bank in excess of the minimum required to be deemed an adequately-capitalized bank by regulatory measures.

In 2004, as well as 2003, the Company utilized alternative forms of regulatory capital to supplement our shareholders’ equity in order to remain “well capitalized” for regulatory purposes. The Company has issued three blocks of 30 year variable rate junior subordinated debentures to its wholly owned capital trusts: $5.2 million in April of 2003 priced at 3 month libor + 3.25%; $6.2 million in September of 2003 priced at 3 month libor + 2.80%; and $5.2 million in September of 2004 priced at 3 month libor + 2.40%. These instruments are classified as long-term debt on our Company’s financial statements.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2004 AND 2003

Overview. The Company reported net income of $3.8 million or $1.03 per diluted share for the year ended December 31, 2004, as compared with net income of $3.4 million or $0.91 per diluted share for 2003, an improvement of $398,000 or $0.12 per diluted share. Net interest income increased by $3.2 million, or 26.7%, in 2004, while non-interest income decreased by $189,000, or 5.6%. The net increases in income exceeded the $1.9 million increase in non-interest expenses, which totaled $11.9 million in 2004 as compared with $10.0 million in 2003.

Net Interest Income. Like most financial institutions, the primary component of earnings for the Bank is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, “volume” refers to the average dollar level of interest-earning assets and interest-bearing liabilities, “spread” refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and “margin” refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning

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assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities. During the years ended December 31, 2004 and 2003, average interest-earning assets were $408.4 million, and $299.0 million, respectively. During these same years, the Bank’s tax effected net yields on average interest-earning assets were 3.87% and 4.14%, respectively. The decline in the net interest margin from 2003 to 2004 was due primarily to two factors:

The Company’s loan portfolio, which grew by $116.3 million during 2004, had its variable rate portfolio increase by $131.6 million, which carries a lower rate than comparable loans with a fixed rate of interest. The fixed rate loan portfolio actually decline during 2004 by $14.5 million. The disadvantage associated with the lower rates on variable rate loans are weighted against the positives associated with the ability of these variable rate loans to reprice upwards as rates increase. In order to provide future pricing mobility of these loans, considering the historically low interest rate environment in which the Bank operated during 2004, the majority of loans originated in 2004 carried variable rate pricing.

The Bank experienced a flat year in terms of growth in the non-interest bearing demand account balances. This area provides the Bank with interest free money to supplement and offset the costs associated with fully funding loans through time deposits. With no growth in the non-interest bearing sector, the Bank was very dependent on growth from the wholesale funding sector. The Bank utilized the wholesale funding markets to increase wholesale time deposits with terms of 12 months to 60 months by $69.7 million in 2004, while short-term advances from the FHLB that reprice daily increased by $10.9 million.

Table 2 and Table 3 following this discussion, “Average Balances and Net Interest Income” and “Volume and Rate Analysis,” respectively, presents an analysis of the Bank’s net interest income and rate/volume activity for 2004 and 2003.

As described above, the primary component of earnings for the Bank is net interest income. Net interest income increased to $15.1 million for the year ended December 31, 2004, a $3.2 million or 26.7% increase from the $12.0 million earned in 2003. Total interest income benefited from strong growth in the level of average earning assets, which offset lower asset yields cause by a remix of our loan pricing throughout the year. Average total interest-earning assets increased $109.4 million, or 36.6%, during 2004 as compared to 2003, while the average yield dropped by 33 basis points from 6.17% to 5.84%. Average total interest-bearing liabilities increased by $104.6 million, or 38.2%, consistent with the increase in interest-earning assets. The average cost of interest-bearing liabilities decreased by 10 basis points from 2.22% to 2.12%. With both yield on earning assets and cost of interest-bearing liabilities declining, the Bank’s net interest margin also declined by 27 basis points. For the year ended December 31, 2004 the net interest margin was 3.87%, while for the year ended December 31, 2003, the net interest margin was a slightly higher 4.14%.

Provision for Loan Losses. The Bank recorded a $1.2 million provision for loan losses in 2004, representing an increase of $670,000 from the $520,000 provision made in 2003. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In both 2004 and 2003 the provision for loan losses was made principally in response to growth in loans, as net loan growth totaled $116.3 million in 2004 and $70.6 million in 2003. The allowance for loan losses, as a percentage of loans outstanding, declined from 1.51% at the beginning of 2004 to 1.27% at the end of the year. At December 31, 2004, the allowance for loan losses was $5.4 million, an increase of $763,000, or 16.6% from the $4.6 million at the end of 2003. The allowance represents 1.27% and 1.51%, respectively, of loans outstanding at the end of 2004 and 2003. At December 31, 2004 and 2003, the Bank had $332,000 and $835,000 in nonaccrual loans, respectively. The nonaccrual balance at December 31, 2004 has been written down to a balance that management believes is collectible under normal market conditions. Net loan charge-offs for 2004 were $427,000, or 0.12% of average loans outstanding during the year.

Non-Interest Income. Non-interest income decreased to $3.2 million for the year ended December 31, 2004 as compared with $3.4 million for the year ended December 31, 2003, a decrease of $189,000 or 5.6%. Since

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inception, the Bank has actively pursued additional non-interest income sources outside of traditional banking operations, including income from our investment service operations and our mortgage origination department. The fee income from the Company’s mortgage origination unit decreased in 2004 to $526,000 from $1.3 million in 2003. The historically low rates on conventional mortgage loans during the two year period ending in the fourth quarter of 2003 caused mortgage origination income from refinancing activity to reach unsustainable levels. Mortgage origination volumes declined to more normal levels in 2004, resulting in a significant decline in mortgage fee income. In early 2004, the Bank began to offer sub-prime mortgage products as a way of supplementing our product mix and expanding our revenue sources. These mortgages are underwritten and approved by a correspondent bank, and the Bank obtains a written commitment to sell these loans prior to relaying the commitment to the customer. While there is generally greater risk associated with sub-prime lending, since the Bank is not involved in underwriting decisions and closes these loans on a pre-sold basis, the risk to the Bank is minimized significantly. Service charges on deposits and other services in 2004 were $1.7 million, an increase of $212,000, or 14.4%, when compared to the $1.5 million in 2003. This increase was essentially growth related. Table 4 following this discussion presents a comparative analysis of the components of non-interest income.

Non-Interest Expenses. Non-interest expenses totaled $11.9 million for the year ended December 31, 2004, an increase of $1.9 million over the $10.0 million reported for 2003. Substantially all of this increase resulted from the Bank’s growth and development during 2004 and 2003, including the opening of loan production offices in both Salisbury and High Point, and the costs of advancing technology needed to make our branch delivery system customer friendly. Personnel costs increased by $863,000 or 14.4%, with the majority of this increase attributable to paying the salaries of the lenders and support staff at the two new loan production offices opened in 2003, and the hiring of the staff for the High Point office expected to open in early 2005. In addition, with the Bank experiencing asset growth of 33.6% for the year, the necessary support staff also increased. Table 5 following this discussion presents a comparative analysis of the components of non-interest expenses.

Income Taxes. The provision for income taxes of $1.5 million in 2004 and $1.4 million in 2003 represents 27.9% and 28.7%, respectively, of income before income taxes. These effective rates are lower than the blended federal/North Carolina statutory rate of 38.55% principally due to tax exempt income from municipal bonds and bank-owned life insurance.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2003 AND 2002

Overview. The Company reported net income of $3.4 million or $0.91 per diluted share for the year ended December 31, 2003, as compared with net income of $2.6 million or $0.75 per diluted share for 2002, an improvement of $797,000 or $0.16 per diluted share. Net interest income increased by $1.9 million, or 19.4%, in 2003, while non-interest income increased by $1.0 million, or 43.9%. These increases in income exceeded the $2.3 million increase in non-interest expenses, which totaled $10.0 million in 2003 as compared with $7.8 million in 2002.

Net Interest Income. Like most financial institutions, the primary component of earnings for the Bank is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, “volume” refers to the average dollar level of interest-earning assets and interest-bearing liabilities, “spread” refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and “margin” refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities. During the years ended December 31, 2003, 2002 and 2001, average interest-earning assets were $299.0 million, $232.3 million, and $182.2 million, respectively. During these same years, the Bank’s tax effected net yields on average interest-earning assets were 4.14%, 4.42%, and 4.35%, respectively. The decline in the net interest margin from 2002 to 2003 was due primarily to two factors:

(1.) A greater percentage of its new loans in 2003 were variable based, which carries a lower rate than comparable loans with a fixed rate of interest. The disadvantage associated with the lower rates on variable rate loans are weighted against the positives associated with the ability of these variable rate loans to reprice upward in the event

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market rates increase. In order to provide future pricing mobility of these loans, considering the historically low interest rate environment in which the Bank operated during 2003, the majority of loans originated in 2003 carried variable rate pricing.

(2.) The Bank experienced a flat year in terms of growth in the non-interest bearing demand account balances. This area provides the Bank with interest free money to supplement and offset the costs associated with fully funding loans through time deposits. With no growth in the non-interest bearing sector, the Bank was very dependent on growth from the premium money market and wholesale funding sectors. With rates at historically low levels, the Bank utilized the wholesale funding markets to raise $21 million in wholesale time deposits with terms of 18 to 60 months, and $15 million in FHLB advances with terms of 24 to 60 months. These longer term funds reduced the Bank’s net interest margin in the short-term. If rates rise in the future, these longer term funds could serve to enhance the Bank’s net interest margin during future periods.

Table 2 and Table 3 following this discussion, “Average Balances and Net Interest Income” and “Volume and Rate Analysis,” respectively, presents an analysis of the Bank’s net interest income and rate/volume activity for 2004 and 2003.

As described above, the primary component of earnings for the Bank is net interest income. Net interest income increased to $11.6 million for the year ended December 31, 2003, a $1.9 million or 19.4% increase from the $10.0 million earned in 2002. Total interest income benefited from strong growth in the level of average earning assets, which offset lower asset yields cause by declining interest rates throughout the year. The rates earned on a significant portion of the Bank’s loans adjust immediately when index rates such as the prime rate change. Conversely, most interest-bearing liabilities, including certificates of deposit and borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in the Bank’s interest income on loans, with a more delayed impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of deposit or borrowings. Average total interest-earning assets increased $66.8 million, or 28.8%, during 2003 as compared to 2002, while the average yield dropped by 80 basis points from 6.97% to 6.17%. Average total interest-bearing liabilities increased by $67.8 million, or 32.9%, consistent with the increase in interest-earning assets. The average cost of interest-bearing liabilities decreased by 65 basis points from 2.87% to 2.22%. With both yield on earning assets and cost of interest-bearing liabilities dropping dramatically, the Bank’s net interest margin also declined by 28 basis points. For the year ended December 31, 2003 the net interest margin was 4.14%, while for the year ended December 31, 2002, the net interest margin was a slightly higher 4.42%.

Provision for Loan Losses. The Bank recorded a $520,000 provision for loan losses in 2003, representing a decrease of $300,000 from the $820,000 provision made in 2002. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In both 2003 and 2002 the provision for loan losses was made principally in response to growth in loans, as loan growth, exclusive of the Independence Bank merger and loans held for sale, totaled $70.6 million in 2003 and $27.0 million in 2002. The Independence loan portfolio acquired in 2002 had experienced heavy charge-offs prior to our acquisition. The allowance was increased in 2002 based on this historical trend; and the results of our due diligence undertaken for the merger. With close attention and evaluation, many of the relationships that had been of concern were paid off or restructured to better protect the Bank from default. As a result of these measures, management was able to reduce the allowance for loan losses from 1.85% at the beginning of 2003 to 1.51% at the end of the year. At December 31, 2003, the allowance for loan losses was $4.6 million, an increase of $292,000, or 6.8% from the $4.3 million at the end of 2002. The allowance represents 1.51% and 1.85%, respectively, of loans outstanding at the end of 2003 and 2002. At December 31, 2003 and 2002, the Bank had $835,000 and $1.7 million in nonaccrual loans, respectively. The nonaccrual balance at December 31, 2003 has been written down to a balance that management believes is collectible under normal market conditions. Net loan charge-offs for 2003 were $228,000, a decrease of $778,000 from net charge-offs of $1.0 million in 2002.

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Non-Interest Income. Non-interest income increased to $3.4 for the year ended December 31, 2003 as compared with $2.3 million for the year ended December 31, 2002, an increase of $1.0 million, or 43.9%. Since inception, the Bank has actively pursued additional non-interest income sources outside of traditional banking operations, including income from our investment service operations and our mortgage origination department. The mortgage origination unit increased its fee income to $1.3 million in 2003, as compared to $673,000 in 2002. The historically low rates on conventional mortgage loans has caused mortgage origination income from refinancing activity to reach levels during 2003 that are not expected to be sustainable in the long run. Mortgage origination volumes are expected to normalize at lower levels in future years. The Bank opened an additional mortgage office in Mt. Airy, North Carolina during the first quarter of 2004. This office is staffed by a seasoned mortgage lender who we anticipate will provide a meaningful contribution to the mortgage department during 2004. This additional income should help to offset the loss expected due to the slowdown in refinance activity. In addition, the Bank has begun to offer sub-prime mortgage products during the first quarter of 2004 as a way of supplementing our product mix and expanding our revenue sources. These mortgages are underwritten and approved by a correspondent bank, and the Bank obtains a written commitment to sell these loans prior to relaying the commitment to the customer. While there is generally greater risk associated with sub-prime lending, since the Bank is not involved in underwriting decisions and closes these loans on a pre-sold basis, the risk to the Bank is minimized significantly. Service charges on deposits and other services in 2003 were $1.5 million, an increase of $373,000, or 34.0%, when compared to the $1.1 million in 2002. This increase was essentially growth related. Table 4 following this discussion presents a comparative analysis of the components of non-interest income.

Non-Interest Expenses. Non-interest expenses totaled $10.0 million for the year ended December 31, 2003, an increase of $2.2 million over the $7.8 million reported for 2002. Substantially all of this increase resulted from the Bank’s growth and development during 2003 and 2002, including the opening of loan production offices in both Salisbury and High Point, the purchase of the two branches in the acquisition of Independence Bank in June of 2002, and the opening of a new mortgage origination office in Winston Salem during the third quarter of 2002. Personnel costs increased by $1.5 million, with the majority of this increase attributable to paying the salaries of the employees of the branches added by the Independence Bank merger for a full year versus six months in 2002; the salaries and commissions associated with the mortgage origination office in Winston Salem for a full year; the additional commissions paid to our existing mortgage and investment services staff on increased fee generation during 2003; and the personnel costs associated with the lenders and support staff at our two new loan production offices. In addition, with the Bank experiencing asset growth of 21.4% for the year, the necessary support staff also increased. Table 5 following this discussion presents a comparative analysis of the components of non-interest expenses.

Income Taxes. The provision for income taxes of $1.4 million in 2003 and $1.2 million in 2002 represent 28.7% and 30.7%, respectively, of income before income taxes. These effective rates are lower than the blended federal/North Carolina statutory rate of 38.55% principally due to tax exempt income from municipal bonds and bank-owned life insurance.

LIQUIDITY

The Bank’s sources of funds are deposits, cash and demand balances due from other banks, interest-earning deposits in other banks and investment securities available for sale. These funds, together with loan repayments, are used to make loans and to fund continuing operations. In addition, at December 31, 2004, the Bank had credit availability with the FHLB of approximately $74.6 million, with $50.9 million outstanding at December 31, 2004.

Total deposits were $391.5 million, and $296.7 million at December 31, 2004 and 2003, respectively. As a result of the Company’s loan growth exceeding local deposit growth, the Bank utilized its wholesale funding sources, such as borrowings from the FHLB and the wholesale CD market. Due to the availability of funds and a wide range of terms available in the wholesale CD market, the Bank raised $69.7 million in out-of-market time deposits. At December 31, 2004 and 2003 time deposits represented 52.6% and 38.2%, respectively, of the Company’s total deposits. Certificates of deposit of $100,000 or more represented 34.4% and 17.3%, respectively, of the Bank’s total deposits at December 31, 2004 and 2003. At December 31, 2004, the Company had no funds from public municipalities and $102.7 million in wholesale time deposits. Management believes that most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Bank anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

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Management anticipates that the Bank will rely primarily upon customer deposits, loan repayments and current earnings to provide liquidity, and will use funds thus generated to make loans and to purchase securities, primarily securities issued by the federal government and its agencies, municipal securities and mortgage-backed securities.

In the normal course of business there are various outstanding contractual obligations of the Bank that will require future cash outflows. In addition there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require future cash outflows. Table 6 following this discussion, “Contractual Obligations and Commitments”, summarizes the Bank’s contractual obligations and commitments as of December 31, 2004.

CAPITAL RESOURCES

At December 31, 2004 and 2003, the Company’s tangible shareholders’ equity totaled $25.5 million and $23.0 million, respectively. The Company’s tangible equity to asset ratio on those dates was 5.16% and 6.22%, respectively. These ratios are above regulatory minimums necessary to be classified as well-capitalized, and show continued effort in our plan to leverage tangible equity capital to better enhance our return on average tangible equity. The Company and the Bank are subject to minimum capital requirements. See “PART 1, ITEM 1 - DESCRIPTION OF BUSINESS” — Supervision and Regulation.”

All capital ratios place the Bank in excess of the minimum required to be deemed adequately capitalized by regulatory measures. During 2002, the Bank’s Total Capital to Risk Weighted Assets ratio fell below the 10% threshold to be considered a well-capitalized institution as a result of the high concentration of cash paid in the Independence transaction. The Company’s wholly owned capital trust issued $5.0 million in trust preferred securities during the first half of 2003 to re-establish the Bank’s capital levels to well-capitalized. In 2004, the Company’s capital trusts issued $11.0 million of 30 year trust preferred securities to augment regulatory Tier I and Tier II capital. The Bank’s Tier I Leverage ratio as of December 31, 2004 and 2003 was 8.60% and 7.94%, respectively.

Note O to the accompanying consolidated financial statements presents an analysis of the Company’s and Bank’s regulatory capital position as of December 31, 2004. With the anticipated issuance of additional trust preferred securities, to be treated as Tier II capital, after December 31, 2004, management expects that the Bank will remain “well-capitalized” for regulatory purposes throughout 2005, although there can be no assurance that the Bank will not fall into the “adequately-capitalized” classification.

ASSET/LIABILITY MANAGEMENT

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

When suitable lending opportunities are not sufficient to utilize available funds, the Bank has generally invested such funds in securities, primarily U.S. Treasury securities, securities issued by governmental agencies, mortgage-backed securities and securities issued by local governmental municipalities. The securities portfolio

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contributes to the Bank’s, and thus the Company’s profits, and plays an important part in the overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, yield, liquidity, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits or as collateral for FHLB advances.

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

Based on the results of the income simulation model as of December 31, 2004, looking forward for 12 months, the Bank would expect an increase in net interest income of $1.7 million if interest rates increase from current rates by 300 basis points and a decrease in net interest income of $990,000 if interest rates decrease from current rates by 300 basis points. When factoring in other interest sensitive revenues and costs, such as the income derived from mortgage originations, the effect of a 300 basis point rise will produce a net increase in interest sensitive income of $1.3 million, while a decline in rates of 300 basis points will result in a reduction in interest sensitive income of $600,000.

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

Table 7 following this discussion, “Interest Rate Sensitivity Analysis” sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2004, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts are considered rate sensitive and place in the shortest period, while negotiable order of withdrawal or other transaction accounts are assumed to be more stable sources that are less price elastic and have been placed in the longest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments which will be received throughout the lives of the loans. The interest rate sensitivity of the Bank’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

Table 7 illustrates that if assets and liabilities reprice in the time intervals indicated in the table, the Bank is asset sensitive within three months, liability sensitive within twelve months, and asset sensitive thereafter. As stated above, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. For instance, while the table is based on the assumption that money market accounts are immediately sensitive to movements in rates, the Bank expects that in a changing rate environment the amount of the

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adjustment in interest rates for such accounts would be less than the adjustment in categories of assets which are considered to be immediately sensitive. The same is true for all other interest bearing transaction accounts. Additionally, certain assets have features which restrict changes in the interest rates of such assets both on a short-term basis and over the lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an increase in market interest rates. Due to these shortcomings, the Bank places primary emphasis on its income simulation model when managing its exposure to changes in interest rates.

LENDING ACTIVITIES

General. The Bank provides to its customers a full range of short- to medium-term commercial, mortgage, construction and personal loans, both secured and unsecured. The Bank also makes real estate mortgage and construction loans.

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

Table 8 following this discussion provides an analysis of the Bank’s loan portfolio composition by type of loan as of the end of each of the last five years.

Table 9 following this discussion presents, at December 31, 2004, (i) the aggregate maturities or repricings of loans in the named categories of the Company’s loan portfolio and (ii) the aggregate amounts of variable and fixed rate loans that mature or reprice after one year.

Commercial Loans. Commercial business lending is a major focus of the Bank’s lending activities. At December 31, 2004, the Bank’s commercial and industrial loan portfolio equaled $58.1 million or 13.8% of total loans, as compared with $85.8 million or 28.2% of total loans at December 31, 2003. Commercial and industrial loans include both secured and unsecured loans for working capital, expansion, and other business purposes. Short-term working capital loans generally are secured by accounts receivable, inventory and/or equipment. The Bank also makes term commercial loans secured by real estate, which are categorized as real estate loans. Lending decisions are based on an evaluation of the financial strength, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment.

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

Real Estate Loans. Real estate loans are made for purchasing, constructing and refinancing one to four family, five or more family and commercial properties. Real estate loans also include home equity credit lines. The Bank offers fixed and adjustable rate options and provides customers access to long-term conventional real estate loans through its mortgage loan department which makes secondary market conforming loans that are originated with a commitment from a correspondent to purchase the loan within 30 days of closing.

Residential real estate loans amounted to $151.6 million and $137.0 million at December 31, 2004 and 2003, respectively. The Bank’s residential mortgage loans are generally secured by properties located within the Bank’s

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market area. Many of the residential mortgage loans that the Bank makes are originated for the account of third parties. Such loans are classified as loans held for sale in the financial statements. The Bank receives fees for each such loan originated, with such fees aggregating $526,000 for the year ended December 31, 2004 and $1.3 million for the year ended December 31, 2003. The Bank anticipates that it will continue to be an active originator of residential loans for the account of third parties.

Commercial real estate loans totaled $192.4 million and $63.0 million at December 31, 2004 and 2003, respectively. This lending has involved loans secured principally by commercial buildings for office, storage and warehouse space, and by agricultural properties. Generally in underwriting commercial real estate loans, the Bank requires the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may be in greater amount and involve a greater degree of risk than one to four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties.

The Bank originates one to four family residential construction loans for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders and consumers for the construction of pre-sold homes. The Company generally receives a pre-arranged permanent financing commitment from an outside entity prior to financing the construction of pre-sold homes. The Company lends to builders who have demonstrated a favorable record of performance and profitable operations and who are building in markets that management believes it understands and in which it is comfortable with the economic conditions. The Company also makes commercial real estate construction loans, generally for owner-occupied properties. The Company further endeavors to limit its construction lending risk through adherence to established underwriting procedures. Also, the Company generally requires documentation of all draw requests and utilizes loan officers to inspect the project prior to paying any draw requests from the builder. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment on construction loans.

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

COMMITMENTS TO EXTEND CREDIT

In the ordinary course of business, the Bank enters into various types of transactions that include commitments to extend credit that are not included in loans receivable, net, presented on the Company’s consolidated balance sheets. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The Bank’s exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. See Table 6 and Note P to the accompanying consolidated financial statements.

ASSET QUALITY

The Bank considers asset quality to be of primary importance, and employs a formal internal loan review process to ensure adherence to its lending policy as approved by the Bank’s and the Company’s Boards of Directors. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. Credit Administration, through the loan review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, it is Credit Administration’s responsibility to change the borrower’s risk grade accordingly. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in the Bank’s market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows

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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.

The Bank’s policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a non-accrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses.

NONPERFORMING ASSETS

Table 10 following this discussion sets forth, for the period indicated, information with respect to the Bank’s nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), and total nonperforming assets.

The Company’s 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. The Bank accounts for loans on a nonaccrual basis when it has serious doubts about the ability to collect principal or interest in full. Generally, the Bank’s policy is to place a loan on nonaccrual status when the loan becomes past due 90 days. Loans are also placed on nonaccrual status in cases where management is uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition. The Bank accrues interest on restructured loans at the restructured rates when management anticipates that no loss of original principal will occur. Potential problem loans are loans which are currently performing and are not included in nonaccrual or restructured loans above, but about which management has serious doubts as to the borrower’s ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or restructured loans, so they are considered by management in assessing the adequacy of the Bank’s allowance for loan losses. At December 31, 2004, the Bank had identified $332,000 in nonaccrual loans, down from $835,000 at the end of 2003.

Real estate owned consists of foreclosed, repossessed and idled properties. At December 31, 2004 and 2003, there were $540,000 and $177,000, respectively, in assets classified as real estate owned.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management increases allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off. The allowance is reduced by loans charged off. Management evaluates the adequacy of the allowance at least quarterly. In addition, on a quarterly basis our Board of Directors reviews the loan portfolio, conducts an evaluation of credit quality and reviews the computation of the loan loss allowance. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors deriving from the Bank’s history of operations. In addition to the Bank’s history, management also considers the loss experience and allowance levels of other similar banks and the historical experience encountered by our management and senior lending officers prior to joining us. In addition, regulatory agencies, as an integral part of their examination process, periodically review allowance for loan losses and may require us to make additions for estimated losses based upon judgments different from those of management. No regulatory agency asked for a change in our allowance for loan losses during 2004 or 2003.

Management uses the risk grading program, as described under “Asset Quality,” to facilitate evaluation of

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

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

Loans classified as “substandard” are those loans with clear and defined weaknesses such as unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some losses if the deficiencies are not corrected. A reserve of 15% is generally allocated to these loans. Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable. A reserve of 50% is generally allocated to loans classified as doubtful. Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future. As a practical matter, when loans are identified as loss they are charged off against the allowance for loan losses. In addition to the above classification categories, the Bank also categorizes loans based upon risk grade and loan type, assigning an allowance allocation based upon each category.

Growth in loans outstanding has, throughout the Bank’s history, been the primary reason for increases in the Bank’s allowance for loan losses and the resultant provisions for loan losses necessary to provide for those increases. This growth has been spread among the Bank’s major loan categories, with the concentrations of major loan categories being relatively consistent from 2000 through 2004. For the four fiscal years 2000 through 2003, the Bank’s loan loss experience has seen net loan charge-offs in each year of range from 0.09% to 0.49% of average loans outstanding. For 2004 net charge-offs were 0.12% of average loans outstanding as compared to .09% in the prior year. The Bank’s allowance for loan losses at December 31, 2004 of $5.4 million represents 1.27% of total loans outstanding, excluding loans held for sale. The Bank’s allowance for loan losses at December 31, 2003 of $4.6 million represents 1.51% of total loans outstanding, excluding loans held for sale. This decrease in the allowance relative to our gross loans has been significantly impacted by the continued improvement in the credit quality of loans acquired in the acquisition of another financial institution during 2002. Many of the loans acquired in that business combination had a history of credit issues, which increased the level of the allowance allocated to those loans. Since the business combination, the Company has made a concerted effort to readdress the collateral and cash flow requirements for these loans thereby improving their classifications. This improvement has reduced the level of the allowance necessary for these loans. Management has determined that the allowance for loan losses at December 31, 2004 is adequate to absorb probable losses inherent in the loan portfolio.

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. The Bank makes specific allowances that are allocated to certain individual loans and pools of loans based on risk characteristics, as discussed below. In addition to the allocated portion of the allowance for loan losses, the Bank maintains an unallocated portion that is not assigned to any specific category of loans. This unallocated portion is intended to reserve for the inherent risk in the portfolio and the intrinsic inaccuracies associated with the estimation of the allowance for loan losses and its allocation to specific loan categories. 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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Furthermore, while management believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our portfolio, will not require an adjustment to the allowance for loan losses. No regulatory agency asked for a change in our allowance for loan losses during 2004 or 2003. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Bank’s and the Company’s financial condition and results of operations.

Bank of North Carolina’s primary markets, including the counties of Davidson, Guilford, Randolph, Forsyth, Surry and Rowan, have historically been very heavily concentrated in textile, furniture, and heavy manufacturing. With the competition from overseas, these industries have experienced significant plant closings and layoffs in our markets. To this point, the retraction in the manufacturing base has had a minimal impact on our loan quality. However, if this trend continues, it could negatively impact the Bank’s asset quality.

Table 11 following this discussion shows the allocation of the allowance for loan losses at the dates indicated. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the categories of loans shown.

Table 12 following this discussion sets forth for the periods indicated information regarding changes in the Bank’s allowance for loan losses.

INVESTMENT ACTIVITIES

The Bank’s portfolio of investment securities, all of which are available for sale, consists primarily of securities issued by local governmental municipalities, U.S. government agency securities, and mortgage-backed securities. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with any unrealized gains or losses reflected as an adjustment to stockholders’ equity. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks. It is the Bank’s policy to classify all investment securities as available for sale. Table 13 following this discussion summarizes securities available for sale.

Table 14 following this discussion summarizes the amortized costs, fair values and weighted average yields of securities available-for-sale at December 31, 2004, by contractual maturity groups.

The Bank does not engage in, nor does it presently intend to engage in, securities trading activities and therefore does not maintain a trading account. At December 31, 2004, there were no securities of any issuer (other than governmental agencies) that exceeded 10% of the Company’s shareholders’ equity.

SOURCES OF FUNDS

Deposit Activities. The Bank provides a range of deposit services, including non-interest-bearing checking accounts, interest-bearing checking and savings accounts, money market accounts and certificates of deposit. These accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. During 2004, the Bank had net growth of approximately $69.7 million in wholesale time deposits. This compares to $33.0 million of net growth in 2003. With rates at historically low levels, the Bank chose to extend the average term of our time deposit portfolio. In general, investors in the local markets are not interested in time deposits with terms of two years and longer. The wholesale markets provide a very efficient source of long term funding at rates well below those quoted at the local level.

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Borrowings. Borrowings provide an additional source of funding for the Bank. The Bank may purchase federal funds through unsecured federal funds guidance lines of credit totaling $6.0 million at December 31, 2004. 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 Bank had no outstanding balance on the line of credit as of December 31, 2004 and 2003.

As an additional source of borrowings the Bank utilizes securities sold under agreements to repurchase, with balances outstanding of $4.9 million and $4.6 million at December 31, 2004 and 2003, respectively. Securities sold under agreements to repurchase generally mature within one day from the transaction date and are collateralized by U.S. Government Agency obligations.

The Bank also uses advances from the FHLB of Atlanta under a line of credit equal to 15% of the Bank’s total assets ($74.6 million at December 31, 2004). Outstanding advances totaled $50.9 million and $36.9 million at December 31, 2004 and 2003, respectively. These advances are secured by a blanket floating lien on qualifying first mortgage loans. A more detailed analysis of the Bank’s FHLB advances is presented in Note F and Note G to the consolidated financial statements.

Table 15 following this discussion sets forth for the periods indicated the average balances outstanding and average interest rates for each major category of deposits.

Table 16 following this discussion sets forth at the dates indicated the amounts and maturities of certificates of deposit with balances of $100,000 or more at December 31, 2004.

Table 17 following this discussion sets forth for the periods indicated information regarding the Company’s borrowed funds.

MARKET RISK

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

Table 7 following this discussion sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2004, which are projected to reprice or mature in each of the future time periods shown.

Table 18 following this discussion presents information about the contractual maturities, average interest rates and estimated fair values of our financial instruments that are considered market risk sensitive at December 31, 2004.

QUARTERLY FINANCIAL INFORMATION

Table 19 following this discussion sets forth, for the periods indicated, certain of our consolidated quarterly financial information. This information is derived from our unaudited financial statements, which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with our consolidated financial statements included elsewhere in this report. The results for any quarter are not necessarily indicative of results for any future period.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note A to the Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

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In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP also prohibits companies from “carrying over” or creating a valuation allowance in the initial accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP is not expected to have a material impact on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the first interim reporting period that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2005. If we had included the cost of employee stock option compensation in our consolidated financial statements, our net income for the fiscal years ended December 31, 2004, 2003 and 2002 would have decreased by approximately $193,000, $25,000, and $143,000, respectively. Accordingly, the adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial statements.

CRITICAL ACCOUNTING POLICY

Allowance for Loan losses. The Company’s most significant critical accounting policy is the determination of our allowance for loan losses. A critical accounting policy is one that is both very important to the portrayal of our financial condition and results, and requires our most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. If the mix and amount of future write-offs differ significantly from those assumptions we use in making our determination, the allowance for loan losses and provision for loan losses on our income statement could be materially affected. For further discussion of the allowance for loan losses and a detailed description of the methodology used in determining the adequacy of the allowance, see the sections of this discussion titled “Asset Quality” and “Analysis of Allowance for Loan Losses” and Note C to the consolidated financial statements contained in this Annual Report.

OFF-BALANCE SHEET ARRANGEMENTS

Information about our off-balance sheet risk exposure is presented in Note P to the accompanying consolidated financial statements. As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2004, our SPE activity is limited to our capital trust subsidiaries: BNC Bancorp Capital Trust I, BNC Bancorp Capital Trust II & BNC Bancorp Capital Trust III, which in aggregate issued 16,000,000 Trust Preferred Securities.

RISKS ASSOCIATED WITH THE BANK AND THE COMPANY

Concentration of Operations. The Bank’s operations are concentrated in the piedmont region of North Carolina. As a result of this geographic concentration, the Bank’s results may correlate to the economic conditions in these areas. Deterioration in economic conditions in any of these market areas, particularly in the industries on which these geographic areas depend, may adversely affect the quality of the Bank’s loan portfolio and the demand for its products and services, and accordingly, its results of operations.

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

Competition with Larger Financial Institutions. The banking and financial services business in the Bank’s market area continues to be a competitive field and is becoming more competitive as a result of:

Changes in regulations;

Changes in technology and product delivery systems; and

The accelerating pace of consolidation among financial services providers.

It may be difficult to compete effectively in the Bank’s market, and results of operations could be adversely affected by the nature or pace of change in competition. The Bank competes for loans, deposits and customers with various bank and nonbank financial services providers, many of which are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services.

Trading Volume. The Company’s common stock is now listed on the NASDAQ Small-Cap exchange. The Company’s stock was listed on this market during 2003, hoping that this listing would lead to a more active and liquid trading market. However, The Company cannot guarantee that a more active and liquid trading market for the Company’s common stock will develop in the future.

Technological Advances. The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Bank’s future success will depend, in part, on its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in the Bank’s operations. Many of our competitors have substantially greater resources than the Company and the Bank to invest in technological improvements.

Government Regulations. Current and future legislation and the policies established by federal and state regulatory authorities will affect the Company’s and the Bank’s operations. The Bank is subject to supervision and periodic examination by the FDIC and the Commissioner. The Company is subject to the supervision and regulation of the Federal Reserve and the Commissioner. Banking regulations, designed primarily for the protection of depositors, may limit the Company’s and the Bank’s growth and the return to our shareholders by restricting certain of the Company’s and the Bank’s activities, such as:

The Company cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that any changes may have on future business and earnings prospects. The cost of compliance with regulatory requirements may adversely affect the Company’s and the Bank’s ability to operate profitably. The enactment of the Sarbanes-Oxley Act, and the related rules and regulations enacted by the SEC, has resulted in a significant increase in audit and legal fees.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Market Risk” under item 7.

ITEM 8. FINANCIAL STATEMENTS

The information required by this item is filed herewith.

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BNC Bancorp

Table 2

Average Balances and Net Interest Income

($ in thousands)

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BNC Bancorp

Table 3

Volume and Rate Variance Analysis

(In Thousands)

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BNC Bancorp

Table 4

Non-Interest Income

(In thousands)

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BNC Bancorp

Table 5

Non-Interest Expenses

(In thousands)

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BNC Bancorp

Table 6

Contractual Obligations and Commitments

(In thousands)

In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. The following table reflects contractual obligations of the Company outstanding as of December 31, 2004.

The following table reflects other commitments of the Company outstanding as of December 31, 2004.