UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~WASHINGTON~~Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2012~~2013

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

~~COMMISSION~~Commission ~~FILE~~File ~~NUMBER~~Number ~~000~~001-~~32951~~36009

~~CRESCENT~~VANTAGESOUTH ~~FINANCIAL~~ BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Delaware		45-2915089
(State or Other Jurisdiction ofIncorporation or Organization)		(I.R.S. EmployerIdentification No.)
(State of Incorporation)		(I.R.S. Employer Identification No.)
3600 Glenwood Avenue, Suite 300Raleigh, North Carolina		27612
(Address of principal executive offices)		(Zip Code)

~~3600~~(919) ~~Glenwood Avenue, Suite 300, Raleigh, North Carolina 27612~~659-9000

(~~Address~~Registrant’s oftelephone ~~Principal~~number, ~~Executive~~including ~~Offices)~~area ~~(Zip Code~~code)

~~Registrant’s~~Securities ~~Telephone~~registered ~~number,~~pursuant ~~including~~to ~~area~~Section ~~code:~~ 12(~~919~~b) ~~659-9000~~of the Act:

Securities registered pursuant to Section 12(b) of the Act



Title of each class		Name of each exchange on which registered
Common stock, $0.001 par value		New York Stock Exchange

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value		The NASDAQ Global Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

~~Securities~~Indicate ~~registered~~by check mark if the registrant is not required to file reports pursuant to Section 1213 or Section 15(gd) of the Act:. ~~None~~ ¨ Yes x No

Indicate by check mark ifwhether the registrant is(1) ahas ~~well-known~~filed ~~seasoned~~all ~~issuer,~~reports asrequired ~~defined~~to inbe ~~Rule~~filed ~~405~~by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¨x Yes ý¨ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

¨ Yes ý No

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

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

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ýx

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

¨State ~~Yes~~the xaggregate Nomarket value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $52,922,064.

~~State~~Indicate the ~~aggregate~~number ~~market value~~ of ~~the~~shares ~~voting~~outstanding ~~and~~of ~~non-voting~~each ~~common~~of ~~equity~~the ~~held~~registrant’s byclasses ~~non-affiliates~~of ~~computed~~Common byStock ~~reference~~as toof the ~~price~~latest atpracticable ~~which~~date: ~~the common equity was last sold~~55,255,340 orshares ~~the average bid and asked price~~ of ~~such~~Common ~~common~~Stock ~~equity,~~outstanding as of ~~the last business day of the registrant's most recently completed second fiscal quarter: $14~~March 13,~~153,493~~ 2014.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date: 35,779,127 shares of Common Stock outstanding as of March 29, 2013.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Act of 1934, as amended, for the Company’s Combined Annual Meeting of Stockholders are incorporated into Part IIINone.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	5
Item 1A.	Risk Factors	2119
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	2829
Item 3.	Legal Proceedings	29
Item 4.	Mine Safety Disclosures	29
PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3029
Item 6.	Selected Financial Data	3231
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 8.	Financial Statements and Supplementary Data	57
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~115~~112
Item 9A.	Controls and Procedures	~~115~~112
Item 9B.	Other Information	~~116~~113
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~116~~113
Item 11.	Executive Compensation	~~116~~120
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~116~~126
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~116~~128
Item 14.	Principal Accountant Fees and Services	~~116~~129
PART IV
Item 15.	Exhibits and Financial Statement Schedules	~~116~~130

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of our statements contained in this Annual Report, including, without limitation, matters discussed under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operation,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events or the future financial performance of ~~Crescent~~VantageSouth ~~Financial~~ Bancshares, Inc. (the “Company”) or its wholly-owned subsidiary, VantageSouth Bank (the “Bank”), and include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, our proposed merger with Yadkin Financial Corporation (“Yadkin”), our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared.

These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to the following:


•	deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;


•	changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;


•	the failure of assumptions underlying the establishment of reserves for possible loan losses;


•	changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

• changes in political and economic conditions, including the political and economic effects of ~~the recent~~ economic ~~downturn~~downturns and other major developments, ~~including~~such as the ongoing war on terrorism, continued tensions in the Middle East, and the ongoing economic challenges facing the European Union;


•	changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;


•	the Company's ability to comply with any requirements imposed on it or the Bank by their respective regulators, and the potential negative consequences that may result;

• the impacts of renewed regulatory scrutiny on consumer protection and compliance led by the ~~newly-created~~ Consumer Finance Protection Bureau;


•	fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;

• ~~governmental~~the ~~monetary~~impact ~~and~~of ~~fiscal~~new ~~policies,~~minimum ~~including~~capital ~~the~~thresholds ~~undetermined~~established ~~effects~~by of the ~~Federal Reserve'~~Company’s ~~“Quantitative~~regulators ~~Easing” program,~~ as ~~well~~a aspart ~~other~~of ~~legislative~~their ~~and~~implementation ~~regulatory~~of ~~changes~~Basel III;

• ~~changes~~the inpossibility ~~capital~~that ~~standards~~the ~~and~~proposed ~~asset~~merger ~~risk-weighting~~with ~~included~~Yadkin indoes ~~proposed~~not ~~Federal~~close ~~Reserve~~when ~~rules~~expected or at all because required regulatory, stockholder or other approvals and other conditions to ~~implement~~closing ~~the~~are ~~so-called~~not ~~“Basel~~received ~~III”~~or ~~accords~~satisfied on a timely basis or at all;

• the possibility that the proposed acquisition of ECB Bancorp, Inc. (“ECB”) does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;

• the Company's participation or lack of participation in governmental programs implemented under the Emergency Economic Stabilization Act (the “EESA”) and the American Recovery and Reinvestment Act (the “ARRA”), including, without limitation, the Capital Purchase Program (“CPP”) administered under the Troubled Asset Relief Program (“TARP”);


•	the risks of changes in interest rates or an unprecedented period of record-low interest rates on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;

•

the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet; and

• the effect of any mergers, acquisitions or other transactions, to which we or our subsidiary may from time to time be a party, including, without limitation, our ability to successfully integrate ~~any~~the ~~businesses~~Company’s ~~that~~2013 weacquisition ~~acquire~~of ECB Bancorp.

Many of these risks are beyond our ability to control or predict, and you are cautioned not to put undue reliance on such forward-looking statements. The Company does not intend to update or reissue any forward-looking statements contained in this Annual Report on Form 10-K as a result of new information or other circumstances that may become known to the Company.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and

~~Our actual results may differ significantly from those we discuss in these forward-looking statements.~~ 3

~~For other factors, risks and~~ uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, please read the “Risk Factors” section of this Annual Report beginning on Page 2119.

PART I

ITEM 1. BUSINESS

Organization

~~Crescent~~VantageSouth ~~Financial~~ Bancshares, Inc. (~~hereinafter referred to as~~ the “Company” ~~or "Crescent Financial"~~), is a bank holding company incorporated under the laws of Delaware in 2011. ~~and~~The Company is a ~~successor~~majority-owned ~~company~~subsidiary toof ~~Crescent~~Piedmont ~~Financial~~Community ~~Corporation~~Bank Holdings, ~~which~~Inc. ~~was~~("Piedmont"). aOn ~~bank~~July ~~holding~~22, ~~company~~2013, ~~incorporated~~the ~~under~~Company ~~the~~changed ~~laws~~its ofname ~~North~~from ~~Carolina~~Crescent inFinancial ~~2001~~Bancshares, Inc. ("Crescent") to VantageSouth Bancshares, Inc. The Company conducts its business operations primarily through its ~~commercial~~wholly-owned bank subsidiary, VantageSouth Bank (~~formerly~~the ~~known as Crescent State~~ "Bank"). The Company's headquarters are located at 3600 Glenwood Avenue, Suite 300, Raleigh, North Carolina 27612. ~~Crescent~~ ~~Financial~~The isBank was incorporated in 1998 as a ~~subsidiary~~North ofCarolina-chartered ~~Piedmont~~commercial ~~Community~~bank ~~Bank~~and ~~Holdings,~~operates ~~Inc.~~forty-five ~~("Piedmont")~~banking offices in central and eastern North Carolina.

VantageSouth Bank ~~(or~~is a community bank focused on being the ~~"Bank")~~bank ~~was~~of ~~incorporated~~choice infor ~~1998~~businesses, asbusiness aowners, ~~North~~and ~~Carolina-chartered~~professionals ~~commercial~~in ~~bank~~its markets. The Bank ~~serves~~is ~~central~~accomplishing ~~North~~this ~~Carolina~~goal by creating mutually beneficial and robust relationships with its customers and positively impacting its communities. In addition to offering standard banking products and services, the ~~coast~~Bank builds relationships with ~~twenty~~its ~~full~~customers ~~service~~by ~~branch~~understanding ~~offices~~their ~~located~~personal inand ~~Apex,~~business ~~Burlington~~challenges ~~(2),~~and ~~Cary~~goals ~~(2),~~and ~~China~~providing ~~Grove,~~tangible ~~Clayton,~~solutions. ~~Fayetteville,~~The ~~Garner,~~Bank ~~Holly~~offers ~~Springs~~a broad range of banking services, ~~Knightdale~~including checking and savings accounts, ~~Pinehurst~~individual retirement accounts (“IRAs”), ~~Raleigh~~certificates of deposit (3“CDs”), ~~Salisbury~~commercial, ~~Sanford~~consumer and personal loans, ~~Southern~~mortgage ~~Pines~~banking services and ~~Wilmington~~other ~~(2),~~associated ~~North~~financial ~~Carolina~~services. ~~Additional~~ ~~information~~These ~~about~~banking services are offered through the Bank's branch ~~offices~~network, isand ~~included~~certain inservices ~~Item~~are 2.offered ~~Properties~~through its online banking platform.

VantageSouth Bank is a community bank focused on being the bank of choice for businesses, business owners, and professionals in its markets. The Bank is accomplishing this by creating mutually beneficial and robust relationships with its customers and positively impacting its communities. In addition to offering standard banking products and services, the Bank builds relationships with its customers by understanding their personal and business challenges and goals, and providing tangible solutions. The Bank offers a broad range of banking services, including checking and savings accounts, individual retirement accounts (“IRAs”), certificates of deposit (“CDs”), commercial, consumer and personal loans, mortgage banking services and other associated financial services. These banking services are offered through the Bank's branch network and certain services are offered through its online banking platform.

Piedmont Acquisition of Crescent Financial

Piedmont was established in 2009 as a bank holding company headquartered in Raleigh, North Carolina for the purpose of building a community banking franchise in the North Carolina, South Carolina, and Virginia markets. On November 18, 2011, Crescent Financial completed the issuance and sale to Piedmont of 18,750,000 shares of common stock for $75.0 million in cash, or $4.00 per share. As part of its investment, Piedmont also made a tender offer to Crescent Financial's stockholders pursuant to which it purchased 6,128,423 shares of Crescent Financial's common stock for $29.1 million, or $4.75 per share (the "Tender Offer"). As a result of Piedmont's investment and the Tender Offer, Piedmont acquired approximately 88 percent of Crescent Financial's outstanding common stock.

Crescent Financial's financial condition and results of operations were significantly impacted by Piedmont's investment. Because of the level of Piedmont's ownership and control following the controlling investment, push-down accounting was applied. Accordingly, Crescent Financial's assets, liabilities and non-controlling interests were adjusted to estimated fair value at the acquisition date, and the allowance for loan losses was eliminated.

Piedmont Acquisition of VantageSouth Bank

VantageSouth Bank ("Legacy VantageSouth") was organized and incorporated under the laws of the State of North Carolina and commenced operations in 2006. Prior to its merger with Crescent State Bank on November 30, 2012, Legacy VantageSouth was headquartered in Burlington, North Carolina and operated five branch offices in central North Carolina. On February 19, 2010, Legacy VantageSouth sold 1,768,794 shares of its newly issued Series A Convertible Perpetual Preferred Stock (the “Series A Stock”) to Piedmont for an aggregate price of $7.7 million, or $4.35 per share. The Series A Stock was immediately convertible on a one-for-one basis into shares of Legacy VantageSouth’s common stock, which totaled approximately 62 percent of its outstanding common stock at the date of Piedmont's investment (as adjusted for the assumed conversion of the Series A Stock). The investment in Legacy VantageSouth gave Piedmont voting control over a majority of Legacy VantageSouth’s outstanding common stock and the ability to control the election of Legacy VantageSouth’s Board of Directors.

Piedmont Acquisition of Community Bank of Rowan

and Merger of Community Bank of Rowan into Legacy VantageSouth

On April 19, 2011, Piedmont acquired Community Bank of Rowan, a North Carolina-chartered bank (“Rowan”). Piedmont purchased all 813,083 shares of Rowan’s common stock for an aggregate purchase price of $9.5 million. Immediately following the acquisition, Piedmont purchased an additional 569,158 shares of newly issued common stock for an aggregate price of $7.0 million. Since Piedmont owned 100 percent of Rowan following its acquisition, purchase accounting fair value adjustments were pushed down to Rowan’s financial statements at that date. In addition, Legacy VantageSouth and Rowan became commonly controlled by Piedmont beginning on the date of Piedmont’s acquisition of Rowan.

On February 1, 2012, a transaction was completed whereby Piedmont purchased the remaining non-controlling interests in Legacy VantageSouth and simultaneously merged Rowan into Legacy VantageSouth. Piedmont purchased all remaining shares of Legacy VantageSouth common stock from non-controlling shareholders for an aggregate purchase price of $4.8 million, or $4.35 per share. Following this transaction, Piedmont wholly owned the combined Legacy VantageSouth except for directors' qualifying shares. Because Piedmont purchased the remaining non-controlling common stock of Legacy VantageSouth with this transaction, push-down accounting was applied to Legacy VantageSouth so that the basis reported in Legacy VantageSouth’s financial statements from that date forward reflected Piedmont’s basis in Legacy VantageSouth. The merger of Rowan into Legacy VantageSouth was a merger of commonly controlled companies and was accounted for in a manner similar to a pooling of interests transaction.

Merger of Legacy VantageSouth into Crescent Financial and Change in Reporting Entity

On November 30, 2012, Crescent Financial completed the merger of Legacy VantageSouth into Crescent State Bank in a share exchange. All outstanding Legacy VantageSouth shares of common stock were converted into Crescent Financial's shares at a 5.3278 exchange ratio for a total transaction value of $35.0 million. At the time of merger, Piedmont owned all outstanding shares of Legacy VantageSouth except for directors' qualifying shares. Piedmont owned approximately 90 percent of the Company's outstanding common stock following the merger. The Company re-branded its wholly-owned banking subsidiary as VantageSouth Bank immediately following the merger.

The merger of Legacy VantageSouth into Crescent State Bank was a merger of commonly controlled companies and was accounted for in a manner similar to a pooling of interests transaction. Thus, the Company's financial statements have been retrospectively adjusted to combine the financial statement balances of Crescent Financial and Legacy VantageSouth beginning on November 18, 2011, the date the two companies became commonly controlled by Piedmont. In addition, periods prior to the date of common control reflect only Legacy VantageSouth's historical balances since it was the first company acquired by Piedmont, which resulted in a change in reporting entity.

Proposed ECB Bancorp, Inc. Merger

On September 25, 2012, the Company entered into a merger agreement with ECB Bancorp, Inc. ("ECB"). Pursuant to the ECB merger agreement, ECB will merge with and into Crescent Financial, which will be the surviving bank holding corporation in the merger. Immediately following the merger, The East Carolina Bank, a North Carolina banking corporation and a wholly-owned subsidiary of ECB, will be merged with and into VantageSouth Bank. At the time of the merger, ECB's outstanding shares of common stock will be converted into the right to receive 3.55 shares of the common stock of the Company.

The merger has received all regulatory and stockholder approvals and is expected to be completed in April 2013. ECB is a bank holding company, headquartered in Engelhard, North Carolina. As of December 31, 2012, ECB had total consolidated assets of $899.6 million, loans of $509.4 million, and deposits of $751.7 million. The East Carolina Bank has twenty-five branch offices in eastern North Carolina stretching from the Virginia to South Carolina state lines east of Interstate 95. ECB offers a full range of financial services, including mortgage, agricultural banking and wealth management services.

Lending Activities

The Company provides a wide range of business and consumer loans in the markets it serves. Its objective is to have a well-diversified and balanced loan portfolio focusing on commercial and industrial, consumer and commercial real estate loans. In order to manage loan portfolio risk, the Company has established concentration limits by borrower, product type, ~~maturity,~~ loan structure, ~~industry~~ and ~~geography~~industry. The majority of business loans are secured by business assets and real estate supported in most cases by personal guarantees. Consumer loans are primarily secured with personal assets and real estate. Underwriting is primarily focused on the underlying cash flow of the business or consumer and secondarily on assets securing the loans.

The Company's loan policies, guidelines, and procedures establish the basic guidelines governing its lending operations. They address the types of loans sought, target markets, underwriting, collateral requirements, term, interest rate, yield considerations and compliance with laws and regulations. The loan policies are reviewed and approved annually by the Board of Directors of the Bank. The summary below provides an overview of the Company's current lending practices.

Commercial and Industrial Loans. Commercial and industrial loans are a focus of the Company. These loans are typically for working capital, equipment, and business expansion. Commercial and industrial loans are generally secured by accounts receivable, inventory, equipment and owner-occupied real estate. With few exceptions, the Company requires personal guarantees from the principal business owners. Commercial loans are generally originated with one to seven year maturities for working capital and equipment loans and five to seven year maturities with 15- to 25-year amortizations for owner-occupied real estate. Commercial and industrial loans totaled $230.6 million as of December 31, 2013.

Commercial Real Estate Loans. Commercial real estate loans for stabilized properties are a focus of the Company. These loans are secured principally by leased apartments, retail centers, and commercial office and industrial buildings, acquired by the borrower for both investment and owner-occupied purposes. The Company generally requires the personal guaranty of the principal business owners on all such loans. The real estate collateral is a secondary source of repayment. Commercial real estate loans are generally originated with three-to-seven year maturities with up to 25-year amortizations. Owner-occupied commercial real estate loans totaled $282.0 million, and non-owner-occupied commercial real estate loans totaled $388.1 million as of December 31, 2013.

Construction Loans. Commercial construction loans for owner-occupied buildings and projects that are pre-sold or pre-leased are also a focus of the Company. These loans are generally originated with one to five year maturities and may have an amortization feature that could extend up to 25 years once the properties are stabilized. The Company's primary focus on one-to-four family residential construction loans is to borrowers who are the primary end users or to builders in situations in which the home is pre-sold to the end user and the loan is repaid when the end user secures a permanent mortgage. These loans are generally originated with maturities up to 18 months in length. Construction loans to home builders for speculative residential homes are not a focus for the Company. In many cases, home builders do require a speculative component to their lending facilities; however, credit exposure is controlled through the covenants relating to the home builder's speculative-to-sold ratio. Any loans made in this product would be to well-established home builders with an excellent track record who are focused on delivering commodity-style housing. Through its Builder Finance division, the Company lends to home builders in its markets who have demonstrated a favorable record of performance and profitable operations. The Company's loan policies require personal guarantees of the principal business owners. Commercial construction loans and one-to-four family residential construction loans to home builders totaled $173.9 million as of December 31, 2013.

Consumer Loans, Home Equity Lines of Credit and Residential Real Estate Loans. Consumer loans include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans, and miscellaneous secured and unsecured personal loans. Residential real estate loans are made for purchasing and refinancing one-to-four family properties. The Company also offers construction-to-permanent loans for one-to-four family properties. These loans are generally sold to investors when construction is complete and the loan converts to permanent financing. The Company offers fixed and variable rate options on consumer loans but generally limits the maximum term to five to seven years for non-real estate secured loans. Home equity loans and lines of credit, residential real estate loans, and other consumer loans totaled $94.4 million, $190.3 million, and $8.3 million, respectively, as of December 31, 2013. Construction loans to consumers totaled $22.5 million as of December 31, 2013.

Residential Mortgage Loans. The Company provides customers access to long-term conventional real estate loans through its mortgage loan department. The loans are funded by the Company and are primarily sold to national investors/servicers.

Government-Guaranteed Loans. The Company provides loans guaranteed by the Small Business Administration (“SBA”) for the purchase of businesses, business startups, business expansion, equipment, and working capital. All SBA loans are underwritten and documented as prescribed by the SBA. SBA loans are generally fully amortizing and have maturity dates and amortizations of up to 25 years. SBA loans held for investment totaled $61.2 million as of December 31, 2013 and were primarily classified as commercial and industrial and commercial real estate loans and were included in the balances disclosed above. SBA loans held for investment represent primarily unguaranteed balances. SBA loans held for sale to investors totaled $1.9 million as of December 31, 2013.

Loan Approvals. The Company's loan policies and procedures establish the basic guidelines governing lending operations. Generally, the guidelines address the type of loans sought, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans and credit lines are subject to approval procedures and exposure limits. Bankers are assigned to work with specific credit administration officers, and any loans must be approved by the designated credit administration officer prior to origination. Loans where the total borrower credit exposure exceeds $7.5 million must also be approved by the Bank's Chief Credit Officer. Exposure over $10 million must be approved by the Bank's Board of Directors' Loan Commitment Committee. Lending policies are reviewed and approved at least annually by the Board of Directors.

Loan Review. Responsibility for loan review resides with the Loan Review Officer. To supplement internal loan review resources, the Company has engaged an independent third-party loan review group. Together, the Loan Review Officer and the independent third-party loan review group form our combined internal loan review function. The Company's combined internal loan review function reports to the Audit Committee of the Board of Directors, and the Audit Committee approves the annual loan review plan.

Asset Quality. The Company considers asset quality to be of primary importance. It is the responsibility of each banker and credit administration officer to assign an appropriate risk grade to every loan originated, reviewed and renewed. The loan review function evaluates compliance with established underwriting and risk grading standards and provides a report detailing the conclusions of all internal and external reviews to the Board of Directors and senior management. The Company's loan policies require management to address any criticisms raised during the loan review and to take appropriate actions where warranted. The Company also employs a special assets group which is responsible for maximizing the collection of amounts owed to the Company related to problem assets. In addition to developing workout and repayment plans with borrowers, as appropriate, the special assets group takes appropriate legal action to file claims and judgments to recover amounts owed to the Company.

~~The~~Loan ~~Company's~~Commitments. In ~~loan~~the ~~policies~~ordinary ~~and~~course ~~procedures~~of ~~establish~~business, the ~~basic~~Company ~~guidelines~~enters ~~governing~~into ~~its~~various ~~lending~~types ~~operations~~of transactions that include commitments to extend credit. The ~~guidelines~~Company ~~address~~applies the ~~types~~same ofcredit ~~loans~~standards to these commitments that ~~are~~it ~~sought,~~utilizes ~~target~~in ~~markets,~~all ~~underwriting,~~of ~~collateral~~its ~~requirements,~~lending ~~terms,~~activities ~~interest~~and ~~rate,~~has ~~yield~~included ~~considerations~~these ~~and~~commitments ~~compliance~~in ~~with~~its ~~laws~~lending ~~and~~risk ~~regulations~~evaluations. ~~The~~ ~~loan~~Commitments ~~policies~~to extend credit are ~~reviewed~~agreements ~~and~~to ~~approved~~lend ~~annually~~to bya ~~the~~customer ~~Board~~as long as there is no violation of ~~Directors~~conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. See Note O "Commitments and Contingencies" in the ~~Bank~~“Notes to Consolidated Financial Statements” for more information.

The summary below provides a overview of the Company's current lending practices. Because of Piedmont's bank acquisitions in 2010 and 2011, the acquired loan portfolios do not necessarily reflect the Bank's current focus and lending strategy. Acquired loan amounts were adjusted to estimated fair value in purchase accounting and are being serviced and managed according to the specific circumstances of each loan and borrower relationship.

Commercial and Industrial Loans. Commercial and industrial loans are a focus of the Bank. These loans are typically for working capital, equipment, and business expansion. Commercial and industrial loans are generally secured by accounts receivable, inventory, equipment and owner-occupied real estate. With few exceptions, the Bank requires personal guarantees from the principal business owners. Commercial loans are generally originated with one to seven year maturities for working capital and equipment loans and five to seven year maturities with 15 to 25 year amortizations for owner-occupied real estate. Commercial and industrial loans totaled $98.7 million as of December 31, 2012.

Commercial Real Estate Loans. Commercial real estate loans for stabilized properties are a focus of the Bank. These loans are secured principally by leased apartments, retail centers, and commercial office and industrial buildings, acquired by the borrower for both investment and owner-occupied purposes. The Bank's emphasis is on lending for stabilized, income-producing properties and not on speculative projects. The Bank generally requires the personal guaranty of the principal business owners on all such loans. The real estate collateral is a secondary source of repayment. Commercial real estate loans are generally originated with three-to-seven year maturities with up to 25-year amortizations. Owner-occupied commercial real estate loans totaled $149.9 million, and non-owner-occupied commercial real estate loans totaled $243.0 million as of December 31, 2012.

Construction Loans. Commercial construction loans for owner-occupied buildings and projects that are pre-sold or pre-leased are a focus of the Bank. These loans are generally originated with one to five year maturities and may have an amortization feature that could extend up to 25 years. The Bank's focus on one-to-four family residential construction loans is to borrowers who are the primary end users or to a builder where the home is pre-sold to the end user and where the loan is repaid when the end user secures a permanent mortgage. These loans are generally originated with maturities up to 18 months in length. Construction loans to builders for speculative residential homes are not a focus. Any loans made in this product would be to well-established, well-capitalized regional builders. Through its Builder Finance division, the Bank lends to builders in its markets who have demonstrated a favorable record of performance and profitable operations. The Bank's loan policies require personal guarantees of the principal business owners. Commercial construction loans and one-to-four family residential construction loans to home builders totaled $72.6 million as of December 31, 2012. Construction loans to consumers totaled $6.2 million as of December 31, 2012.

Mortgage Loans. The Bank provides customers access to long-term conventional real estate loans through its mortgage loan department. The loans are funded by the Bank and are sold to national investors/servicers.

Government Guaranteed Loans. The Bank provides loans guaranteed by the Small Business Administration (“SBA”) for the purchase of businesses, business startups, business expansion, equipment, and working capital. All SBA loans are underwritten and documented as prescribed by the SBA. SBA loans are generally fully amortizing and have maturity dates and amortizations of up to 25 years. SBA loans held for investment totaled $19.9 million as of December 31, 2012 and were primarily classified as commercial and industrial and commercial real estate loans and were included in the balances disclosed above. SBA loans held for investment represent primarily unguaranteed balances. SBA loans held for sale to investors totaled $6.8 million as of December 31, 2012.

Loan Approvals. The Bank's loan policies and procedures establish the basic guidelines governing lending operations. Generally, the guidelines address the type of loans sought, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans and credit lines are subject to approval procedures and exposure limits. Bankers are assigned to work with specific credit administration officers, and any loans must be approved by the designated credit administration officer prior to origination. Loans where the total borrower credit exposure exceeds $7.5 million must also be approved by the Bank's Chief Operating Officer. Exposure over $10 million must be approved by the Bank's Board of Directors' Loan Commitment Committee. Lending policies are reviewed and approved at least annually by the Board of Directors.

Loan Review. Responsibility for loan review resides with the Loan Review Officer. To supplement internal loan review resources, the Bank has engaged an independent third-party loan review group, which together form our combined internal loan review function. The Bank's combined internal loan review function reports to the Audit Committee of the Board of Directors, and the Audit Committee approves the annual loan review plan. Responsibility for loan underwriting, compliance and document monitoring reside with the credit administration department, the compliance department and loan operations department, respectively. On an annual basis, the Board of Directors determines and approves the Chief Operating Officer's lending authority, who then delegates lending authorities to credit administration officers.

Credit Cards. The Bank offers a credit card on an agency basis as an accommodation to its customers but assumes none of the underwriting risk.

Loan Participations. At times, the Bank may purchase and sell loan participations to or from other banks within and outside its market area. All loan participations purchased are underwritten using the Bank's standard and customary underwriting criteria.

Asset Quality. The Company considers asset quality to be of primary importance. It is the responsibility of each banker and credit administration officer to assign an appropriate risk grade to every loan originated, reviewed and renewed. The loan review function evaluates compliance with established underwriting and risk grading standards and provides a report detailing the conclusions of all internal and external reviews to the Board of Directors and senior management. The Bank’s loan policies require management to address any criticisms raised during the loan review and to take appropriate actions where warranted. The Bank also employs a special assets group which is responsible for maximizing the collection of amounts owed to the Bank related to problem assets. In addition to developing workout and repayment plans with borrowers, as appropriate, the special assets group takes appropriate legal action to file claims and judgments to recover amounts owed to the Bank.

Commitments and Contingent Liabilities

In the ordinary course of business, the Company enters into various types of transactions that include commitments to extend credit. The Company applies the same credit standards to these commitments that it utilizes in all of its lending activities and has included these commitments in its lending risk evaluations. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. See Note N "Commitments and Contingencies" in the “Notes to Consolidated Financial Statements” for more information.

Investment Activities

The Company's investment portfolio plays a major role in the management of liquidity and interest rate sensitivity and, therefore, it is managed in the context of the overall balance sheet. The Company invests in securities as allowable under bank regulations and its investment policy. These securities include obligations of the U.S. Treasury, U.S. government agencies, U.S. government-sponsored entities, including mortgage-backed securities, bank eligible obligations of any state or political subdivision, privately-issued residential and commercial mortgage-backed securities, bank eligible corporate bonds, mutual funds and limited types of equity securities.

The securities portfolio generates some of the Company's interest income and serves as a necessary source of liquidity. Debt and equity securities that will be held for indeterminate periods of time, including securities that the Company may sell in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments, are classified as available for sale. The Company carries these investments at market value, which it generally determines by using published quotes or a pricing matrix obtained at the end of each month. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported, net of applicable income tax, as a component of accumulated other comprehensive income in stockholders’ equity until realized.

Deposit Activities

Deposits are the primary source of funds for the Company's lending and investing activities; therefore, deposit cost is the largest driver of interest expense. The Company provides a range of deposit services to businesses and individuals, including non-interest bearing checking accounts, interest bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company's primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of December 31, ~~2012~~2013, brokered deposits represented approximately 98 percent of total deposits, which was a decline from 169 percent as of December 31, ~~2011~~2012.

~~Borrowed~~Merger ~~Funds~~and Acquisition Activities

AsThe ~~additional sources of funding, the~~ Company's ~~has~~strategic ~~established~~plan ~~borrowing~~involves ~~arrangements~~growing ~~with~~a ~~the~~high ~~Federal~~performing ~~Home~~community ~~Loan~~bank ~~Bank~~through oforganic ~~Atlanta~~loan ~~(“FHLB”),~~and ~~the~~deposit ~~Federal~~growth ~~Reserve~~as ~~Bank~~well ofas ~~Richmond~~disciplined ~~(the~~merger ~~“Federal~~and ~~Reserve~~acquisition ~~Bank”~~("M&A") ~~and other correspondent banks~~activity. The Company ~~uses~~has ~~advances~~focused ~~from~~on ~~the~~maintaining ~~FHLB~~an ~~under~~M&A aapproach ~~line~~that ofinvolves ~~credit~~disciplined ~~equal~~targeting toand 30pricing ~~percent~~as ofwell ~~the~~as ~~Bank's~~extensive ~~total assets. The maximum~~ credit, ~~available~~financial, ~~totaled~~legal, ~~$238.0~~information ~~million~~technology, asand ofoperational ~~December~~due ~~31, 2012~~diligence. The Company ~~had~~also ~~$15.0~~understands ~~million~~the inimportance ~~outstanding~~of ~~FHLB advances~~ and ~~$223.0~~has ~~million~~significant inexperience ~~remaining~~integrating ~~credit~~management ~~available~~teams, aspolicies ofand ~~December 31~~procedures, ~~2012. Pursuant~~branch tonetworks, ~~collateral~~systems, ~~agreements~~and ~~with~~balance ~~the~~sheets. ~~FHLB,~~The asCompany's ofM&A ~~December~~process ~~31,~~is ~~2012,~~governed ~~investment~~by ~~securities~~the ~~available~~Company's ~~for~~Board ~~sale~~of ~~totaling~~Directors ~~$2.8 million~~ and ~~loans~~is ~~totaling~~subject ~~$228.0~~to ~~million~~stockholder ~~were~~and ~~pledged~~regulatory ~~against future advances~~approvals.

~~The~~Piedmont, ~~Company~~which ~~has~~owns ~~also established~~ a ~~borrowing~~controlling ~~relationship~~interest atin the ~~Federal~~Company, ~~Reserve~~acquired ~~Bank’s~~controlling ~~discount~~interests ~~window. As~~in ofVantageSouth ~~December~~Bank ~~31,~~("Legacy ~~2012,~~VantageSouth") ~~the~~in ~~Company~~2010 ~~had~~and ~~pledged~~Community asBank ~~collateral~~of ~~$6.8~~Rowan ~~million~~("Rowan") ofand ~~loans~~Crescent toFinancial ~~the~~Bancshares, ~~discount window~~Inc. ~~The~~ ~~pledged~~("Crescent") ~~loans~~in ~~are~~2011. ~~construction~~During ~~loans~~2012, ~~commercial~~in ~~and~~two ~~industrial~~separate ~~loans~~transactions, ~~and~~Piedmont ~~consumer~~merged ~~loans. The~~Rowan ~~Federal~~into ~~Reserve~~Legacy ~~Bank~~VantageSouth ~~has~~and ~~established~~then ~~lending~~merged ~~margins~~the oncombined ~~the~~Legacy ~~various~~VantageSouth ~~collateral~~into ~~types~~Crescent. The combined Company, ~~and~~which ~~the~~was ~~loans~~rebranded ~~pledged~~as ~~allow~~VantageSouth ~~the~~Bancshares, ~~Company~~Inc., toacquired ~~borrow~~ECB ~~between~~Bancorp, 60Inc. ~~and~~("ECB") 65in ~~percent~~2013. ofLegacy VantageSouth is the ~~collateral~~historical ~~value. The~~reporting ~~Company~~entity ~~had~~for nothe ~~outstanding~~Company ~~discount~~since ~~window~~it ~~borrowings~~was asthe offirst ~~December~~company ~~31,~~acquired ~~2012~~by Piedmont.

The Company may purchase federal funds through unsecured lines of credit aggregating $75.0 million. These lines are intended for short-term borrowing needs and are subject to restrictions limiting the frequency and terms of the advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no federal funds purchased as of December 31, 2012.7

~~Long-Term~~The ~~Debt~~table below provides a summary of Piedmont's and the Company's acquisitions.

Trust Preferred Securities

Acquired Institution

Acquisition Date

Total Assets Acquired

Purchase Price

Price to TBV

($ in thousands)

VantageSouth Bank

February 19, 2010

99,189

7,694

1.03x

Community Bank of Rowan

April 19, 2011

139,353,000

9,500,000

1.26x

Crescent Financial Bancshares, Inc.

November 18, 2011

995,156

75,000

1.28x

ECB Bancorp, Inc.

April 1, 2013

856,076

40,629

0.92x

Average Price to TBV

1.12x

InProposed ~~August~~Merger ~~2003,~~With ~~$8.0~~Yadkin ~~million in trust preferred securities were issued through Crescent~~ Financial Capital Trust I (the “Trust”). The Trust invested the total proceeds from the sale of its trust preferred securities (“TRUPs”) in junior subordinated deferrable interest debentures issued by the Company. The Company fully and unconditionally guarantees the TRUPs. The Company's obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness. These TRUPs qualify as Tier 1 capital for regulatory capital purposes, subject to certain limitations. The TRUPs mature on October 7, 2033 and are redeemable, subject to approval by the Federal Reserve, on a quarterly basis.Corporation

~~The~~On ~~TRUPs~~January ~~pay cumulative cash distributions quarterly at an annual contract rate~~27, ~~reset quarterly~~2014, ~~equal~~the toCompany ~~three-month~~and ~~LIBOR~~Piedmont ~~plus~~entered ~~3.10~~into ~~percent. The~~an ~~dividends~~Agreement ~~paid~~and toPlan ~~holders~~ of ~~the~~Merger with ~~TRUPs,~~Yadkin ~~which~~Financial ~~are~~Corporation ~~recorded~~(“Yadkin”) asunder ~~interest~~which ~~expense,~~the ~~are deductible for income tax purposes. The~~ Company ~~elected~~and toPiedmont ~~defer~~will ~~interest~~each ~~payments~~merge ~~on its TRUPs beginning~~ with ~~the~~and ~~payment~~into ~~due~~Yadkin ~~April~~(referred 7,to ~~2011. Under~~collectively ~~the~~as ~~terms of~~ the ~~indenture~~“Yadkin ~~governing~~Merger”). ~~the~~Immediately ~~junior~~following ~~subordinated debentures,~~ the ~~Company~~completion ~~may defer payments~~ of ~~interest for up to 20 consecutive quarterly periods without default or penalty. In~~ the ~~second~~Yadkin ~~quarter of 2012~~Merger, ~~the~~VantageSouth ~~Company received approval from the Federal Reserve~~ Bank ofwill ~~Richmond~~merge towith ~~resume interest payments on its TRUPs~~ and ~~paid~~into ~~all~~Yadkin ~~accrued~~Bank, ~~deferred~~Yadkin’s ~~interest~~wholly-owned ~~plus~~banking ~~current interest on the quarterly payment date of July 7, 2012~~subsidiary.

In ~~May 2012,~~ the ~~Company~~Yadkin ~~purchased~~Merger, aneach ~~interest~~outstanding ~~rate~~share ~~cap~~of ~~contract~~the ~~which~~Company's ~~began~~common instock, ~~July~~other ~~2012. This~~than ~~derivative~~shares ~~financial~~held ~~instrument~~by ~~caps~~Piedmont, ~~the~~will ~~interest~~be ~~rate~~converted oninto the ~~the~~right ~~full~~to ~~$8.~~receive 0.3125 ~~million~~shares ~~notional amount~~ of ~~the~~Yadkin ~~TRUPs~~common ~~at 3~~stock.57 ~~percent~~Pursuant ~~through~~to ~~July~~the ~~2017. In~~Yadkin ~~the~~Merger ~~event~~Agreement, ~~that~~Yadkin will be the ~~variable~~legal ~~rate~~acquirer, onbut the ~~TRUPs~~Company ~~exceeds~~(consolidated ~~the~~with ~~cap~~Piedmont) ~~rate,~~will be the ~~counterparty~~accounting ~~would~~acquirer ~~pay~~due to the Company ~~the~~controlling ~~difference~~a ~~between~~larger ~~the~~percentage ~~variable~~of ~~rate~~outstanding ~~due~~shares toof the ~~holders~~combined company. As of ~~the~~December ~~debentures~~31, ~~and~~2013, ~~the~~Yadkin ~~cap~~had ~~rate. See~~total ~~Note~~assets Iof ~~"Borrowings"~~$1.8 ~~and~~billion, ~~Note~~deposits Mof ~~"Derivative~~$1.5 ~~Financial~~billion, ~~Instruments"~~and inshareholders' ~~the~~equity ~~“Notes~~of to$184.5 ~~Consolidated~~million. ~~Financial~~The ~~Statements”~~Yadkin ~~for~~Merger ~~additional~~is ~~information~~subject ~~regarding~~to ~~the~~all ~~TRUPs~~stockholder and ~~the~~regulatory ~~interest rate cap~~approvals.

9Yadkin Bank is a full-service community bank with thirty-three branches throughout its two regions in North and South Carolina. The Western Region serves Avery, Watauga, Ashe, Surry, Wilkes, Yadkin, Durham, and Orange Counties in North Carolina. The Southern Region serves Iredell, Mecklenburg, and Union Counties in North Carolina, and Cherokee and York Counties in South Carolina. Yadkin Bank provides mortgage lending services through its mortgage division, Yadkin Mortgage, headquartered in Greensboro, North Carolina. Securities brokerage services are provided by Yadkin Wealth, Inc., a Yadkin Bank subsidiary with offices located throughout the branch network.

Subordinated Term Loan

In September 2008, the Bank entered into an unsecured subordinated term loan agreement in the amount of $7.5 million. The agreement requires the Bank to make quarterly payments of interest at an annual contract rate, reset quarterly, equal to three-month LIBOR plus 4.00 percent. The subordinated term loan qualifies as Tier 2 capital for regulatory capital purposes, subject to a phase out of the capital qualification five years prior to maturity.

The subordinated term loan agreement matures on October 18, 2018 and can be prepaid, subject to the approval of the FDIC and other Governmental Authorities (if applicable), beginning on October 1, 2013 unless the loan ceases to be deemed Tier 2 capital for regulatory capital purposes. Should the loan cease to be considered Tier 2 capital for regulatory capital purposes, the debt can either be structured as senior debt of the Bank or be repaid.

In May 2012, the Company purchased an interest rate cap contract which began in July 2012. This derivative financial instrument caps the interest rate on the the full $7.5 million notional amount of the subordinated term loan at 4.47 percent through July 2017. In the event that the variable rate on the subordinated term loan exceeds the cap rate, the counterparty would pay the Company the difference between the variable rate due on the subordinated term loan and the cap rate. See Note I "Borrowings" and Note M "Derivative Financial Instruments" in the “Notes to Consolidated Financial Statements” for additional information regarding the subordinated term loan and the interest rate cap.

Primary Market Area

Management views the Company's target market area for both organic and acquisition growth as the Interstate 85 growth corridor, which has been identified by demographers as a key U.S. "mega region" for the next ~~forty~~40 years. This corridor includes areas in North Carolina, South Carolina and Virginia. North Carolina's population is projected to grow by ~~three~~3 million people by 2030. North Carolina is currently the ~~tenth~~10th largest state in the U.S. and is projected to be the ~~seventh~~7th largest state by 2030. North Carolina has been the ~~number~~#1 ~~one~~ state in the U.S. for corporate relocations in ~~eight~~8 out of the last ~~nine~~9 years. The Raleigh~~-Cary,~~ ~~North Carolina~~ metropolitan statistical area ("MSA"), ~~which~~ is ~~the~~projected ~~heart~~to ofgrow ~~the~~by ~~Company's~~3 ~~footprint,~~times is the ~~fifth~~national ~~fastest~~average, ~~growing metropolitan area in the U.S. This growth is~~ primarily driven by the education, technology, healthcare and state government sectors. The Charlotte MSA is projected to grow by twice the national average through 2017.

~~The following table highlights some important economic indicators and demographic trends for the Company's and ECB's current markets.~~8

Target Metropolitan Statistical Area	Numberof Branches(1)	June 30, 2012 Total MSA Deposits(1) (2)		2012 Total Population*	2012-2017ProjectedPopulationChange*		2012 Median Household Income*		2012-2017 Projected Household Income*		Unemployment Rate*
Raleigh-Cary, NC	10	$	469,901	1,177,361	12.9	%	$	56,678	12.5	%	7.5	%
Wilmington, NC	6	145,655		373,464	8.6	%	43,449		18.2	%	10.2	%
Greenville, NC	4	123,076		194,791	8.0	%	36,424		15.8	%	9.6	%
Burlington, NC	2	92,401		154,581	6.1	%	39,473		20.8	%	9.3	%
Southern Pines-Pinehurst, NC	2	80,642		91,912	7.9	%	44,122		15.3	%	8.9	%
Fayetteville, NC	1	10,497		378,419	8.2	%	40,007		19.2	%	10.0	%
Target MSAs (3)	25	$	922,172	2,370,528	10.4	%	$	48,874	15.0	%	8.5	%
Total CRFN (3)	45	$	1,664,959	4,647,701	6.2	%	$	49,287	14.1	%	10.3	%
North Carolina				9,759,332	6.2	%	$	42,900	18.5	%	9.4	%
National				313,129,017	3.5	%	$	50,157	13.4	%	7.9	%
* Source: SNL Financial, which derives its information from U.S. census data.
(1) Pro forma giving effect to the Company's proposed acquisition of ECB Bancorp, Inc. which is expected to be completed in April 2013.
(2) In thousands.
(3) Population growth and median household income metrics are deposit weighted by MSA.

The following table highlights some important economic indicators and demographic trends for the Company's current markets.



Market Area	Number of Branches	June 30, 2013 Total MSA Deposits⁽¹⁾		2013 Total Population*	2013-2018 Projected Population Change*		2013 Median Household Income*		2013-2018 Projected Household Income*		Unemployment Rate*

Key VSB MSAs:
Raleigh-Cary, NC	10	$	611,177	1,196,126	10.6	%	$	57,914	17.4	%	5.2	%
Kill Devil Hills, NC	6	234,023		38,979	3.2	%	52,269		9.8	%	9.4	%
Greenville, NC	4	120,688		172,996	5.8	%	37,627		21.2	%	6.5	%
Wilmington, NC	3	106,422		261,782	6.0	%	46,725		17.0	%	7.1	%
Pinehurst-Southern Pines, NC	2	89,228		92,763	7.0	%	43,648		18.4	%	6.4	%
Charlotte-Concord, NC	2	72,863		2,302,347	7.1	%	50,909		13.9	%	6.6	%
Burlington, NC	2	57,938		154,750	4.3	%	42,631		21.6	%	6.4	%
Washington, NC	1	57,515		48,528	1.4	%	38,221		22.3	%	8.0	%
Total VSB	45	1,655,149		7,306,783	6.6	%	$	49,619	16.6	%	6.8	%
North Carolina⁽²⁾				9,827,435	5.4	%	$	44,373	19.5	%	6.9	%
National⁽²⁾				314,467,933	3.6	%	$	51,314	16.1	%	6.7	%

* Source: SNL Financial, which derives its information from U.S. census data.
(1) In thousands.
(2) Population growth and median household income metrics are deposit weighted by MSA.

Competition

Commercial banking in North Carolina is very competitive. The Company competes in its market areas with large regional and national banking organizations, other federally and state chartered financial institutions such as savings and loan institutions and credit unions, consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many competitors have broader geographic markets and higher lending limits than the Company and are also able to provide more services and make greater use of media advertising. All markets in which the Company has a banking office are also served by branches of the largest banks in North Carolina and the country.

Despite the competition in its market areas, the Company believes that it has certain competitive advantages that distinguish it from its competition. The Company serves the needs of businesses, business owners, and professionals by creating mutually beneficial and robust relationships with its customers and positively impacting its communities. In addition to offering standard banking products and services, the Company's associates build relationships with customers by understanding their personal and business challenges and goals, and providing tangible solutions. The Company offers customers modern banking services and technology with prompt, personal service and friendliness. The Company believes its approach to business builds goodwill among customers, stockholders, and the communities it serves that results in referrals from stockholders and satisfied customers. The Company also relies on traditional marketing to attract new customers. To enhance a positive image in the community, the Company supports and participates in local events, and its officers and directors serve on boards of local civic and charitable organizations.

Employees

The Company employed ~~242~~443 full-time and 2324 part-time employees as of December 31, ~~2012~~2013, none of which are covered by a collective bargaining agreement. The Company believes that relations with its employees are good.

SUPERVISION AND REGULATION

~~Both~~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. ~~are~~This ~~subject~~summary contains what management believes to ~~extensive~~be ~~state~~the material information related to the supervision and ~~federal~~regulation ~~banking~~of ~~laws~~the Company and ~~regulations~~the ~~that~~Bank, ~~impose~~but ~~restrictions~~is onnot ~~and~~intended ~~provide~~to ~~for~~be ~~general~~an ~~regulatory~~exhaustive ~~oversight~~description of the statutes or regulations applicable to their ~~operations~~respective businesses. ~~These~~ ~~laws~~Supervision, regulation and ~~regulations~~examination ~~are~~of ~~generally~~the Company and the Bank by regulatory agencies are intended toprimarily ~~protect~~for the protection of depositors rather than shareholders of the Company. The Company cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which the business of the Company and ~~not~~the ~~stockholders~~Bank may be affected by a statute or regulation. ~~Legislation~~ The discussion is qualified in its entirety by reference to applicable laws and regulations. ~~authorized~~Changes byin ~~legislation~~such ~~influence,~~laws ~~among~~and ~~other~~regulations ~~things:~~may have a material effect on our business and prospects.

~~• how, when, and where we may expand geographically;~~9

•Federal ~~into~~Bank ~~what~~Holding ~~product~~Company orRegulation ~~service~~and ~~markets we may enter;~~Structure

•As ~~how~~a webank ~~must~~holding ~~manage~~company, ~~our~~the ~~assets;~~Company is subject to regulation under the Bank Holding Company Act (the "BHCA") and to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve System, or the Federal Reserve. The Bank has a North Carolina state charter and is subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the "FDIC") and the North Carolina Commissioner of Banks (the "NCCOB").

•The ~~under~~BHCA ~~what~~requires ~~circumstances~~every ~~money~~bank ~~may~~holding orcompany ~~must~~to ~~flow~~obtain ~~between~~ the ~~parent~~prior ~~bank~~approval ~~holding~~of ~~company and~~ the ~~subsidiary~~Federal ~~bank.~~Reserve before:

~~Set~~• ~~forth~~it ~~below~~may isacquire andirect ~~explanation~~or ofindirect ~~the~~ownership ~~major~~or ~~pieces~~control of ~~legislation~~any ~~and~~voting ~~regulation~~shares ~~affecting~~of ~~our~~any ~~industry~~other ~~and~~bank ~~how~~holding ~~that~~company ~~legislation~~if, ~~and~~after ~~regulation affects our actions. The following summary is qualified by reference to~~ the ~~statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects~~acquisition, ~~and legislative changes and~~ the ~~policies~~bank ofholding ~~various~~company ~~regulatory~~will ~~authorities~~directly ~~may significantly affect our operations. We cannot predict the effect that fiscal~~ or ~~monetary~~indirectly ~~policies,~~own or ~~new~~control ~~federal~~more orthan ~~state~~5 ~~legislation~~percent ~~may~~of ~~have~~the onvoting ~~our~~shares ~~business~~of ~~and~~the ~~earnings~~other inbank ~~the~~holding ~~future.~~company;

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

~~Because~~• ~~the~~it ~~Company~~or ~~owns~~any ~~all~~ of ~~the~~its ~~capital stock of the Bank~~subsidiaries, weother ~~are~~than a bank ~~holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result~~, wemay ~~are~~acquire ~~primarily~~all ~~subject~~or tosubstantially ~~the~~all ~~supervision, examination, and reporting requirements~~ of the ~~Bank~~assets ~~Holding Company Act and the regulations~~ of ~~the~~any ~~Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a~~ bank; ~~holding company located in North Carolina, the Office of the North Carolina Commissioner of Banks (the “Commissioner”) also regulates and monitors all significant aspects of our operations.~~or

~~Acquisitions~~• ofit ~~Banks. The~~may ~~Bank~~merge ~~Holding~~or ~~Company~~consolidate ~~Act~~with ~~requires~~any ~~every~~other bank holding company ~~to obtain the prior approval of the Federal Reserve before:~~.

•The ~~acquiring~~BHCA ~~direct~~further orprovides ~~indirect~~that ~~ownership~~the orFederal ~~control~~Reserve ofmay not approve any ~~voting~~transaction ~~shares~~that ofwould ~~any~~result ~~bank~~in ~~if,~~a ~~after~~monopoly or that would substantially lessen competition in the ~~acquisition~~banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding ~~company~~companies ~~will~~and ~~directly~~banks orinvolved ~~indirectly~~and ~~own~~the orconvenience ~~control~~and ~~more~~needs ~~than~~of 5the ~~percent~~communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the ~~bank's~~performance ~~voting~~under ~~shares;~~the Community Reinvestment Act of 1977, both of which are discussed elsewhere in more detail.

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

• ~~merging~~the orbank ~~consolidating~~holding ~~with~~company ~~any~~has ~~other~~registered ~~bank~~securities ~~holding~~under ~~company.~~Section 12 of the Securities Exchange Act of 1934 (the Exchange Act"); or

Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve's consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Company or any other bank holding company located in North Carolina may purchase a bank located outside of North Carolina. Conversely, an adequately capitalized and adequately managed bank holding company located outside of North Carolina may purchase a bank located inside North Carolina. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.

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

• the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or


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

~~Our~~The Company’s common stock is registered under Section 12 of the ~~Securities~~ Exchange Act ~~of 1934~~. The regulations provide a procedure for challenging rebuttable presumptions of control.

~~Permitted Activities.~~ The ~~Bank~~BHCA ~~Holding Company Act has~~ generally ~~prohibited~~prohibits a bank holding company from engaging in activities other than banking; or managing or controlling banks or other permissible subsidiaries; and ~~from~~ acquiring or retaining direct or indirect control of any company engaged in any activities other than ~~those~~activities ~~determined by the Federal Reserve to be~~ closely related to banking or managing or controlling banks. asIn todetermining bewhether a ~~proper~~particular ~~incident~~activity ~~thereto. Provisions~~is ofpermissible, the ~~Gramm-Leach-Bliley~~Federal ~~Act~~Reserve ~~have~~considers ~~expanded~~whether performing the ~~permissible~~activity ~~activities~~can ofbe aexpected ~~bank~~to ~~holding~~produce ~~company~~benefits to the public that ~~qualifies~~outweigh possible adverse effects, such as aundue ~~financial~~concentration ~~holding~~of ~~company~~resources, decreased or unfair competition, conflicts of interest or unsound banking practices. ~~Under~~ ~~the~~The ~~regulations~~Federal ~~implementing~~Reserve has the ~~Gramm-Leach-Bliley~~power ~~Act,~~to order a ~~financial~~bank holding company ~~may~~or ~~engage~~its insubsidiaries ~~additional~~to ~~activities~~terminate ~~that~~any ~~are~~activity ~~financial~~or incontrol ~~nature~~of orany ~~incidental~~subsidiary when the continuation of the activity or ~~complementary~~control constitutes a serious risk to the financial ~~activities. Those~~safety, ~~activities~~soundness ~~include,~~or ~~among~~stability ~~other~~of ~~activities,~~any ~~certain~~bank ~~insurance~~subsidiary ~~and~~of ~~securities~~that ~~activities~~bank holding company.

ToUnder ~~qualify~~the toBHCA, ~~become~~ a ~~financial~~bank holding company, may file an election with the ~~Bank~~Federal Reserve to be treated as a financial holding company and ~~any~~engage ~~other~~in ~~depository~~an ~~institution~~expanded ~~subsidiary~~list of ~~the~~financial ~~Company~~activities. The election must be accompanied by a certification that all of the company’s insured depository institution subsidiaries are “well capitalized” and “well managed.” ~~and~~Additionally, ~~must~~the ~~have a~~ Community Reinvestment Act of 1977 rating of ateach ~~least~~subsidiary “bank must be satisfactory or better.~~” Additionally~~ If, ~~the~~after ~~Company~~becoming ~~must~~a ~~file~~financial anholding ~~election~~company ~~with~~and undertaking activities not permissible for a bank holding company, the ~~Federal~~company ~~Reserve~~fails to ~~become~~continue ato meet any of the prerequisites for financial holding company ~~and~~status, the company must ~~provide~~enter into an agreement with the Federal Reserve to comply with 30all ~~days'~~applicable ~~written~~capital ~~notice~~and ~~prior~~management requirements. If the company does not return to ~~engaging~~compliance inwithin a180 ~~permitted~~days, ~~financial~~the ~~activity.~~Federal ~~While~~Reserve may order the ~~Company~~company ~~meets~~to divest its subsidiary banks, or the ~~qualification~~company ~~standards~~may ~~applicable~~discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding ~~companies,~~company. ~~the~~The Company has not elected to ~~become~~be treated as a financial holding company ~~at this time~~.

Support of Subsidiary Institutions. Under Federal Reserve policy, we are expected to act as a source of financial strength for the Bank and to commit resources to support the Bank. In addition, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), this longstanding policy has been given the force of law and additional regulations promulgated by the Federal Reserve to further implement the intent of the new statute are possible. As in the past, such financial support from the Company may be required at times when, without this legal requirement, we might not be inclined to provide it. In addition, any capital loans made by us to the Bank will be repaid only after the Bank's deposits and various other obligations are repaid in full. In the unlikely event of our bankruptcy, any commitment that we give to a bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.10

~~TARP~~The ~~Participation. On~~Company ~~October~~is ~~14,~~required ~~2008,~~to ~~the~~act ~~U.S.~~as ~~Treasury~~a ~~announced~~source ~~the~~of ~~capital~~financial ~~purchase~~strength ~~component~~for of the ~~Troubled~~Bank ~~Asset~~and ~~Relief~~to ~~Program~~commit ~~(“TARP”). This~~resources ~~program~~to ~~was~~support ~~instituted by~~ the UBank.S. ~~Treasury~~This ~~pursuant~~support tomay ~~the~~be ~~Emergency~~required ~~Economic~~at ~~Stabilization~~times ~~Act~~when ofthe ~~2008,~~Company ~~which~~might ~~provided~~not upbe toinclined ~~$700 billion~~ to ~~the~~provide Uit.S. ~~Treasury~~In toaddition, ~~among~~any ~~other~~capital ~~things,~~loans ~~take~~made ~~equity~~by ~~ownership~~the ~~positions~~Company into ~~financial institutions. The TARP capital purchase program (~~the ~~“TARP~~Bank ~~CPP”)~~will ~~was~~be ~~intended~~repaid toonly ~~encourage~~after ~~financial~~its ~~institutions~~deposits ~~to build capital~~ and ~~thereby~~various ~~increase~~other ~~the~~obligations ~~flow~~are ofrepaid ~~financing to businesses and consumers. We participated~~ in ~~the capital purchase component of TARP~~full.

Bank Merger Act

Section 18(c) of the Federal Deposit Insurance Act, commonly known as the “Bank Merger Act,” requires the prior written approval of the FDIC before any bank may (i) merge or consolidate with, (ii) purchase or otherwise acquire the assets of, or (iii) assume the deposit liabilities of, another bank if the resulting institution is to be a state nonmember bank.

The Bank Merger Act prohibits the FDIC from approving any proposed merger transaction that would result in a monopoly or would further a combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States. Similarly, the Bank Merger Act prohibits the FDIC from approving a proposed merger transaction whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade. An exception may be made in the case of a merger transaction whose effect would be to substantially lessen competition, tend to create a monopoly, or otherwise restrain trade, if the FDIC finds that the anticompetitive effects of the proposed transaction are clearly outweighed by the probable effect of the transaction in meeting the convenience and needs of the community to be served.

In every proposed merger transaction, the FDIC must also consider the financial and managerial resources and future prospects of the existing and proposed institutions, the convenience and needs of the communities to be served, and the effectiveness of each insured depository institution involved in the proposed merger transaction in combating money-laundering activities, including in overseas branches.

State Law

The Bank is subject to extensive supervision and regulation by the NCCOB. The NCCOB oversees state laws that set specific requirements for bank capital and that regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The NCCOB supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and banks are required to make regular reports to the NCCOB describing in detail their resources, assets, liabilities, and financial condition. Among other things, the NCCOB regulates mergers and consolidations of state-chartered banks, capital requirements for banks, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

The NCCOB has extensive enforcement authority over North Carolina banks. Such authority includes the ability to issue cease and desist orders and to seek civil money penalties. The NCCOB may also take possession of a North Carolina bank in various circumstances, including for a violation of its charter or of applicable laws, operating in an unsafe and unsound manner, or as a result of an impairment of its capital. The NCCOB also has authority to appoint a receiver.

On October 1, 2012, the North Carolina Banking Law Modernization Act became effective and many of the state banking laws to which the Bank is subject were amended, including laws impacting capital requirements, authorized activities, permissible investments, and numerous operational functions. It is not possible to predict fully the future effects that this legislation may have on the business and earnings of the Bank.

The Bank is also subject to numerous state and federal statutes and regulations that affect its businesses, activities and operations and are supervised and examined by state and federal bank regulatory agencies. The FDIC and the NCCOB regularly examine the operations of the Bank and are given the authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions.

Payment of Dividends and Other Restrictions

The Company is a legal entity separate and distinct from the Bank. While there are various legal and regulatory limitations under federal and state law governing the extent to which banks can pay dividends or otherwise supply funds to holding companies, the principal source of cash revenues for the Company is dividends from the Bank. The relevant federal and state regulatory agencies also have authority to prohibit a state bank, savings bank or bank holding company from engaging in conduct that, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of a bank, be deemed to constitute an unsafe or unsound practice in conducting its business.

Insured depository institutions, such as the Bank, are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

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

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

Capital Adequacy

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

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

Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. The minimum guideline for the ratio of total capital to risk-weighted assets is 8 percent. At least half of total capital must be comprised of Tier 1 Capital, which is common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remainder of total capital may consist of Tier 2 Capital, which is subordinated debt, other preferred stock and a limited amount of loan loss reserves.

As of December 31, 2013, the Bank’s total risk-based capital ratio and its Tier 1 risk-based capital ratio were 12.70 percent and 11.85 percent respectively. Neither the Company nor the Bank has been advised by any federal banking agency of any additional specific minimum capital ratio requirement applicable to it.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and certain other intangible assets, of 3 percent for bank holding companies that meet specified criteria. All other bank holding companies generally are required to maintain a minimum leverage ratio of 4 percent. The Company’s ratio as of December 31, 2013 was 10.16 percent compared to 11.45 percent at December 31, 2012. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indications of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised the Company of any additional specific minimum leverage ratio or tangible Tier 1 capital leverage ratio applicable to it.

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

The Federal Deposit Insurance Act, or the FDI Act, requires the federal regulatory agencies to take “prompt corrective action” if a depository institution does not meet minimum capital requirements. The FDI Act establishes five capital tiers: “well capitalized,”

~~For~~“adequately ~~additional~~capitalized,” ~~information~~“undercapitalized,” ~~about~~“significantly ~~this~~undercapitalized” ~~transaction~~ and ~~the~~“critically ~~Company's~~undercapitalized.” ~~participation~~A indepository ~~the~~institution’s ~~TARP~~capital ~~CPP,~~tier ~~please~~will ~~see~~depend ~~Note~~upon Qhow ~~"Cumulative~~its ~~Perpetual~~capital ~~Preferred~~levels ~~Stock"~~compare ~~in the "Notes~~ to ~~Consolidated~~various ~~Financial~~relevant ~~Statements"~~capital ~~included~~measures ~~with this report~~ and ~~the~~certain ~~Company's~~other ~~current~~factors, ~~report~~as onestablished ~~Form~~by ~~8-K filed with the Securities and Exchange Commission on January 14, 2009~~regulation.

~~Use of TARP Proceeds.~~ The ~~Company~~federal ~~applied~~bank ~~and~~regulatory ~~was~~agencies ~~approved~~have ~~for~~adopted ~~participation~~regulations inestablishing ~~the~~relevant ~~TARP~~capital ~~CPP~~measures inand ~~late~~relevant ~~2008. On~~capital ~~January~~levels 9,applicable ~~2009, the Company issued and sold~~ to ~~the~~FDIC-insured ~~Treasury~~banks. ~~(1)~~The ~~24,900~~relevant ~~shares~~capital ofmeasures are the ~~Company's~~Total ~~Fixed~~Risk-Based ~~Rate~~Capital ~~Cumulative~~ratio, ~~Perpetual~~Tier ~~Preferred~~1 ~~Stock,~~Risk-Based ~~Series~~Capital A,ratio and ~~(2) a warrant to purchase 833,705 shares of~~ the ~~Company's~~leverage ~~common stock for an aggregate purchase price of $24~~ratio.9 ~~million~~Under inthe ~~cash. The~~regulations, ~~preferred~~a ~~stock~~FDIC-insured ~~qualifies~~bank aswill ~~Tier 1 capital.~~be:

As• a“well ~~result~~capitalized” ofif ~~its~~it ~~participation~~has ina ~~the~~Total ~~TARP~~Risk-Based ~~CPP,~~Capital ~~the~~ratio ~~Company~~of ~~became~~10 ~~subject~~percent toor greater, a ~~number~~Tier of1 ~~new~~Risk-Based ~~regulations~~Capital ~~and~~ratio ~~restrictions. The ability~~ of ~~the~~6 ~~Company~~percent ~~to declare~~ or ~~pay~~greater ~~dividends~~and ora ~~distributions~~leverage ~~on,~~ratio orof ~~purchase,~~5 ~~redeem~~percent or ~~otherwise~~greater ~~acquire~~and ~~for~~is ~~consideration~~not ~~shares~~subject ofto ~~its~~any ~~common~~order ~~stock~~or iswritten ~~subject~~directive toby ~~restrictions. The~~the ~~Company~~appropriate isregulatory ~~also~~authority ~~required~~ to ~~have~~meet inand ~~place~~maintain ~~certain~~a ~~limitations~~specific oncapital ~~the~~level ~~compensation~~for ofany ~~its~~capital ~~senior executive officers.~~ measure;

~~Payment~~• of“adequately ~~Dividends. We~~capitalized” ~~are~~if ait ~~legal~~has ~~entity~~a ~~separate~~Total ~~and~~Risk-Based ~~distinct~~Capital ~~from~~ratio ~~the Bank. The principal source~~ of ~~our~~8 ~~cash~~percent ~~flow,~~or ~~including cash flow to pay dividends to stockholders~~greater, isa ~~dividends~~Tier ~~that~~1 weRisk-Based ~~receive~~Capital ~~from~~ratio ~~the~~of ~~Bank. As~~4 ~~will~~percent beor ~~noted~~greater ~~more fully below, statutory~~ and ~~regulatory~~a ~~limitations~~leverage ~~apply~~ratio toof ~~the~~4 ~~payment~~percent ofor ~~dividends~~greater by(3 apercent ~~subsidiary~~in ~~bank~~certain tocircumstances) ~~its~~and ~~bank~~is ~~holding~~not ~~company.~~“well capitalized;”

~~The~~• ~~payment~~“undercapitalized” ofif ~~dividends~~it byhas usa ~~and~~Total ~~the~~Risk-Based ~~Bank~~Capital ~~may~~ratio ~~also~~of beless ~~affected~~than by8 ~~other factors~~percent, ~~including~~a ~~other~~Tier ~~restrictions~~1 ~~imposed~~Risk-Based ~~under~~Capital ~~discretionary~~ratio ~~powers afforded our state and federal regulators. For example, if, in the opinion~~ of ~~the~~less ~~FDIC,~~than ~~the~~4 ~~Bank~~percent ~~was engaged in~~ or ~~about to engage in an unsafe or unsound practice, the FDIC could require, after notice and~~ a ~~hearing,~~leverage ~~that~~ratio ~~the~~of ~~Bank~~less ~~stop~~than or4 ~~refrain~~percent ~~from~~(3 ~~engaging~~percent in ~~the~~certain practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound banking practice. Under the FDIC Improvement Act of 1991 (the “FDIA”circumstances), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.;

~~When~~• we“significantly ~~received~~undercapitalized” aif ~~capital~~it ~~investment~~has ~~from~~a ~~the~~Total ~~Treasury~~Risk-Based ~~under~~Capital ~~the~~ratio ~~TARP CPP, we became subject to additional limitations on the payment~~ of ~~dividends. These~~less ~~limitations~~than ~~require,~~6 ~~among other things~~percent, ~~that~~a ~~(i)~~Tier ~~all~~1 ~~dividends~~Risk-Based ~~for~~Capital ~~the~~ratio ~~securities~~of ~~purchased~~less ~~under~~than ~~the~~3 ~~TARP~~percent ~~CPP~~or bea ~~paid~~leverage ~~before~~ratio ~~other~~of ~~dividends~~less ~~can~~than be3 ~~paid~~percent; and ~~(ii) the Treasury must approve any increases in common dividends for three years following the Treasury's investment.~~

~~Furthermore,~~• ~~the~~“critically ~~Federal~~undercapitalized” ~~Reserve~~if ~~Board clarified~~ its ~~guidance~~tangible onequity dividend policies for bank holding companies through the publication of a Supervisory Letter, dated February 24, 2009. As part of the letter, the Federal Reserve Board encouraged bank holding companies, particularly those that had participated in the TARP CPP, to consult with the Federal Reserve Board prior to dividend declarations and redemption and repurchase decisions even when not explicitly required to do so by federal regulations. The Federal Reserve Board has indicated that TARP CPP recipients, such as the Company, should consider and communicate in advance to regulatory staff how proposed dividends, capital repurchases. and capital redemptions are consistent with its obligation to eventually redeem the securities held by the Treasury. This new guidance is ~~largely~~equal ~~consistent with prior regulatory statements encouraging bank holding companies~~ to ~~pay dividends out of net income and to avoid dividends that could adversely affect the capital needs~~ or ~~minimum~~less ~~regulatory~~than ~~capital~~2 ~~ratios~~percent of ~~the~~average ~~bank~~quarterly ~~holding~~tangible ~~company and its subsidiary bank~~assets.

~~Any~~An ~~future~~institution ~~determination~~may ~~relating~~be downgraded to, ~~our~~or ~~dividend~~deemed ~~policy~~to ~~will~~be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be ~~made~~in atan ~~the~~unsafe ~~discretion~~or ofunsound ~~the~~condition ~~Board~~or ofif ~~Directors~~it ~~and~~receives ~~will~~an ~~depend~~unsatisfactory onexamination ~~many~~rating with respect to certain matters. As of December 31, 2013, the ~~statutory~~Bank ~~and~~had ~~regulatory~~capital ~~factors~~levels ~~mentioned~~that ~~above~~qualify as “well capitalized” under such regulations.

~~Sarbanes-Oxley~~The FDI Act ofgenerally ~~2002. On~~prohibits ~~July~~an ~~30,~~FDIC-insured ~~2002,~~bank ~~the~~from ~~Sarbanes-Oxley~~making ~~Act~~a ofcapital ~~2002~~distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be “~~Sarbanes-Oxley~~undercapitalized.” ~~Act~~“Undercapitalized”) ~~was~~banks ~~signed~~are ~~into~~subject ~~law~~to growth limitations and ~~became~~are ~~some~~required ofto ~~the~~submit ~~most~~a ~~sweeping~~capital restoration plan. The federal ~~legislation~~regulators ~~addressing~~may ~~accounting~~not accept a capital plan without determining, ~~corporate~~among ~~governance~~other things, that the plan is based on realistic assumptions and ~~disclosure~~is ~~issues~~likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable to regulators, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The ~~impact~~aggregate liability of the ~~Sarbanes-Oxley~~parent ~~Act~~holding company is ~~wide-ranging~~limited asto the lesser of: (i) an amount equal to 5 percent of the bank’s total assets at the time it ~~applies~~became “undercapitalized”; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all ~~public~~capital ~~companies~~standards ~~and~~applicable ~~imposes~~with ~~significant~~respect ~~new~~to ~~requirements~~such ~~for~~institution ~~public~~as ~~company~~of ~~governance~~the ~~and~~time ~~disclosure~~it ~~requirements~~fails to comply with the plan. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

In“Significantly ~~general,~~undercapitalized” ~~the~~insured ~~Sarbanes-Oxley~~banks ~~Act~~may ~~mandated~~be ~~important~~subject ~~new~~to ~~corporate~~a ~~governance~~number ~~and~~of ~~financial reporting~~ requirements ~~intended to enhance the accuracy~~ and ~~transparency~~restrictions, ofincluding ~~public~~orders ~~companies'~~to ~~reported~~sell ~~financial~~sufficient ~~results. It~~voting ~~established~~stock ~~new~~to ~~responsibilities~~become ~~for~~“adequately ~~corporate~~capitalized,” ~~chief~~requirements ~~executive~~to ~~officers,~~reduce ~~chief~~total ~~financial~~assets ~~officers~~ and ~~audit committees in~~ the ~~financial~~cessation ~~reporting~~of ~~process~~receipt ~~and~~of ~~creates~~deposits afrom ~~new~~correspondent ~~regulatory body to oversee auditors of public companies~~banks. It ~~backed~~“Critically ~~these~~undercapitalized” ~~requirements~~institutions ~~with~~are ~~new~~subject ~~SEC~~to ~~enforcement~~the ~~tools,~~appointment ~~increases~~of ~~criminal~~a ~~penalties~~receiver ~~for~~or ~~federal~~conservator. ~~mail,~~A ~~wire~~bank ~~and~~that ~~securities~~is ~~fraud,~~not ~~and~~“well ~~created~~capitalized” ~~new~~is ~~criminal penalties for document and record destruction in connection with federal investigations. It~~ also ~~increased~~subject ~~the~~to ~~opportunity~~certain ~~for more private litigation by lengthening the statute of~~ limitations ~~for~~relating ~~securities~~to ~~fraud~~brokered ~~claims and provided new federal corporate whistleblower protection~~deposits.

The regulatory capital framework under which the Company and the Bank operate is expected to change in significant respects as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, which was enacted in July 2010, and other regulations, including the separate regulatory capital requirements set forth by the Basel Committee on Banking Supervision, commonly known “Basel III.” Currently, the Company and the Bank are governed by a set of capital rules that the Federal Reserve and the FDIC have had in place since 1988, with some subsequent amendments and revisions.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule implements in the United States the Basel III regulatory capital reforms and certain changes required by the Dodd-Frank Act.

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

In• ~~2010~~The new rule implements higher minimum capital requirements, ~~the~~includes ~~Dodd-Frank~~a ~~Act~~new ~~was~~common ~~signed~~equity ~~into~~tier ~~law~~1 capital requirement, and ~~included~~establishes acriteria ~~permanent~~that ~~delay~~instruments ofmust meet in order to be considered common equity tier 1 capital, additional tier 1 capital, or tier 2 capital. These enhancements will both improve the ~~implementation~~quality ofand ~~section~~increase ~~404(b)~~the quantity of capital required to be held by banking organizations, better equipping the ~~Sarbanes-Oxley~~U.S. ~~Act~~banking ~~for~~system ~~companies~~to deal with ~~non-affiliated~~adverse ~~public~~economic ~~float~~conditions. ~~under~~The ~~$75.0~~new ~~million~~minimum ~~(“non~~capital to risk-~~accelerated~~weighted ~~filer”). Section~~assets ~~404~~(bRWA) isrequirements ~~the~~are ~~requirement~~a tocommon ~~have~~equity antier ~~independent~~1 ~~accounting~~capital ~~firm~~ratio ~~audit~~of 4.5 percent and ~~attest~~a totier ~~the~~1 ~~effectiveness~~capital ratio of a6.0 ~~Company's~~percent, ~~internal~~which ~~controls. As~~is ~~the~~an ~~Company~~increase ~~currently~~from ~~qualifies~~4.0 aspercent, and a ~~non-accelerated~~total ~~filer~~capital ~~under~~ratio ~~the~~that ~~SEC~~remains ~~rules~~at ~~and~~8.0 ~~expects~~percent. The minimum leverage ratio (tier 1 capital to ~~remain~~total ~~one~~assets) ~~through~~is ~~fiscal~~4.0 ~~year~~percent. ~~2013,~~The ~~there~~new ~~are~~rule nomaintains ~~additional~~the ~~costs~~general ~~anticipated~~structure ~~for~~of ~~complying~~the ~~with~~current ~~Section~~prompt ~~404~~corrective action (b"PCA") framework while incorporating these increased minimum requirements.

~~Regulation~~• The new rule improves the quality of capital by implementing changes to the ~~Bank~~definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets (MSAs), deferred tax assets (DTAs), and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity tier 1 capital.

~~The~~• ~~Bank~~Under isthe annew ~~insured~~rule, ~~North~~in ~~Carolina~~order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-~~chartered~~based ~~bank~~capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The ~~Bank's~~buffer ~~deposits~~is ~~are~~measured ~~insured~~relative asto ~~part~~RWA. Phase-in of the ~~FDIC's~~capital ~~Deposit~~conservation ~~Insurance~~buffer ~~Fund~~requirements ~~(“DIF”)~~will begin on January 1, ~~and~~2016. itA isbanking organization with a buffer greater than 2.5 percent would not be subject to ~~supervision~~limits ~~and~~on ~~examination~~capital bydistributions or discretionary bonus payments; however, ~~and~~a ~~the~~banking ~~regulations~~organization ~~and~~with ~~reporting~~a ~~requirements~~buffer of, ~~the~~less ~~FDIC~~than ~~and~~2.5 percent would be subject to increasingly stringent limitations as the ~~Commissioner~~buffer approaches zero. The ~~FDIC~~new ~~and~~rule ~~the~~also ~~Commissioner~~prohibits ~~are~~a ~~the~~banking ~~Bank's~~organization ~~primary~~from ~~federal~~making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and ~~state~~its ~~banking~~capital ~~regulators~~conservation buffer ratio was less than 2. ~~The~~5 ~~Bank~~percent at the beginning of the quarter. When the new rule is ~~not~~fully aphased ~~member~~in, ~~bank~~the ofminimum capital requirements plus the ~~Federal~~capital ~~Reserve~~conservation buffer will exceed the PCA well-capitalized thresholds.

As• anThe ~~insured~~new ~~bank,~~rule ~~the~~also ~~Bank~~increases isthe ~~prohibited~~risk ~~from~~weights ~~engaging as principal in any activity that is not permitted~~ for ~~national~~past-due ~~banks~~loans, ~~unless~~certain ~~(1)~~commercial ~~the~~real ~~FDIC~~estate ~~determines that the activity or investment would not pose a significant risk to the DIF~~loans, and ~~(2)~~some ~~the~~equity ~~Bank is~~exposures, and ~~continue~~makes toselected ~~be,~~other inchanges ~~compliance with the capital standards that apply to it. The Bank also is prohibited from directly acquiring or retaining any equity investment of a type or~~ in anrisk ~~amount~~weights ~~that~~and iscredit ~~not~~conversion ~~permitted for national banks~~factors.

~~The~~On ~~FDIC~~July ~~and the Commissioner regulate all areas of the Bank's business~~9, ~~including its reserves~~2013, ~~mergers,~~the ~~payment~~FDIC ofissued ~~dividends~~an ~~and~~“interim ~~other~~final ~~aspects~~rule” ofapplicable ~~its~~to ~~operations. They regularly examine~~ the Bank, ~~and~~that ~~the~~is ~~Bank~~identical ~~must~~in ~~furnish~~substance ~~periodic reports~~ to the ~~FDIC~~final ~~and~~rules issued by the ~~Commissioner~~Federal ~~containing~~Reserve ~~detailed~~described ~~financial and other information about its affairs~~above. The ~~FDIC and the Commissioner have broad powers to enforce laws and regulations that apply to the~~ Bank ~~and~~is torequired ~~require it~~ to ~~correct~~comply ~~conditions~~with that affect its safety and soundness. Among others, these powers include issuing cease and desist orders, imposing civil penalties, and removing officers and directors, and their ability otherwise to intervene in the ~~Bank's~~interim ~~operation~~final ifrule ~~their~~by ~~examinations~~January ~~of the bank~~1, ~~or the reports it files, reflect a need for them to do so~~2015.

~~The~~Compliance ~~Bank's business also is influenced~~ by ~~prevailing economic conditions and governmental policies, both foreign and domestic, and by~~ the ~~monetary~~Company and ~~fiscal policies of~~ the ~~Federal Reserve. The~~ Bank iswith ~~not~~these anew ~~member~~capital ofrequirements ~~the~~will ~~Federal~~likely ~~Reserve. However,~~affect ~~under the Federal Reserve's regulations, all FDIC-insured banks must maintain average daily reserves against~~ their ~~transaction~~respective ~~accounts~~operations. ~~Currently~~ However, ~~no reserves are required on~~ the ~~first~~extent ~~$10.7 million~~ of ~~transaction~~that ~~accounts,~~impact ~~but~~cannot abe ~~bank~~known ~~must~~until ~~maintain~~there ~~reserves~~is ~~equal~~greater toclarity ~~3.0~~regarding ~~percent~~the onspecific ~~aggregate~~requirements ~~balances~~applicable ~~between $10.7 million and $58.8 million, and reserves equal~~ to 10them.0 ~~percent~~While ~~on aggregate balances in excess of $58.8 million. The Federal Reserve may adjust these percentages from time to time. Because~~ the ~~Bank's~~Dodd-Frank ~~reserves~~Act ~~must~~was beenacted ~~maintained~~ in ~~the~~2010, ~~form~~many of ~~vault~~its ~~cash~~provisions orwill inrequire anadditional ~~account~~implementing atrules abefore ~~Federal~~becoming ~~Reserve Bank or with a qualified correspondent bank~~effective, ~~one~~and ~~effect of~~ the ~~reserve~~proposed ~~requirement~~federal isbanking toagency ~~reduce~~regulations ~~the~~implementing ~~amount of~~ the ~~bank's~~Basel ~~assets~~III that are available for lending and other investment activities. The Federal Reserve's actions and policy directives determine to a significant degree the cost and availability of funds the Bank obtains from money market sources for lending and investingstandards, ~~and~~while ~~they~~recently ~~also influence~~promulgated, ~~directly~~have ~~and~~not ~~indirectly,~~been ~~the rates of interest the bank pays on time and savings deposits and the rates it charges on commercial bank loans~~implemented.

Dodd-Frank Act. During 2010, the bank regulatory landscape was dramatically changed by the Dodd-Frank Act which was enacted on July 21, 2010 and which implements far-reaching regulatory reform. Among its many significant provisions, the Dodd-Frank Act:Acquisitions

•As ~~established~~an active acquirer, the ~~Financial~~Company ~~Stability~~must ~~Oversight~~comply ~~Council~~with ~~made~~numerous uplaws related to our acquisition activity. As mentioned above, under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the ~~heads~~voting shares or substantially all of the ~~various~~assets of any bank ~~regulatory~~or ~~and~~merge ~~other~~or ~~agencies~~consolidate with another bank holding company without the prior approval of the Federal Reserve. Further, the Bank Merger Act requires approval from the FDIC prior to ~~identify~~the Bank merging with or acquiring the deposits of another bank. Subject to certain reciprocity provisions, current federal law authorizes interstate acquisitions of banks and ~~respond~~bank holding companies without geographic limitation. Generally, a bank headquartered in one state is authorized to ~~risks~~merge with a bank headquartered in another state, as long as neither of the states has opted out of such interstate merger authority prior to ~~U.S.~~such ~~financial~~date, ~~stability~~and ~~arising~~subject ~~from~~to ~~ongoing~~any ~~activities~~state requirement that the target bank shall have been in existence and operating for a minimum period of ~~large~~time, ~~financial~~not ~~companies;~~to exceed five years, and to certain deposit market-share limitations.

• established centralized responsibility for consumer financial protection by creating a new Consumer Financial Protection Bureau which will be responsible for implementing, examining and enforcing compliance with federal consumer financial laws with respect to financial institutions with over $10 billion in assets;

• required that banking agencies establish for most bank holding companies the same leverage and risk-based capital requirements as apply to insured depository institutions, and that bank holding companies and banks be well-capitalized and well managed in order to acquire banks located outside their home states;

• prohibits bank holding companies from including new trust preferred securities in their Tier 1 capital and, beginning with a three-year phase-in period on January 1, 2013, requires bank holding companies with assets over $15 billion to deduct existing trust preferred securities from their Tier 1 capital;Branching

•With ~~required~~appropriate ~~the~~regulatory ~~FDIC~~approvals, North Carolina commercial banks are authorized to ~~set~~establish abranches ~~minimum~~both ~~DIF~~in ~~reserve~~North ~~ratio~~Carolina ofand 1in other states.35 ~~percent~~As ~~and~~a ~~that~~result of the ~~DIF~~Dodd-Frank ~~reserve~~Act, ~~ratio~~federal belaw ~~increased~~allows tode ~~that~~novo ~~level~~interstate bybranching ~~September~~and ~~30,~~branching ~~2020;~~through mergers. A bank that ~~FDIC~~establishes ~~off-set~~a ~~the~~branch ~~effect~~in ofanother ~~the~~state ~~higher~~may ~~minimum~~conduct ~~ratio~~any onactivity ~~insured~~at ~~depository~~that ~~institutions~~branch ~~with~~office ~~assets~~that ofis ~~less~~permitted ~~than~~by ~~$10~~the ~~billion;~~law ~~and~~of that ~~FDIC~~state ~~change~~to the ~~assessment~~extent ~~base~~that ~~used~~the activity is permitted either for ~~calculating~~a ~~insurance~~state ~~assessments~~bank ~~from~~chartered ~~the~~by ~~amount~~that ofstate ~~insured~~or ~~deposits~~for toa ~~average~~branch ~~consolidated~~in ~~total~~the ~~assets~~state ~~minus~~of ~~average~~an ~~tangible~~out-of-state ~~equity;~~national bank.

•FDIC ~~established~~Insurance a permanent $250,000 limit for federal deposit insurance; provided separate, unlimited federal deposit insurance until December 31, 2012 for noninterest-bearing demand transaction accounts; and repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;Assessments

•The ~~amended~~FDIC, through the ~~Electronic~~Deposit Insurance Fund ~~Transfer Act to~~(“DIF”), ~~among~~insures ~~other~~the ~~things,~~deposits ~~give~~of the ~~Federal~~Bank ~~Reserve~~up ~~the~~to ~~authority~~prescribed tolimits ~~establish~~for ~~rules~~each ~~regarding~~depositor. ~~interchange~~The ~~fees~~assessment ~~charged~~paid ~~for~~by ~~electronic~~each ~~debit~~DIF ~~transactions~~member byinstitution ~~payment~~is ~~card~~based ~~issuers~~on ~~having~~its ~~assets~~relative ~~over~~risk ~~$10~~of ~~billion~~default as measured by regulatory capital ratios and toother ~~enforce~~factors. aSpecifically, ~~new~~the ~~statutory~~assessment ~~requirement~~rate ~~that~~is ~~those~~based ~~fees~~on bethe ~~reasonable~~institution’s capitalization risk category and ~~proportional~~supervisory tosubgroup category. An institution’s capitalization risk category is based on the ~~actual~~FDIC’s ~~cost~~determination of awhether ~~transaction~~the toinstitution ~~the~~is ~~issuer;~~well capitalized, adequately capitalized or less than adequately capitalized. The Company’s insurance assessments during 2013 and 2012 were $1.5 million and $1.1 million, respectively.

•An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. ~~implementation~~The FDIC may terminate insurance of ~~various~~deposits ~~corporate~~upon ~~governance~~a ~~processes~~finding ~~affecting~~that ~~areas~~an ~~such~~institution ashas ~~executive~~engaged ~~compensation~~in unsafe and ~~proxy~~unsound ~~access~~practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by ~~shareholders~~the FDIC.

~~Many~~The ~~provisions~~Dodd-Frank Act expands the base for FDIC insurance assessments, requiring that assessments be based on the average consolidated total assets less tangible equity capital of a financial institution. On February 7, 2011, the FDIC approved a final rule to implement the foregoing provision of the Dodd-Frank Act. ~~are~~Among other things, the final rule revises the assessment rate schedule to provide assessments ranging from 5 to 35 basis points, with the initial assessment rates subject to ~~rulemaking~~adjustments bywhich ~~bank~~could ~~regulatory~~increase ~~agencies~~or ~~and~~decrease the ~~SEC~~total ~~and~~base ~~will~~assessment ~~take~~rates. ~~effect~~The ~~over~~FDIC ~~time,~~has ~~making~~three itpossible ~~difficult~~adjustments to ~~anticipate~~an institution’s initial base assessment rate: (1) a decrease of up to five basis points (or 50 percent of the ~~overall~~initial ~~financial~~base ~~impact~~assessment onrate) ~~financial~~for ~~institutions~~long-term ~~and~~unsecured ~~consumers. However~~debt, ~~many~~including ~~provisions~~senior inunsecured debt (other than debt guaranteed under the ~~Dodd-Frank~~Temporary ~~Act~~Liquidity Guarantee Program) and subordinated debt; (~~including~~2) ~~those~~an ~~permitting~~increase for holding long-term unsecured or subordinated debt issued by other insured depository institutions known as the ~~payment~~Depository ofInstitution ~~interest~~Debt onAdjustment, ~~demand~~or ~~deposits~~the DIDA; and ~~restricting~~(3) ~~interchange~~for ~~fees)~~institutions ~~are~~not ~~likely~~well torated and well capitalized, an increase ~~expenses~~not ~~and~~to ~~reduce~~exceed ~~revenues~~10 basis points for ~~all~~brokered ~~financial~~deposits ~~institutions~~in excess of 10 percent of domestic deposits.

~~Consumer~~Each ~~Financial~~of ~~Protection~~these ~~Bureau~~changes ~~(“CFPB”). The~~may ~~Dodd-Frank~~increase ~~Act~~the ~~created~~rate aof ~~new,~~FDIC ~~independent~~insurance ~~federal~~assessments ~~agency,~~to maintain or replenish the ~~CFPB,~~FDIC’s ~~which~~DIF. ~~was~~This ~~granted~~could, ~~broad~~in ~~rulemaking~~turn, ~~supervisory~~raise ~~and~~the ~~enforcement~~Bank’s ~~powers~~future ~~under~~deposit ~~various~~insurance ~~federal~~assessment ~~consumer~~costs. ~~financial~~On ~~protection~~the ~~laws~~other hand, ~~including~~the law changes the ~~laws~~deposit ~~referenced~~insurance ~~above,~~assessment ~~fair~~base ~~lending~~so ~~laws~~that ~~and~~it ~~certain~~will ~~other~~generally ~~statutes~~be equal to consolidated assets less tangible equity. ~~The~~ ~~CFPB~~This ~~has~~change ~~examination~~of ~~and~~the ~~primary~~assessment ~~enforcement~~base ~~authority~~from ~~with~~an ~~respect~~emphasis on deposits to ~~depository~~an ~~institutions~~emphasis ~~with~~on ~~$10~~assets ~~billion~~is orgenerally ~~more~~considered inlikely ~~assets~~to cause larger banking organizations to pay a disproportionately higher portion of future deposit insurance assessments, ~~their~~which ~~service~~may, ~~providers~~correspondingly, ~~and~~lower ~~certain~~the ~~non-depository~~level ~~entities~~of deposit insurance assessments that smaller community banks such as ~~debt~~the ~~collectors~~Bank ~~and~~may ~~consumer~~otherwise ~~reporting~~have ~~agencies~~to pay in the future. ~~Although~~ While it is likely that the ~~Bank~~new ~~has~~law ~~less~~will ~~than~~increase ~~$10~~the ~~billion~~Company’s infuture ~~assets~~deposit insurance assessment costs, the ~~impact~~specific ofamount by which the ~~formation~~new oflaw’s ~~the~~combined ~~CFPB~~changes ~~has~~will ~~caused~~affect athe ~~ripple~~Company’s ~~effect~~deposit ~~across~~insurance ~~all~~assessment ~~bank~~costs ~~regulatory~~is ~~agencies~~hard to predict, ~~and~~particularly ~~placed~~because athe ~~renewed~~new ~~focus~~law ongives ~~consumer~~the ~~protection~~FDIC ~~and~~enhanced ~~compliance~~discretion ~~efforts~~to set assessment rate levels.

~~For~~The ~~examples~~FDIC ofalso ~~this~~collects ~~new~~a ~~authority,~~deposit-based ~~the~~assessment ~~CFPB~~from ~~has~~insured ~~authority~~financial toinstitutions ~~prevent~~on ~~unfair,~~behalf ~~deceptive~~of ~~or abusive practices in connection with~~ the ~~offering~~Financing ofCorporation, ~~consumer~~or ~~financial products~~FICO. The ~~Dodd-Frank~~funds ~~Act~~from ~~authorizes~~these ~~the~~assessments ~~CFPB~~are used to ~~establish~~service ~~certain~~debt ~~minimum~~issued ~~standards~~by ~~for~~FICO ~~the~~in ~~origination~~its ofcapacity ~~residential~~as ~~mortgages including~~ a ~~determination~~financial ofvehicle ~~the~~for ~~borrower's ability to repay. In addition,~~ the ~~Dodd-Frank~~Federal ~~Act~~Savings ~~allows~~& ~~borrowers~~Loan toInsurance ~~raise~~Corporation. ~~certain~~The ~~defenses~~FICO toassessment ~~foreclosure~~rate ifis ~~they~~set ~~receive~~quarterly ~~any~~and ~~loan~~ranged ~~other~~from ~~than a “qualified mortgage” as defined by the CFPB~~0. ~~The~~66 ~~Dodd-Frank~~basis ~~Act~~points ~~permits~~throughout ~~states~~2012 to ~~adopt~~0.64 ~~consumer~~basis ~~protection~~points ~~laws~~throughout ~~and~~2013 ~~standards~~per ~~that~~$100 ~~are~~of ~~more~~assessable ~~stringent~~deposits. ~~than~~These ~~those~~assessments ~~adopted~~will atcontinue until the ~~federal~~debt ~~level~~matures ~~and,~~ in ~~certain~~2017 ~~circumstances,~~through ~~permits state attorneys general to enforce compliance with both the state and federal laws and regulations~~2019.

~~The~~Community ~~CFPB~~Reinvestment ~~has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank~~ Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending, and servicing practices. During 2012, the CFPB issued three proposed rulemakings covering loan origination and servicing requirements, which were finalized in January 2013, along with other rules on mortgages. The ability to repay and qualified mortgage standards rules, as well as the mortgage servicing rules, are scheduled to become effective in January 2014. The escrow and loan originator compensation rules are scheduled to become effective in June 2013. A final rule integrating disclosures required by the Truth in Lending Act and the Real Estate Settlement and Procedures Act is expected later this year. We continue to analyze the impact that such rules may have on our business model, particularly with respect to our mortgage banking division.

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

~~Restrictions~~The onCRA ~~Payment~~regulations ofprovide ~~Dividends. Under~~for ~~North~~certain ~~Carolina~~disclosure ~~law,~~obligations. ~~the~~Each ~~Bank~~institution ~~may~~must ~~pay~~post ~~dividends~~a ~~only~~notice ~~from~~advising ~~its undivided profits. However, if~~ the ~~Bank's~~public ~~surplus~~of isits ~~less~~right ~~than~~to 50comment ~~percent~~to ofthe ~~its~~institution ~~paid-in~~and ~~capital stock, then~~ its ~~directors~~regulator ~~may~~on ~~not~~the ~~declare~~institution’s ~~any~~CRA ~~cash~~performance ~~dividend~~and ~~until~~to review the ~~Bank~~institution’s ~~has~~CRA ~~transferred~~public ~~from~~file. ~~undivided~~Each ~~profits~~lending toinstitution ~~surplus~~must 25maintain ~~percent~~for ofpublic ~~its~~inspection ~~undivided~~a ~~profits~~file orthat ~~any~~includes ~~lesser~~a ~~percentage~~listing ~~necessary~~of tobranch ~~raise~~locations ~~its~~and ~~surplus~~services, toa ansummary ~~amount~~of ~~equal~~lending toactivity, 50a ~~percent~~map of its ~~paid-in~~communities ~~capital~~and ~~stock. However,~~any ~~effective~~written ~~October~~comments 1,from ~~2012,~~the ~~recently-passed~~public ~~amendments~~on toits ~~the~~performance ~~North~~in ~~Carolina~~meeting ~~Banking~~community ~~Code~~credit ~~became effective~~needs. ~~Under~~ ~~Section~~The ~~53-4-7~~CRA ofrequires ~~the~~public ~~revised~~disclosure ~~Banking~~of ~~Code,~~a ~~North~~financial ~~Carolina-chartered~~institution’s ~~banks~~written ~~are~~CRA ~~permitted~~evaluations. toThis ~~pay~~requirement ~~dividends~~promotes ~~under~~enforcement ~~state~~of ~~law~~CRA soprinciples ~~long~~by asproviding ~~they~~the ~~maintain~~public ~~regulatory~~with ~~capital~~the ~~ratios~~status ~~sufficient~~of toa beparticular ~~considered~~institution’s ~~“adequately~~community ~~capitalized”~~reinvestment ~~for regulatory purposes~~record.

InThe ~~addition~~Gramm-Leach-Bliley toAct ~~the~~made ~~restrictions~~various ~~described~~changes ~~above, other state and federal statutory and regulatory restrictions apply~~ to the ~~Bank's payment of cash dividends~~CRA. As anAmong ~~insured~~other ~~depository institution~~changes, ~~federal~~CRA ~~law~~agreements ~~prohibits~~with ~~the~~private ~~Bank~~parties ~~from~~must ~~making~~be ~~any capital distributions~~disclosed, ~~including~~and ~~the~~annual ~~payment~~CRA ofreports amust ~~cash~~be ~~dividend~~made ifavailable it is “undercapitalized” (as that term is defined in the Federal Deposit Insurance Act (the “FDIA”) or after making the distribution would become undercapitalized. If the FDIC believes that the Bank is engaged in, or about to ~~engage~~a ~~in, an unsafe or unsound practice, the FDIC may require, after notice and hearing, that the~~ bank’s ~~cease~~primary ~~and~~federal ~~desist from that practice~~regulator. ~~The~~ ~~FDIC~~A ~~has~~bank ~~indicated~~holding ~~that~~company ~~paying~~will ~~dividends~~not ~~that~~be ~~deplete~~permitted ~~a depository institution's capital base~~ to anbecome ~~inadequate~~a ~~level~~financial ~~would~~holding becompany ~~an unsafe~~ and ~~unsound~~no ~~banking~~new ~~practice. The~~activities ~~FDIC~~authorized ~~has issued policy statements that provide that insured banks generally should pay dividends only from their current operating earnings, and,~~ under the ~~FDIA,~~Gramm-Leach-Bliley noAct ~~dividend~~ may be ~~paid~~commenced by ana ~~insured~~holding ~~bank~~company ~~while~~or itby isa inbank ~~default~~financial onsubsidiary if any ~~assessment due the FDIC. The Bank's payment~~ of ~~dividends~~its ~~also~~bank ~~could~~subsidiaries bereceived ~~affected~~less orthan ~~limited~~a bysatisfactory ~~other~~CRA ~~factors,~~rating ~~such~~in asits ~~events~~latest orexamination. ~~circumstances~~The ~~which~~Bank ~~lead~~received ~~the~~a ~~FDIC~~“Satisfactory” torating ~~require~~in ~~(as~~its ~~further~~last ~~described~~CRA ~~below)~~examination ~~that~~which itwas ~~maintain~~conducted ~~capital~~during inOctober ~~excess of regulatory guidelines~~2011.

InConsumer ~~the~~Protection future, the Bank's ability to declare and pay cash dividends will be subject to its board of directors' evaluation of the Bank's operating results, capital levels, financial condition, future growth plans, general business and economic conditions, and tax and other relevant considerations.Laws

~~Regulatory~~The ~~Guidance~~Bank onis ~~“CRE”~~subject ~~Lending~~to ~~Concentrations. During~~a ~~2006,~~number ~~the~~of ~~FDIC~~federal and ~~other~~state ~~federal~~laws ~~banking~~designed ~~regulators~~to ~~issued~~protect ~~guidance~~borrowers ~~for~~and ~~sound~~promote ~~risk~~lending ~~management for financial institutions whose loan portfolios are deemed~~ to ~~have~~various ~~significant~~sectors ~~concentrations~~of ~~in commercial real estate (“CRE”). In March 2008,~~ the ~~FDIC~~economy and ~~other~~population. ~~federal~~These ~~banking~~laws ~~regulators~~include, ~~issued~~without ~~further~~limitation, ~~guidance on applying these principles in~~ the ~~current~~Equal ~~real~~Credit ~~estate~~Opportunity ~~lending environment~~Act, ~~and they noted particular concern about construction and development loans. The banking regulators have indicated that this guidance does not set strict limitations on~~ the ~~amount~~Fair orCredit ~~percentage~~Reporting ~~of CRE within any given loan portfolio~~Act, ~~and~~the ~~that~~Truth ~~they also will examine risk indicators~~ in ~~banks~~Lending ~~which~~Act, ~~have amounts or percentages of CRE below~~ the ~~thresholds. However,~~Home ifMortgage aDisclosure ~~bank's CRE exceeds these thresholds or if other risk indicators are present~~Act, the ~~FDIC~~Real ~~and~~Estate ~~other~~Settlement ~~federal~~Procedures ~~banking~~Act, ~~regulators may require additional reporting and analysis to document management's evaluation of~~ the ~~potential~~Fair ~~additional~~Debt ~~risks~~Collection ofAct ~~such concentration~~ and ~~the~~state ~~impact~~law ~~of any mitigating factors~~counterparts. ~~The March 2008 supplementary guidance stated that banks with significant CRE concentrations should maintain or implement processes to:~~

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

•Additional ~~ensure~~Legislative ~~that~~and ~~their~~Regulatory ~~loan loss allowances are appropriately strong;~~Matters

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

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

• bolster their workout infrastructure for problem loans.

It is possible that regulatory constraints associated with this guidance could adversely affect the Bank's ability to grow CRE assets, and they also could increase the costs of monitoring and managing this component of the bank's loan portfolio.

Capital Adequacy. The Bank is required to comply with the FDIC's capital adequacy standards for insured banks. The FDIC has issued risk-based capital and leverage capital guidelines for measuring capital adequacy, and all applicable capital standards must be satisfied for the Bank to be considered in compliance with regulatory capital requirements.

Under the FDIC's risk-based capital measure, the minimum ratio (“Total Capital Ratio”) of the Bank's total capital (“Total Capital”) to its risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit) is 8.0 percent. At least half of Total Capital must be composed of “Tier 1 Capital.” Tier 1 Capital includes common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and various other intangible assets. The remainder of Total Capital may consist of “Tier 2 Capital” which includes certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of loan loss reserves. A bank that does not satisfy minimum capital requirements may be required to adopt and implement a plan acceptable to its federal banking regulator to achieve an adequate level of capital.

~~Under~~Fiscal ~~the leverage capital measure, the minimum ratio (“Leverage Capital Ratio”) of Tier 1 Capital to average assets, less goodwill~~ and ~~various~~Monetary other intangible assets, generally is 4.0 percent. The FDIC's guidelines also provide that banks experiencing internal, growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum levels without significant reliance on intangible assets, and a bank's “Tangible Leverage Ratio” (determined by deducting all intangible assets) and other indicators of a bank's capital strength also are taken into consideration by banking regulators in evaluating proposals for expansion or new activities.Policy

~~The~~Banking ~~FDIC~~is ~~also~~a ~~considers~~business which depends on interest rate ~~risk~~differentials ~~(arising~~for ~~when~~success. In general, the difference between the interest ~~rate~~paid ~~sensitivity~~by ofa ~~the~~bank ~~Bank's~~on ~~assets~~its ~~does~~deposits ~~not~~and ~~match~~its other borrowings, and the ~~sensitivity~~interest ofreceived ~~its~~by ~~liabilities~~a orbank on its ~~off-balance-sheet~~loans ~~position)~~and insecurities holdings, constitutes the ~~evaluation~~major portion of ~~the~~a bank'’s ~~capital adequacy~~earnings. ~~Banks~~ ~~with~~Thus, ~~excessive~~the ~~interest~~earnings ~~rate~~and ~~risk~~growth ~~exposure~~of ~~are~~the ~~required~~Company toand ~~hold~~the ~~additional~~Bank ~~amounts~~will be subject to the influence of ~~capital~~economic ~~against~~conditions ~~their~~generally, ~~exposure~~both todomestic ~~losses~~and ~~resulting~~foreign, ~~from~~and ~~that~~also ~~risk. Through~~to the ~~risk-weighting~~monetary and fiscal policies of ~~assets~~the United States and its agencies, particularly the ~~regulators~~Federal ~~also~~Reserve. ~~require~~The ~~banks~~Federal toReserve ~~incorporate~~regulates ~~market~~the ~~risk~~supply ~~components~~of ~~into~~money ~~their~~through ~~risk-based~~various ~~capital. Under~~means, ~~these~~including open market ~~risk~~dealings ~~requirements~~in United States government securities, ~~capital~~the isdiscount ~~allocated~~rate toat ~~support~~which banks may borrow from the ~~amount~~Federal Reserve and the reserve requirements on deposits. The nature and timing of ~~market~~any ~~risk~~changes ~~related~~in tosuch apolicies ~~bank's~~and ~~lending~~their effect on the Company and ~~trading~~the ~~activities~~Bank cannot be predicted.

~~The~~Current ~~Bank's~~and ~~capital~~future ~~categories~~legislation ~~are~~and ~~determined solely for~~ the ~~purpose~~policies ofestablished ~~applying~~by ~~the~~federal ~~“prompt corrective action” rules described below~~ and ~~they~~state ~~are~~regulatory ~~not~~authorities ~~necessarily~~will anaffect ~~accurate~~the ~~representation~~future operations of ~~its overall financial condition or prospects for other purposes. A failure to meet~~ the ~~capital~~Company ~~guidelines~~and ~~could subject~~ the Bank. toBanking alegislation ~~variety~~and ofregulations ~~enforcement~~may ~~actions~~limit ~~under~~the ~~those~~Company’s ~~rules,~~and ~~including~~ the ~~issuance~~Bank’s ofgrowth aand ~~capital directive,~~ the ~~termination~~return ofto ~~deposit~~their ~~insurance~~investors by ~~the~~restricting ~~FDIC,~~certain ~~a prohibition on the taking~~ of ~~brokered~~their ~~deposits, and other restrictions on its business~~activities. ~~As described below, the FDIC also can impose other substantial restrictions on banks that fail to meet applicable capital requirements.~~

~~Basel III Capital Proposals.~~ In ~~June 2012~~addition, ~~federal regulators issued proposed rules to implement the~~ capital ~~adequacy~~requirements ~~recommendations~~could ofbe ~~the~~changed ~~Basel~~and ~~Committee~~have ~~on Bank Supervision first proposed in December 2010. These proposals, which are known as “Basel III,” propose significant changes to~~ the ~~minimum~~effect ~~capital levels and asset risk-weights for all banks, regardless~~ of ~~size,~~restricting ~~and bank holding companies with greater than $500 million in assets. Among~~ the ~~many~~activities ~~changes in these proposed rules, banks would be required to hold higher levels~~ of ~~capital, a significantly higher portion of which would be required to be Tier 1 capital. Further, beginning in 2016,~~ the ~~ability~~Company ~~of a bank or bank holding company to declare~~ and ~~pay dividends or pay discretionary bonuses to certain executive officers would become limited should~~ the ~~bank~~Bank, or ~~bank~~requiring ~~holding~~additional ~~company~~capital ~~fail~~ to ~~maintain~~be ~~a “capital conservation buffer” composed of Tier 1 common equity that is 2~~maintained.5 ~~percent~~We ~~greater~~cannot ~~than~~predict ~~applicable~~with ~~minimum~~certainty ~~capital~~what ~~requirements. The proposed Basel III rules would also impose significant~~ changes, onif ~~the risk-weighting of many assets~~any, ~~including~~will ~~home~~be ~~mortgages~~made ~~with high loan~~ to ~~value~~existing ~~ratios,~~federal ~~certain acquisition, development~~ and ~~construction~~state ~~loans,~~legislation and ~~certain~~regulations ~~past~~or ~~due assets. Finally,~~ the ~~proposed~~effect ~~rules~~that ~~would~~such ~~also~~changes ~~prevent~~may ~~trust~~have ~~preferred~~on ~~securities from counting as Tier 1 capital for~~ the ~~issuer~~business ~~following~~of ~~a ten-year phase out ending in 2022. The comment period for~~ the ~~proposed~~Company ~~rules~~or ~~closed in late October 2012, and federal regulators have indicated that implementation of~~ the ~~proposed Base III rules will be delayed~~Bank.

~~Prompt~~Real ~~Corrective~~Estate ~~Action. Federal~~Lending law establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”) and is required to take various mandatory supervisory actions, and is authorized to take other discretionary actions with respect to banks in the three undercapitalized categories. The severity of any such actions taken will depend upon the capital category in which a bank is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint a receiver or conservator for a bank that is critically undercapitalized.Evaluations

~~Under~~The ~~the~~federal ~~FDIC's~~regulators ~~prompt~~have ~~corrective~~adopted ~~action~~uniform ~~rules,~~standards afor ~~bank~~evaluations ~~that~~of ~~(1)~~loans ~~has~~secured aby ~~Total~~real ~~Capital~~estate ~~Ratio of 10.0 percent~~ or ~~greater,~~made ato ~~Tier~~finance 1improvements ~~Capital~~to ~~Ratio~~real ~~of 6~~estate.0 ~~percent~~Banks orare ~~greater,~~required ~~and~~to aestablish ~~Leverage Ratio of 5.0 percent or greater,~~ and ~~(2)~~maintain ~~is not subject to any~~ written ~~agreement,~~internal ~~order,~~real ~~capital~~estate ~~directive,~~lending orpolicies ~~prompt~~consistent ~~corrective action directive issued by the FDIC, is considered to be “well capitalized.” A bank~~ with asafe ~~Total~~and ~~Capital~~sound ~~Ratio~~banking ofpractices ~~8.0 percent or greater, a Tier 1 Capital Ratio of 4.0 percent or greater,~~ and aappropriate ~~Leverage Ratio of 4.0 percent or greater, is considered~~ to bethe ~~“adequately~~size ~~capitalized.” A bank that has a Total Capital Ratio~~ of ~~less~~the ~~than~~institution ~~8.0~~and ~~percent,~~the anature ~~Tier~~and 1scope ~~Capital Ratio~~ of ~~less~~its ~~than 4~~operations.0 ~~percent,~~The orregulations aestablish ~~Leverage~~loan ~~Ratio of less than 4.0 percent, is considered~~ to bevalue ~~“undercapitalized.”~~ratio Alimitations ~~bank~~on ~~that~~real ~~has~~estate ~~a Total Capital Ratio of less than 6~~loans.0 ~~percent,~~The aBank’s ~~Tier~~loan 1policies ~~Capital~~establish ~~Ratio~~limits ofon ~~less~~loan ~~than 3.0 percent, or a Leverage Ratio of less than 3.0 percent, is considered~~ to bevalue ~~“significantly~~ratios ~~undercapitalized,” and a bank~~ that ~~has~~are ~~a tangible equity capital to assets ratio~~ equal to or less than ~~2.0~~those ~~percent~~established is deemed to be “critically undercapitalized.” For purposes of these rules, the term “tangible equity” includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets (with various exceptions). A bank may be considered to be in asuch capitalization category lower than indicated by its actual capital position if it receives an unsatisfactory examination rating or is subject to a regulatory action that requires heightened levels of capitalregulations.

Commercial Real Estate Concentrations

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


•	total reported loans for construction, land development and other land, or C&D, represent 100 percent or more of the institution’s total capital; or


•	total CRE loans represent 300 percent or more of the institution’s total capital, and the outstanding balance of the institution’s CRE loan portfolio has increased by 50 percent or more.

As of December 31, 2013, the Bank's C&D concentration as a percentage of capital totaled 90.5 percent and the Bank's CRE concentration, net of owner-occupied loans, as a percentage of capital totaled 269.9 percent.

Limitations on Incentive Compensation

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

AIn ~~bank~~June ~~that becomes “undercapitalized~~2010,” ~~“significantly~~the ~~undercapitalized,”~~Federal orReserve ~~“critically~~issued ~~undercapitalized”~~the isincentive ~~required~~compensation toguidance ~~submit~~in anfinal ~~acceptable~~form ~~capital~~and ~~restoration~~was ~~plan~~joined toby the FDIC and the Office of the Comptroller of the Currency. An ~~“undercapitalized”~~The ~~bank~~final ~~also~~guidance, iswhich ~~generally~~covers ~~prohibited~~all ~~from~~employees ~~increasing~~that ~~its~~have ~~average~~the ~~total~~ability ~~assets~~to materially affect the risk profile of an organization, ~~making~~either ~~acquisitions~~individually or as part of a group, ~~establishing~~is ~~new~~based ~~branches~~upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide employees incentives that appropriately balance risk and reward and, orthus, ~~engaging~~do innot ~~any~~encourage ~~new~~risk-taking ~~line~~beyond ofthe ~~business~~organization’s ability to effectively identify and manage risks, ~~except~~(ii) inbe ~~accordance~~compatible with aneffective ~~accepted~~internal ~~capital~~controls ~~restoration~~and ~~plan~~risk ormanagement, ~~with~~and (iii) be supported by strong corporate governance, including active and effective oversight by the ~~approval~~organization’s board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the ~~FDIC. Also~~organization’s supervisory ratings, ~~the~~which ~~FDIC~~can ~~may~~affect ~~treat~~its anability ~~“undercapitalized”~~to ~~bank~~make asacquisitions ~~being~~or ~~“significantly~~perform ~~undercapitalized”~~other ifactions. itThe ~~determines~~guidance provides that ~~those~~enforcement actions ~~are~~may ~~necessary~~be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to ~~carry~~the ~~out~~organization’s safety and soundness and the ~~purpose~~organization ofis not taking prompt and effective measures to correct the ~~law~~deficiencies.

AsEconomic ~~of December 31, 2012, all of the Bank's capital ratios were at levels that would qualify it to be “well capitalized” for regulatory purposes.~~Environment

~~Powers~~The ofpolicies ~~the FDIC in Connection with the Insolvency~~ of anregulatory ~~Insured~~authorities, ~~Depository~~including ~~Institution. Under~~ the ~~FDIA,~~monetary ifpolicy ~~any~~of ~~insured depository institution becomes insolvent and~~ the ~~FDIC~~Federal isReserve, ~~appointed~~have asa ~~its~~significant ~~conservator~~effect oron ~~receiver,~~ the ~~FDIC~~operating ~~may~~results ~~disaffirm~~of orbank ~~repudiate~~holding ~~any~~companies ~~contract~~and ortheir ~~lease~~subsidiaries. toAmong ~~which~~ the ~~institution~~means isavailable ~~a party which it determines~~ to ~~be burdensome, and~~ the ~~disaffirmance~~Federal orReserve ~~repudiation of which is determined~~ to ~~promote~~affect the ~~orderly~~money ~~administration~~supply ofare ~~the~~open ~~institution's~~market ~~affairs. The~~operations ~~disaffirmance~~in orU.S. ~~repudiation~~government ofsecurities, ~~any~~changes ofin the ~~Bank's~~discount ~~obligations~~rate ~~would~~on ~~result~~member inbank aborrowings ~~claim~~and ofchanges ~~the~~in ~~holder~~reserve ofrequirements ~~that obligation~~ against ~~the~~member ~~conservatorship~~bank ~~or receivership~~deposits. ~~The~~ ~~amount~~These ~~paid~~means onare ~~that~~used ~~claim~~in ~~would~~varying ~~depend~~combinations ~~upon,~~to ~~among~~influence ~~other~~overall ~~factors,~~growth ~~the~~and ~~amount~~distribution of ~~conservatorship~~bank orloans, ~~receivership~~investments ~~assets~~and ~~available~~deposits, ~~for the payment of unsecured claims~~ and ~~the~~their ~~priority~~use ofmay ~~the~~affect ~~claim~~interest ~~relative~~rates tocharged ~~the~~on ~~priority~~loans ofor ~~other~~paid ~~unsecured~~on ~~creditors and depositors~~deposits.

InThe ~~its~~Federal ~~resolution~~Reserve’s ofmonetary ~~the~~policies ~~problems~~have ofmaterially anaffected ~~insured~~the ~~depository~~operating ~~institution~~results inof ~~default~~commercial orbanks in ~~danger of default,~~ the ~~FDIC~~past ~~generally~~and isare ~~required~~expected to ~~satisfy~~continue ~~its obligations~~ to ~~insured~~do ~~depositors~~so atin the ~~least possible cost to the deposit insurance funds~~future. In ~~addition,~~The ~~the~~nature ~~FDIC~~of ~~may~~future ~~not~~monetary ~~take~~policies ~~any~~and ~~action that would have~~ the effect of ~~increasing~~these ~~the~~policies ~~losses~~on to the ~~deposit~~business ~~insurance funds by protecting depositors for more than the insured portion of deposits or creditors other than depositors. The FDIA authorizes the FDIC to settle all uninsured~~ and ~~unsecured~~earnings ~~claims in the insolvency~~ of ~~an insured bank by making a formal settlement payment after~~ the ~~declaration~~Company ~~of insolvency as full payment~~ and ~~disposition of~~ the ~~FDIC's~~Bank ~~obligations~~cannot ~~to claimants. The rate of the formal settlement payments will~~ be ~~a percentage rate determined by the FDIC reflecting an average of the FDIC's receivership recovery experience~~predicted.

~~Federal~~Evolving ~~Deposit~~Legislation ~~Insurance~~ and ~~Assessments. The~~Regulatory Bank's deposits are insured by the FDIC to the full extent provided in the FDIA, and the bank pays assessments to the FDIC for that insurance coverage. The Dodd-Frank Act established a permanent $250 thousand limit for federal deposit insurance coverage. The FDIC may terminate the Bank's deposit insurance if it finds that the bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated applicable laws, regulations, rules or orders.Action

~~Under~~In ~~FDIA~~2009, ~~the~~many ~~FDIC~~emergency ~~uses~~government aprograms ~~revised~~enacted ~~risk-based~~in ~~assessment~~2008 ~~system~~in response to ~~determine~~the financial crisis and the ~~amount~~recession slowed or wound down, and global regulatory and legislative focus has generally moved to a second phase of broader regulatory reform and a restructuring of the ~~Bank's~~entire ~~deposit~~financial ~~insurance~~regulatory ~~assessment~~system. ~~based~~The onDodd-Frank anAct ~~evaluation~~was ofsigned into law in 2010 and implements many new changes in the ~~probability~~way ~~that~~financial and banking operations are regulated in the ~~DIF~~United ~~will~~States, ~~incur~~including through the creation of a ~~loss~~new ~~with~~resolution ~~respect~~authority, tomandating ~~the~~higher ~~bank. That~~capital ~~evaluation~~and ~~takes~~liquidity ~~into~~requirements, ~~consideration~~requiring ~~risks~~banks ~~attributable~~to pay increased fees to ~~different~~regulatory ~~categories~~agencies and ~~concentrations~~numerous other provisions intended to strengthen the financial services sector. The Dodd-Frank Act provides for the creation of the ~~Bank's~~Financial ~~assets~~Stability ~~and~~Oversight ~~liabilities~~Council, or the FSOC, which is charged with overseeing and ~~any~~coordinating ~~other~~the ~~factors~~efforts of the ~~FDIC~~primary ~~considers~~U.S. tofinancial beregulatory ~~relevant,~~agencies (including ~~information~~the ~~obtained~~Federal ~~from~~Reserve, the ~~Commissioner~~FDIC and the SEC) in establishing regulations to address systemic financial stability concerns. A ~~higher~~The ~~assessment~~Dodd-Frank ~~rate~~Act ~~results~~also inprovides anfor ~~increase~~the increation of the ~~assessments~~Consumer Financial Protection Bureau, or the ~~Bank~~CFPB, ~~pays~~a new consumer financial services regulator. The CFPB is authorized to ~~the~~prevent ~~FDIC~~unfair, deceptive and abusive practices and ensure that consumers have access to markets for ~~deposit~~consumer ~~insurance~~financial products and services and that such markets are fair, transparent and competitive.

~~The~~New ~~FDIC~~laws isor ~~responsible~~regulations ~~for~~or ~~maintaining~~changes ~~the~~to ~~adequacy~~existing oflaws ~~the DIF,~~ and ~~the amount the Bank pays for deposit insurance is influenced not only by the assessment of the risk it poses to the DIF~~regulations, ~~but~~including ~~also~~changes byin ~~the~~interpretation ~~adequacy~~or ~~of the insurance fund at any time to cover the risk posed by all insured institutions. Because the DIF reserve ratio had fallen below the minimum level required by law~~enforcement, ~~during~~could ~~2008~~materially ~~the~~adversely ~~FDIC~~affect ~~adopted a restoration plan to return~~ the ~~reserve~~Company’s ~~ratio~~financial tocondition ~~the~~or ~~minimum~~results ~~level~~of and, during 2009, it imposed a special assessment on insured institutions, increased regular assessment rates, and required that insured institutions prepay their regular quarterly assessments through 2012operations. ~~More~~ ~~recently,~~Many asaspects ~~required~~of by the Dodd-Frank Act, ~~the~~are ~~FDIC~~subject ~~has increased the minimum DIF reserve ratio~~ to ~~1.35~~further ~~percent~~rulemaking ~~which~~and ~~might~~will betake ~~achieved~~effect byover ~~September~~several ~~30, 2020~~years. ~~Although~~ ~~the~~As ~~Dodd-Frank~~a ~~Act~~result, ~~requires~~ the ~~FDIC~~overall tofinancial ~~offset~~impact ~~the effect of the higher minimum ratio~~ on ~~insured depository institutions with assets of less than $10 billion, FDIC insurance assessments could be increased substantially in~~ the ~~future~~Company ifand the ~~FDIC~~Bank ~~finds~~cannot ~~such an increase to~~ be ~~necessary~~anticipated inat ~~order~~this ~~to adequately maintain the insurance fund~~time.

Community Reinvestment. Under the Community Reinvestment Act (the “CRA”), 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 banks, nor does it limit a bank'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 banks, to assess the banks' 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 various applications by those banks. All banks are required to publicly disclose their CRA performance ratings. The Bank received a “Satisfactory” rating in its most recent CRA examination.

Allowance for Loan and Lease Losses. The Allowance for Loan and Lease Losses (the “ALLL”) represents one of the most significant estimates in the Bank's financial statements and regulatory reports. Because of its significance, the Bank has developed a system by which it develops, maintains, and documents a comprehensive, systematic, and consistently applied process for determining the amounts of the ALLL and the provision for loan and lease losses. The Interagency Policy Statement on the Allowance for Loan and Lease Losses, issued on December 13, 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the Bank's stated policies and procedures, management's best judgment, and relevant supervisory guidance. Consistent with supervisory guidance, the Bank maintains a prudent and conservative, but not excessive, ALLL, that is at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The Bank's estimate of credit losses reflects consideration of all significant factors that affect the collectability of the portfolio as of the evaluation date.

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

• total reported loans for construction, land development, and other land represent 100 percent or more of the institutions total capital, or

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

Restrictions on Transactions with Affiliates. The Bank is subject to the provisions of Sections 23A and 23B of the Federal Reserve Act which restrict a bank's ability to enter into certain types of transactions with its “affiliates,” including its parent holding company or any subsidiaries of its parent company. Among other things, Section 23A limits on the amount of:

• a bank's loans or extensions of credit to, or investment in, its affiliates;

• assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

• the amount of loans or extensions of credit by a bank to third parties which are collateralized by the securities or obligations of the bank's affiliates; and

• a bank's guarantee, acceptance or letter of credit issued on behalf of one of its affiliates.

Transactions of the type described above are limited in amount, as to any one affiliate, to 10 percent of a bank's capital and surplus and, as to all affiliates combined, to 20 percent of a bank's capital and surplus. In addition to the amount limitations, each of the above transactions must also meet specified collateral requirements. The Bank also must comply with other provisions designed to avoid the taking of low-quality assets from an affiliate.

Section 23B, among other things, prohibits a bank or its subsidiaries generally from engaging in transactions with its affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Federal law also places restrictions on the Bank's ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit:

• must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties; and

• must not involve more than the normal risk of repayment or present other unfavorable features.

USA Patriot Act of 2001. The USA Patriot Act of 2001 (the “Patriot Act”) strengthened the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Patriot Act's impact on financial institutions has been significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification when accounts are opened, 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.

Other Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. Our loan operations will be subject to federal laws applicable to credit transactions, such as the:

• Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;

• Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

• Soldiers' and Sailors' Civil Relief Act of 1940, as amended by the Servicemembers' Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the United States military;

• Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for consumer loans to military service members and their dependents; and

• rules and regulations of the various federal banking regulators charged with the responsibility of implementing these federal laws.

The Bank's deposit operations are subject to federal laws applicable to depository accounts, such as:

• Truth-In-Savings Act, requiring certain disclosures of consumer deposit accounts;

• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

• Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services;

• International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers, and other financial institutions; and

• rules and regulations of the various federal banking regulators charged with the responsibility of implementing these federal laws.

Proposed Legislation and Regulatory Action. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies. The Bank's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve, including its ongoing “Quantitative Easing” program, affect the levels of bank loans, investments, and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence over reserve requirements to which member banks are subject. The Bank cannot predict the nature or impact of future changes in monetary and fiscal policies.

ITEM 1A. RISK FACTORS

An investment in our securities involves certain risks. If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition, ~~and~~or results of operations could be ~~harmed~~materially adversely affected. In such a case, the trading price of our securities could decline, and you may lose all or part of your investment. The risks ~~discussed~~identified below and this Form 10-K also ~~include~~contain forward-looking statements, that involve risks and ~~our~~uncertainties. Our actual results ~~may~~could differ ~~substantially~~materially from those ~~discussed~~anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us as described below and elsewhere in this Form 10-K.

Risks Related to ~~the~~Our ~~Company's~~ Business

~~The~~Our ~~Company's~~ financial information reflects the application of the acquisition method of accounting. Any change in the assumptions used in such methodology could have an adverse effect on ~~the~~our ~~Company's~~ results of operations.

As a result of Piedmont’s and the Company's bank and bank holding company acquisitions, our financial results are heavily influenced by the application of the acquisition method of accounting. The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair value. In addition, the balances of nonperforming assets were significantly reduced by the adjustments to fair value recorded in conjunction with Piedmont’s and the Company's acquisitions. If our fair value assumptions ~~are~~were incorrect or the regulatory agencies to whom we report require us to change or modify ~~its~~our assumptions, such change or modification could have a material adverse effect on our financial condition or results of operations or ~~its~~our previously reported results.

We may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition, and results of operations.

Like other lenders, we face the risk that our customers will not repay their loans. A customer'’s failure to repay us is usually preceded by missed monthly payments. In some instances, however, a customer may declare bankruptcy prior to missing payments, and, following a borrower filing bankruptcy, a lender'’s recovery of the credit extended is often limited. Since many of our loans are secured by collateral, we may attempt to seize the collateral when and if customers default on their loans. However, the value of the collateral may not equal the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customers. The resolution of ~~non-performing~~nonperforming assets, including the initiation of foreclosure proceedings, requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities, and will expose ~~the~~us ~~Company~~ to additional legal costs and potential delays. Elevated levels of loan delinquencies and bankruptcies in our market area generally and among our customers specifically can be precursors of future charge-offs and may require us to increase our allowance for loan and lease losses (“ALLL”). Higher charge-off rates, delays in the foreclosure process or in obtaining judgments against defaulting borrowers and an increase in our ~~allowance~~ALLL ~~for loan and lease losses~~ may hurt our overall financial performance if we are unable to increase revenue to compensate for these losses and may also increase our cost of funds.

The effects of the economic downturn on the performance of financial institutions in our geographic area, actions taken by our competitors to address the continuing economic downturn, and the public perception of and confidence in the economy generally, and the banking industry specifically, could negatively impact our performance and operations.

All financial institutions are subject to similar risks resulting from a weakened economy, such as increased charge-offs and levels of past due loans and nonperforming assets. As troubled institutions in our market area continue to recognize and dispose of problem assets, the already substantial inventory of residential homes and lots will increase and may negatively affect home values and increase the time it takes us or our borrowers to sell existing inventory. The perception that troubled banking institutions (and smaller banking institutions that are not “in trouble”) are risky institutions for purposes of regulatory compliance or safeguarding deposits may cause depositors nonetheless to move their funds to larger institutions. If our depositors should move their funds based on events at other financial institutions, our operating results would suffer.

Our loan portfolio mix, which has loans secured by real estate, could result in increased credit risk in a challenging economy.

Our loan portfolio is concentrated in commercial real estate and commercial business loans. These types of loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy loan concentrations in certain types of commercial real estate loans, including acquisition, construction and development loans, and also by geographic segment. Because our loan portfolio contains commercial real estate and commercial business loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in our ~~non-performing~~nonperforming loans. An increase in ~~non-performing~~nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, any of which could have a material adverse impact on our results of operations and financial condition.

~~Any~~The current economic environment and any deterioration or downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both borrowers'’ ability to repay their loans and the value of the real property securing such loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans. Any of these developments could materially adversely affect our business, financial condition, results of operations and prospects.

IfOur ~~our~~loan ~~allowance~~portfolio ~~for~~has ~~loan~~and ~~losses~~will iscontinue ~~not~~to ~~sufficient~~be toaffected ~~cover~~by ~~actual~~the ~~loan~~on-going ~~losses~~correction in real estate markets, ~~our~~including ~~earnings~~reduced ~~could~~levels ~~decrease~~of home sales and declines in the performance of loans.

~~Our~~There ~~success~~continues ~~depends~~ to be a ~~significant~~general ~~extent~~real ~~upon~~estate ~~the~~slowdown ~~quality~~in some of our ~~assets~~market areas, ~~particularly~~reflecting ~~loans~~declining prices and excess inventories. In ~~originating~~As ~~loans~~a result, ~~there~~home isbuilders aand ~~substantial~~commercial ~~likelihood~~developers ~~that~~have weshown ~~will~~signs ~~experience~~of ~~credit~~financial ~~losses~~deterioration. ~~The~~ ~~risk~~A ofsoft ~~loss~~residential ~~will~~housing ~~vary~~market, ~~with~~increased delinquency rates, ~~among~~and ~~other~~a ~~things~~weakened secondary credit market have affected the overall mortgage industry and could adversely affect our Builder Finance Division. In addition, ~~general~~many ~~economic~~banking ~~conditions~~institutions, including our Bank, have experienced declines in the ~~type~~performance of ~~loan~~other loans, ~~the~~including ~~creditworthiness~~construction, ofland ~~the~~development ~~borrower~~and ~~over~~land loans and commercial loans. We make credit and reserve decisions based on the ~~term~~current conditions of borrowers or projects combined with our expectations for the ~~loan~~future. If conditions are worse than forecasted, we could experience higher charge-offs and, delinquencies beyond that which is provided in the ~~case~~allowance offor aloan ~~collateralized~~losses. ~~loan~~As such, ~~the~~our ~~quality~~earnings ofcould ~~the~~be ~~collateral~~adversely ~~for~~affected ~~the~~through higher than anticipated provisions for loan losses.

21SBA lending is an important part of our business. Our SBA lending program is dependent upon the federal government, and we have specific risks associated with originating SBA loans.

Our ~~loan~~SBA ~~customers~~lending ~~may~~program ~~not~~is ~~repay~~dependent ~~their~~upon ~~loans~~the ~~according~~federal togovernment. ~~the~~As ~~terms~~an ofSBA ~~these~~Preferred ~~loans~~Lender, ~~and~~we ~~the~~enable ~~collateral~~our ~~securing~~clients ~~the~~to ~~payment~~obtain ofSBA ~~these~~ loans ~~may~~without bebeing ~~insufficient~~subject to ~~assure~~the ~~repayment. As~~potentially alengthy ~~result,~~SBA weapproval ~~may~~process ~~experience~~necessary ~~significant~~for ~~loan~~lenders ~~losses,~~that ~~which~~are ~~could~~not ~~have~~SBA aPreferred ~~material~~Lenders. ~~adverse~~The ~~effect~~SBA onperiodically ~~our~~reviews ~~operating~~the ~~results. Management~~lending ~~makes~~operations ~~various~~of ~~assumptions~~participating ~~and~~lenders ~~judgments~~to ~~about~~assess, ~~the~~among ~~collectability~~other ~~of our loan portfolio~~things, ~~including~~whether the ~~creditworthiness~~lender ofexhibits ~~our~~prudent ~~borrowers~~risk ~~and~~management. ~~the~~When ~~value~~weaknesses ofare identified, the ~~real~~SBA ~~estate~~may ~~and~~request ~~other~~corrective ~~assets~~actions ~~serving~~or asimpose ~~collateral~~enforcement ~~for~~actions, ~~the~~including ~~repayment~~revocation of ~~many~~the oflender’s ~~our~~Preferred ~~loans~~Lender status. We ~~maintain~~If anwe ~~allowance~~lose ~~for~~our ~~loan~~status ~~losses~~as ina anPreferred ~~attempt~~Lender, towe ~~cover~~may ~~any~~lose ~~loan~~our ~~losses~~customers ~~that~~to ~~may~~lenders ~~occur. In~~who ~~determining~~are ~~the~~SBA ~~size~~Preferred ofLenders, ~~the~~and ~~allowance,~~as a result we ~~rely~~would onexperience ana ~~analysis~~material ofadverse effect to our ~~loan~~financial ~~portfolio~~results. ~~based~~Any onchanges ~~historical~~to ~~loss~~the ~~experience~~SBA program, ~~volume~~including ~~and~~changes ~~types~~to ofthe ~~loans,~~level ~~trends~~of inguarantee ~~classification,~~provided ~~volume~~by ~~and~~the ~~trends~~federal ingovernment ~~delinquencies~~on ~~and~~SBA ~~non-accruals~~loans, ~~national~~may ~~and~~also ~~local~~have ~~economic~~an ~~conditions,~~adverse ~~and~~effect ~~other~~on ~~pertinent~~our ~~information~~business.

IfWe generally sell the guaranteed portion of our ~~assumptions~~SBA ~~are~~7(a) ~~wrong,~~loans in the secondary market. These sales have resulted in our ~~current~~earning ~~allowance~~premium ~~may~~income ~~not~~and/or behave ~~sufficient~~created toa ~~cover~~stream of future ~~loan~~servicing ~~losses,~~income. ~~and~~There can be no assurance that we ~~may~~will ~~need~~be able to ~~make~~continue ~~adjustments~~originating tothese ~~allow~~loans, ~~for~~that ~~different~~a ~~economic~~secondary ~~conditions~~market will exist or ~~adverse~~that ~~developments~~we inwill ~~our~~continue ~~loan~~to ~~portfolio~~realize premiums upon the sale of the guaranteed portion of these loans. ~~Material~~ ~~additions~~When towe ~~our~~sell ~~allowance~~the ~~would~~guaranteed ~~materially~~portion ~~decrease~~of our ~~net~~SBA ~~income~~7(a) loans, we incur credit risk on the non-guaranteed portion of the loans. We ~~expect~~share ~~our~~pro-rata ~~allowance~~with tothe ~~continue~~SBA in any recoveries. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to ~~fluctuate~~significant ~~throughout~~technical ~~2013;~~deficiencies ~~however,~~in ~~given~~the ~~current~~manner ~~and~~in ~~future~~which ~~market~~the ~~conditions~~loan was originated, wefunded ~~can~~or ~~make~~serviced noby ~~assurance~~us, ~~that~~the ~~our~~SBA ~~allowance~~may ~~will~~seek berecovery ~~adequate~~of the principal loss related to ~~cover~~the ~~future~~deficiency ~~loan~~from ~~losses.~~us, which could materially adversely affect our results of operations.

InIf ~~addition, federal and state regulators periodically review~~ our ~~allowance~~ALLL ~~for~~is ~~loan~~not ~~losses~~sufficient ~~and may require us~~ to ~~increase~~cover ~~our~~actual ~~provision for~~ loan losses ~~or recognize further loan charge-offs~~, ~~based on judgments different than those of~~ our ~~management. Any~~earnings ~~increase in our allowance for loan losses or loan charge-offs as required by these regulators~~ could ~~have a negative effect on our operating results~~decrease.

Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, including the current economic environment and real estate market, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Our management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an ALLL in an attempt to cover any loan losses that may occur. In determining the size of the ALLL, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and we may need to make adjustments to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income. We expect our ALLL to continue to fluctuate; however, given current and future market conditions, we can make no assurance that our allowance will be adequate to cover future loan losses.

In addition, federal and state regulators periodically review our ALLL and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulators could have a negative effect on our operating results.

The amount of other real estate owned (“OREO”) may increase significantly, resulting in additional losses, and costs and expenses that will negatively affect our operations.

As the amount of OREO increases, our losses, and the costs and expenses to maintain the real estate, likewise increase. ~~Due~~ toThe ~~the ongoing economic crisis, the~~ amount of OREO we hold may increase due to various economic conditions or other factors. Any additional increase in losses and maintenance costs and expenses due to OREO may have material adverse effects on our business, financial condition, and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of OREO properties more difficult, increase maintenance costs and expenses, and may reduce our ultimate realization from any OREO sales. In addition, at acquisition of the OREO we are required to reflect the fair market value in our financial statements. If the OREO declines in value subsequent to its acquisition, we are required to recognize a loss ~~in connection with continuing to hold the property~~. As a result, declines in the value of our OREO have a negative effect on our results of operations and financial condition.

Our use of appraisals in deciding whether to make a loan on or secured by real property or how to value such a loan in the future may not accurately describe the net value of the real property collateral that we can realize.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values in our market area have experienced changes in value in relatively short periods of time, especially given heightened economic uncertainty, this estimate might not accurately describe the net value of the real property collateral after the loan has been closed. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. In addition, we rely on appraisals and other valuation techniques to establish the value of our OREO and to determine certain loan impairments. If these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of OREO, and our ALLL may not reflect accurate loan impairments. The valuation of the property may negatively impact the continuing value of such loan and could materially adversely affect our results of operations and financial condition.

WeThe ~~may~~fair ~~fail~~value toof ~~realize~~our ~~all~~investment ofsecurities ~~the~~can ~~anticipated~~fluctuate ~~benefits~~due ofto ~~our~~factors ~~pending~~outside ~~acquisition~~ of ~~ECB~~our control.

~~The~~As ~~success~~of December 31, 2013, the fair value of our ~~pending~~investment ~~acquisition~~securities ofportfolio ~~ECB~~was ~~will~~approximately ~~depend~~$404.9 ~~on,~~million. ~~among~~Factors ~~other~~beyond ~~things,~~our control can significantly influence the ~~ability~~fair tovalue ~~successfully~~of ~~combine~~securities ~~the~~in ~~Company~~our portfolio and ~~ECB~~can cause potential adverse changes to the fair value of these securities. If weThese factors include, but are not ~~able~~limited to, ~~achieve~~rating ~~this~~agency ~~objective~~actions in respect of the securities, defaults by the ~~anticipated~~issuer ~~benefits~~or ofwith respect to the ~~acquisition~~underlying ~~may~~securities, ~~not~~monetary bepolicy ~~realized~~changes ~~fully~~by orthe atFederal ~~all~~Reserve, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or ~~may~~unrealized ~~take~~losses ~~longer~~in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a security is other-than-temporary ~~expected~~usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to beassess ~~realized~~the probability of receiving all contractual principal and interest payments on the security.

The Company and ECB have operated and, until the completion of the acquisition, will continue to operate, independently. The companies may have challenges integrating different standards, procedures and policies. It is also possible that clients, customers, depositors and counterparties of ECB could choose to discontinue their relationships with the combined company post-acquisition, which could adversely affect our future anticipated performance. These transition matters could have an adverse effect on us during the pre-acquisition period and for an undetermined time after the completion of the acquisition.21

We may fail to realize all of the anticipated benefits, including estimated cost savings, of our 2013 merger with ECB or other potential future acquisitions.

The success of our merger with ECB, which was consummated in April 2013, will depend on, among other things, the ability to continue to successfully complete the integration the Company and ECB. If we are not able to achieve this objective, the anticipated benefits of the merger may not be realized fully or at all, or may take longer than expected to be realized.

In the future, we also may encounter difficulties in obtaining required regulatory approvals, and unexpected contingent liabilities can arise from the businesses we may acquire. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect our operations or results.

Given continued market volatility and uncertainty, we may experience increased credit costs or need to take additional markdowns and allowances for loan losses on the assets and loans acquired that could materially adversely affect our financial condition and results of operations.

Combining with Yadkin maybe more difficult, costly or time consuming than expected, and the anticipated benefits and cost savings of the merger with Yadkin may not be realized.

The Company and Yadkin have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on the Company’s ability to successfully combine and integrate the businesses of the Company and Yadkin in a manner that permits growth opportunities and does not materially disrupt the existing customer relations or result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either Company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined Company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. If the combined companies experience difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. There also may be business disruptions that cause the Company and/or Yadkin to lose customers or cause customers to remove their accounts from the Company and/or Yadkin and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of the Company and Yadkin during this transition period and for an undetermined period after completion of the merger on the combined Company.

Additionally, the combined company may not be able to successfully achieve the level of cost savings, revenue enhancements and other synergies that it expects, and may not be able to capitalize upon the existing customer relationships of each party to the extent anticipated, or it may take longer, or be more difficult or expensive than expected, to achieve these goals. These circumstances could have an adverse effect on the Yadkin’s business, results of operation and stock price.

We are subject to business uncertainties and contractual restrictions while the merger with Yadkin is pending.

Uncertainty about the effect of the merger with Yadkin on employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to seek to change existing business relationships. Retention of certain employees by us may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, our business could be harmed. In addition, subject to certain exceptions, we have agreed to operate the Company's business in the ordinary course prior to closing.

If the merger with Yadkin is not completed, we will have incurred substantial expenses without realizing the expected benefits of the merger.

We have incurred and will continue to incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement with Yadkin. If the merger is not completed, we would have to recognize these expenses without realizing the expected benefits of the merger.

We may fail to realize the cost savings estimated for the proposed ECB merger and unanticipated costs associated with the proposed merger could reduce our future earnings per share.

The success of the proposed merger with ECB will depend, in part, on our ability to realize the estimated cost-savings from combining the businesses of the Company and ECB. Our management estimated at the time the proposed merger was announced that it expects to achieve annual cost-savings of approximately $6.8 million. While the Company and ECB continue to believe these cost-savings estimates are achievable as of the date of this document, it is possible that the potential cost-savings could turn out to be more difficult to achieve than originally anticipated. The cost-savings estimates also depend on the ability to combine ECB with our business in a manner that permits those cost-savings to be realized. If the estimates of the Company and ECB turn out to be incorrect or the Company and ECB are not able to successfully combine their two companies, the anticipated cost-savings may not be realized fully or at all, or may take longer than expected to realize.

We believe that we have reasonably estimated the likely incremental costs of the combined operations of the Company and ECB following the merger. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses such as unanticipated costs to integrate the two businesses, increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on our results of operations and financial condition following the merger. In addition, if actual costs are materially different than expected costs, the merger could have a significant dilutive effect on our earnings per share or book value per share.

Potential future acquisitions, including the proposed ECB merger, may be dilutive to current stockholders.

In the future, we also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we may acquire. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect our operations or results.

Given continued market volatility and uncertainty, we may experience increased credit costs or need to take additional markdowns and allowances for loan losses on the assets and loans acquired that could adversely affect our financial condition and results of operations in the future.

Changes in the interest rate environment could reduce our net interest income, which could reduce our profitability.

As a financial institution, our earnings significantly depend on our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.

In addition, we cannot predict whether interest rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates. In addition, any significant increase in prevailing interest rates could adversely affect our mortgage banking business because higher interest rates could cause customers to request fewer refinancings and purchase money mortgage originations.

We face strong competition from larger, more established competitors.

The banking ~~business~~industry is highly competitive, and we experience strong competition from many other financial institutions, including some of the largest commercial banks in the United States. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other financial institutions that operate in our primary market areas and elsewhere.

We compete with these institutions both in attracting deposits and in making loans, primarily on the basis of the interest rates we pay and yield on these products. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our markets, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification. Further, should we fail to maintain an adequate volume of loans and deposits in accordance with our business strategy, it could have an adverse effect on our profitability in the future.

and do successfully compete with these other financial institutions in our markets, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification. Further, should we fail to maintain an adequate volume of loans and deposits in accordance with our business strategy, it could have an adverse effect on our profitability in the future.

Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts, and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.

Hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which could have an adverse effect on our business or results of operations.

The economy of North Carolina's coastal region is affected, from time to time, by adverse weather events, particularly hurricanes. Our market area includes several coastal communities, and following the completion of the proposed merger with ECB, we will have several additional branches located on the Outer Banks and other portions of coastal North Carolina. We cannot predict whether, or to what extent, damage caused by future hurricanes will affect our operations, our customers, or the economies in our banking markets. However, weather events could cause a disruption in our day-to-day business activities in branches located in coastal communities, a decline in loan originations, destruction or decline in the value of properties securing our loans, or an increase in the risks of delinquencies, foreclosures, and loan losses. Even if a hurricane does not cause any physical damage in our market area, a turbulent hurricane season could significantly affect the market value of all coastal property.

As a community bank, we have different lending risks than larger banks.

~~We provide services to our local communities.~~ Our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to individuals and to small- to medium-sized businesses, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories. Small- and medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact this economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.

We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, and the economies in which we and our borrowers operate, as well as the judgment of our regulators. We cannot assure you that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, profitability or financial condition.

Hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which could have an adverse effect on our business or results of operations.

The economy of North Carolina’s coastal region is affected, from time to time, by adverse weather events, particularly hurricanes. Our market area includes the Outer Banks and other portions of coastal North Carolina. We cannot predict whether, or to what extent damage caused by future hurricanes will affect our operations, our customers, or the economies in our banking markets. Weather events could cause a disruption in our day-to-day business activities in branches located in coastal communities, a decline in loan originations, destruction or decline in the value of properties securing our loans, or an increase in the risks of delinquencies, foreclosures, and loan losses. Even if a hurricane does not cause any physical damage in our market area, a turbulent hurricane season could significantly affect the market value of all coastal property.

We are subject to liquidity risk in our operations.

Liquidity risk is the possibility of being unable, at a reasonable cost and within acceptable risk tolerances, to pay obligations as they come due, to capitalize on growth opportunities as they arise, or to pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis. Liquidity is required to fund various obligations, including credit obligations to borrowers, mortgage originations, withdrawals by depositors, repayment of debt, dividends to stockholders, operating expenses, and capital expenditures. Liquidity is derived primarily from retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operations, and access to other funding sources. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption in the financial markets or negative views and expectations about the prospects for the financial services industry as a whole, given the recent turmoil faced by banking organizations in the domestic and worldwide credit markets. ~~Currently,~~ weOur ~~have~~ access to ~~liquidity to meet our current anticipated needs; however, our access to additional~~ borrowed funds could become limited in the future, and we may be required to pay above market rates for additional borrowed funds, if we are able to obtain them at all, which may adversely affect our results of operations.

The impact of the economic downturn on the performance of other financial institutions in our geographic area, actions taken by our competitors to address the current economic downturn, and the public perception of and confidence in the economy generally, and the banking industry specifically, could negatively impact our performance and operations.

All financial institutions are subject to the same risks resulting from a weakened economy such as increased charge-offs and levels of past due loans and nonperforming assets. As troubled institutions in our market area continue to recognize and dispose of problem assets, the already substantial inventory of residential homes and lots may negatively affect home values and increase the time it takes us or our borrowers to sell existing inventory. The perception that troubled banking institutions (and smaller banking institutions that are not “in trouble”) are risky institutions for purposes of regulatory compliance or safeguarding deposits may cause depositors nonetheless to move their funds to larger institutions. If our depositors should move their funds based on events happening at other financial institutions, our operating results would suffer.

A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

As a financial institution, our operations rely heavily on the secure data processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted theft of financial assets. We cannot assure you that any such failures, ~~interruption~~interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed. While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.

Additionally, we face the risk of operational disruption, failure, termination or capacity constraints on the part of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

~~Risks~~Our ~~Related~~business tois dependent on the ~~Company's~~successful ~~Regulatory~~and ~~Environment~~uninterrupted functioning of our information technology and telecommunications systems and third-party providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could materially adversely affect our business, financial condition, results of operations and prospects.

Deterioration in the soundness of our counterparties could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could create another market-wide liquidity crisis similar to that experienced in late 2008 and early 2009 and could lead to losses or defaults by us or by other institutions. There is no assurance that the failure of our counterparties would not materially adversely affect our results of operations.

We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel.

We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the relationships maintained with our customers by our chief executive officer and other senior officers. The unexpected loss of any of our key employees could have an adverse effect on our business and possibly result in reduced revenues and earnings. The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them.

Our disclosure controls and procedures and internal controls may not prevent or detect all errors or acts of fraud.

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or omission. Additionally, controls can be circumvented by individual acts, by collusion by two or more people and/or by override of the established controls. Accordingly, because of the inherent limitations in our control systems and in human nature, misstatements due to error or fraud may occur and not be detected.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

Changes in accounting standards and management’s selection of accounting methods, including assumptions and estimates, could materially impact our financial statements.

From time to time the SEC and the Financial Accounting Standards Board change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. In addition, management is required to use certain assumptions and estimates in preparing our financial statements, including determining the fair value of certain assets and liabilities, among other items. If the assumptions or estimates are incorrect, we may experience unexpected material consequences.

We may be required to repurchase mortgage loans sold into the secondary market.

We have entered into agreements to sell mortgage loans into the secondary market. These agreements typically require that we repurchase the loan in the event of a default. If we are required to repurchase a large number of mortgage loans from secondary market investors, our financial condition and results of operations could be adversely affected.

Deterioration in the fiscal position of the U.S. federal government and downgrades in U.S. Treasury and federal agency securities could adversely affect us and our subsidiary’s banking operations.

The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating agencies of the credit rating of the U.S. government and federal agencies. In addition to causing economic and financial market disruptions, any future downgrade, failure to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the U.S. federal government, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In particular, such circumstances could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. Also, the adverse consequences could extend to those to whom we extend credit and could adversely affect their ability to repay their loans. Any of these developments could materially adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Regulatory Environment

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including the declaration and payment of cash dividends to ~~common~~ stockholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth and operations. Should we fail to comply with these regulatory requirements, federal and state regulators could impose additional restrictions on the activities of the Company and the Bank, which could materially affect our growth strategy and operating results in the future.

The laws and regulations applicable to the banking industry have recently changed and may continue to change, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

The ~~Dodd-Frank Act was enacted on July 21, 2010. The~~ implications of the Dodd-Frank Act, or its implementing regulations, on our business ~~are~~remain ~~unclear~~somewhat uncertain at this time, but it may adversely affect our business, results of operations, and the underlying value of our ~~common stock~~securities. The full effect of this legislation will not be ~~even~~ reasonably certain until implementing regulations are promulgated, which could take several years in some cases. ~~See~~ ~~“Supervision and Regulation” for additional information.~~

Some or all of the changes, including the new rulemaking authority granted to the ~~newly-created Consumer Financial Protection Bureau~~CFPB, may result in greater reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens for either, or both, the Bank and the Company, and many of our non-bank competitors may remain free from such limitations. This disparity could adversely affect our ability to attract and maintain depositors, to offer competitive products and services, and to expand our business.

Congress may consider additional proposals to ~~substantially~~ change substantially the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies. Such legislation may change existing banking statutes and regulations, as well as our current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

and regulations, as well as our current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on our deposit levels, loan demand, or business and earnings.

Rulemaking changes implemented by the CFPB will result in higher regulatory and compliance costs related to originating and servicing mortgages and may adversely affect our results of operations.

The CFPB recently has finalized a number of significant rules which will impact nearly every aspect of the ~~lifecycle of a~~ residential mortgage business. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. The final rules require banks to, among other things: (i) develop and implement procedures to ensure compliance with a new “reasonable ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage;” (ii) implement new or revised disclosures, policies and procedures for servicing mortgages including, but not limited to, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower'’s principal residence; (iii) comply with additional restrictions on mortgage loan originator compensation; and (iv) comply with new disclosure requirements and standards for appraisals and escrow accounts maintained for “higher priced mortgage loans.”

~~While~~Our ~~the rules generally affect banks our size somewhat less than larger financial institutions, our~~ compliance with the new rule, and its accompanying enforcement by our federal and state regulators, will create operational and strategic challenges for us, as we originate a significant volume of mortgages. For example, business models for cost, pricing, delivery, compensation, and risk management will need to be reevaluated and potentially revised, perhaps substantially. Additionally, programming changes and enhancements to systems will be necessary to comply with the new rules. Some of these new rules ~~will~~became be effective in June 2013, ~~while~~numerous others ~~will~~become be effective in January 2014, and several more will become effective throughout 2014. Forthcoming additional rulemaking affecting the residential mortgage business is also expected. Achieving full compliance in the relatively short timeframe provided for certain of the new rules will result in increased regulatory and compliance costs.

We may be required to raise additional capital in the future, including through new increased minimum capital thresholds established by our regulators as part of their implementation of Basel III, but that capital may not be available when it is needed and could be dilutive to our existing stockholders, which could adversely affect our financial condition and results of operations.

WeOn ~~are required by regulatory authorities to maintain adequate levels of capital to support our operations~~July 2, ~~and our federal and state regulators are considering new regulations~~2013, ~~including, but not limited to, a proposed rulemaking by~~ the Federal Reserve toapproved ~~implement~~a ~~Basel~~final ~~III~~rule ~~capital~~that ~~and~~establishes ~~risk-weighting~~an ~~standards. This~~integrated ~~proposal,~~regulatory ~~if implemented, would require financial institutions to maintain higher minimum~~ capital ~~ratios,~~framework ~~and~~that ~~place~~addresses ashortcomings ~~greater~~in ~~emphasis~~certain ~~on common equity as a component of Tier 1~~ capital~~. Further,~~ ~~the proposed rules require higher risk-weights associated with many types of loans, including residential mortgages and construction loans~~requirements. In ~~order~~The torule ~~support~~implements the ~~operations~~Basel atIII ~~the~~regulatory ~~Bank, we may need to raise~~ capital inreforms ~~the~~from ~~future. Our ability to raise capital, if needed, will depend in part on conditions in~~ the ~~capital~~Basel ~~markets~~Committee ~~at that time, which are outside our control. Accordingly, we cannot assure you of our ability to raise capital, if needed,~~ on ~~terms~~Banking ~~acceptable~~Supervision toand ~~us. If~~certain wechanges ~~cannot~~required ~~raise~~by ~~capital when needed, our ability to operate or further expand our operations could be materially impaired. In addition, if we decide to raise equity capital under such conditions,~~ the ~~interest~~Dodd-Frank ~~of our stockholders could be diluted~~Act.

The major provisions of the new rule applicable to us are:

•

The new rule implements higher minimum capital requirements, includes a new common equity tier 1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity tier 1 capital, additional tier 1 capital, or tier 2 capital. These enhancements will both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The new minimum capital to risk-weighted assets (“RWA”) requirements are a common equity tier 1 capital ratio of 4.5 percent and a tier 1 capital ratio of 6.0 percent, which is an increase from 4.0 percent, and a total capital ratio that remains at 8.0 percent. The minimum leverage ratio (tier 1 capital to total assets) is 4.0 percent. The new rule maintains the general structure of the current PCA framework while incorporating these increased minimum requirements.

•

The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets (“MSAs”), deferred tax assets (“DTAs”), and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity tier 1 capital.

•

Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements will begin on January 1, 2016. A banking organization with a buffer greater than 2.5 percent would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5 percent would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the PCA well-capitalized thresholds.


•	The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

On July 9, 2013, the FDIC issued an “interim final rule” applicable to the Bank that is identical in substance to the final rules issued by the Federal Reserve described above. The Bank is required to comply with the interim final rule on January 1, 2015.

In order to support the operations at the Bank, we may need to raise capital in the future. Our ability to raise capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we cannot assure you of our ability to raise capital, if needed, on terms acceptable to us. If we cannot raise capital when needed, our ability to operate or further expand our operations could be materially impaired. In addition, if we decide to raise equity capital under such conditions, the interests of our stockholders could be diluted.

The FDIC Deposit Insurance assessments that we are required to pay may continue to materially increase in the future, which would have an adverse effect on our earnings.

As a member institution of the FDIC, we are assessed a quarterly deposit insurance premium. Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits. As a result, we may be required to pay significantly higher premiums or additional special assessments that could adversely affect our earnings.

On October 19, 2010, the FDIC adopted a Deposit Insurance Fund (“DIF”) Restoration Plan, which requires the DIF to attain a 1.35 percent reserve ratio by September 30, 2020. In addition, the FDIC modified the method by which assessments are determined and, effective April 1, 2011, adjusted assessment rates, which will range from 2.5 to 45 basis points (annualized), subject to adjustments for unsecured debt and, in the case of small institutions outside the lowest risk category and certain large and highly complex institutions, brokered deposits. Further increased FDIC assessment premiums, due to our risk classification, emergency assessments, or implementation of the modified DIF reserve ratio, could adversely impact our earnings.

Our agreement with the Treasury under the TARP CPP is subject to unilateral change by the Treasury, which could adversely affect our business, financial condition, and results of operations.

Under the capital TARP CPP, the Treasury may unilaterally amend the terms of its agreement with us in order to comply with any changes in federal law. We cannot predict the effects of any of these changes and of the associated amendments.

Risks Related to Ownership of Our Common Stock

Piedmont is a controlling stockholder and may have interests that differ from the interests of our other stockholders.

Piedmont currently owns approximately 90 percent of the Company's outstanding voting power, and, following the closing of the proposed merger with ECB, Piedmont will own approximately 70 percent of the Company's outstanding voting power. As a result, Piedmont will be able to control the election of our directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to our stockholders for approval. Such transactions may include mergers and acquisitions (which may include mergers of the Company and/or its subsidiaries with or into Piedmont and/or Piedmont's other subsidiaries), sales of all or some of the Company's assets (including sales of such assets to Piedmont and/or Piedmont's other subsidiaries) or purchases of assets from Piedmont and/or Piedmont's other subsidiaries, and other significant corporate transactions. Further, as part of these transactions, Piedmont may use its controlling interest in the Company to cause the Company to issue new shares of the Company's common stock on such terms so as to have the effect of diluting the investment of the Company's current stockholders.

Eight of our twelve directors, and all of our executive officers, including our Chief Executive Officer, our Chief Operating Officer, and our Chief Financial Officer, are affiliated with Piedmont. Piedmont also has sufficient voting power to amend our organizational documents. The interests of Piedmont may differ from those of our other stockholders, and it may take actions that advance its interests to the detriment of our other stockholders. Additionally, Piedmont is in the business of making investments in or acquiring financial institutions and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Piedmont may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

As a controlled company, we are exempt from certain NASDAQ corporate governance requirements.

Our common stock is currently listed on the NASDAQ Global Market. NASDAQ generally requires a majority of directors to be independent and requires independent director oversight over the nominating and executive compensation functions. However, under NASDAQ's rules, if another company owns more than 50 percent of the voting power for the election of directors of a listed company, that company is considered a “controlled company” and exempt from rules relating to independence of the board of directors and the compensation and nominating committees. We are a controlled company because Piedmont owns more than 50 percent of our voting power for the election of directors. Accordingly, we are exempt from certain corporate governance requirements, and holders of our common stock may not have all the protections that these rules are intended to provide.

The trading volume in our common stock has been relatively low, and market conditions and other factors may affect the value of our common stock, which may make it difficult for you to sell your shares at times, volumes or prices you find attractive.

While our common stock is traded on The NASDAQ Global Market, our common stock is thinly traded and has substantially less liquidity than the average trading market for many other publicly traded companies. Trading volume may remain low as a result of Piedmont owning a majority stake in the Company.

Thinly traded stocks can be more volatile than stock trading in an active public market. Our stock price has been relatively volatile in the past and it may fluctuate significantly in the future, with these fluctuations being unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector of the economy, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Therefore, our stockholders may not be able to sell their shares at the volume, prices or times that they desire.

The United States Department of the Treasury has rights that are senior to those of our common stockholders.

We have supported our capital operations by issuing preferred stock to the Treasury under the TARP CPP. The preferred stock has dividend rights that are senior to our common stock; therefore, we must pay dividends on the preferred stock before we can pay any dividends on our common stock. In the event of our bankruptcy, dissolution, or liquidation, the holders of our preferred stock must be satisfied before we can make any distributions to our common stockholders.

We can provide no assurances as to when our Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) can be redeemed.

Subject to consultation with our banking regulators, we intend to repurchase our Series A Preferred Stock and the warrant issued to the Treasury as part of our participation in the TARP CPP when we believe the overall economy has entered into a sustained period of recovery. However, we can provide no assurance at this time as to when the Series A Preferred Stock can be repurchased, if at all. Until such time as the Series A Preferred Stock is repurchased, we will remain subject to the terms and conditions of those instruments, which, among other things, require us to obtain regulatory approval to repurchase or redeem common stock or our other classes of securities that rank junior to the Series A Preferred Stock or commencing the payment of a dividend on our shares of common stock. Further, so long as our Series A Preferred Stock remains outstanding, its terms and conditions would provide that the dividends payable on the Series A Preferred Stock would continue to accrue until such time as those shares are repurchased from the Treasury, with such cumulative dividends increasing from 5 to 9 percent per annum commencing in January 2014. As a result, so long as our Series A Preferred Stock remains outstanding, we continue to be subject to additional costs and regulatory requirements that could adversely affect our profitability.

Our ability to pay cash dividends on our securities is limited and we may be unable to pay future dividends.

We make no assurances that we will pay any dividends on our securities in the future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our board of directors may deem relevant. The holders of our capital stock are entitled to receive dividends when, and if, declared by our board of directors out of funds legally available for that purpose. As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business. In addition, our ability to pay dividends is restricted by federal policies and regulations. It is the current policy of the Federal Reserve that bank holding companies should pay cash dividends on capital stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization'’s expected future needs and financial condition. Further, our principal source of funds to pay dividends is cash dividends that we receive from the Bank, which, in turn, will be highly dependent upon the Bank’s historical and projected results of operations, liquidity, cash flows and financial condition, as well as various legal and regulatory prohibitions and other restrictions on the ability of the Bank to pay dividends, extend credit or otherwise transfer funds to the Company.

~~Because~~Anti-takeover weprovisions ~~have~~could ~~participated~~adversely inaffect ~~the TARP CPP,~~ our ~~ability to pay cash dividends on common stock is further limited~~stockholders. ~~Specifically,~~ we may not pay cash dividends on common stock unless all dividends have been paid on the securities issued to the Treasury under the TARP CPP. The TARP CPP also restricts our ability to increase the amount of cash dividends on common stock. Should we defer payment of these dividends for six quarters, the holders of our Series A Preferred Stock will have the right to appoint directors to serve on our board of directors.

Provisions of Delaware law, our Amended and Restated Certificate of Incorporation, as amended (our “Certificate of Incorporation”) and our Amended and Restated Bylaws (our “Bylaws”) could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. For example, our Certificate of Incorporation authorizes our board of directors to issue preferred stock in one or more series, which could be issued as a defensive measure in response to a takeover proposal. There are substantial regulatory limitations on changes of control of bank holding companies. With certain limited exceptions, federal regulations prohibit a person or Company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10 percent (5 percent if the acquirer is a bank holding Company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our Company without prior notice or application to, and the approval of, the Federal Reserve Board. These provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company leases office space for its corporate headquarters in Raleigh, North Carolina. As of December 31, 2012, the Company operated twenty full service branch offices in Apex, Burlington (2), Cary (2), China Grove, Clayton, Fayetteville, Garner, Holly Springs, Knightdale, Pinehurst, Raleigh (3), Salisbury , Sanford, Southern Pines and Wilmington (2), North Carolina. The Company owns eight of its branch offices and leases the other twelve. The Company also leases office space for its operations center in Cary, North Carolina. Management believes that the premises occupied by the Company are well located, are suitably equipped to serve as financial services facilities, and are adequately covered by insurance.

~~Net~~ITEM ~~book value of the Company’s real property used for business purposes as well as furniture, fixtures, and equipment was $17~~2.~~4 million as of December 31, 2012.~~ ~~Additional information relating to premises, equipment and lease commitments is set forth in Note F "Premises and Equipment" in the "Notes to Consolidated Financial Statements" in this report.~~PROPERTIES

The Company leases office space for its corporate headquarters in Raleigh, North Carolina. As of December 31, 2013, the Company operated forty-five banking offices in central and eastern North Carolina. The Company owns many of the buildings and leases other facilities from third parties. The Company also leases office space for its operations center in Cary, North Carolina. Management believes that the premises occupied by the Company are well located, are suitably equipped to serve as financial services facilities, and are adequately covered by insurance.

Net book value of the Company’s real property used for business purposes as well as furniture, fixtures, and equipment was $44.9 million as of December 31, 2013. Additional information relating to premises, equipment and lease commitments is set forth in Note F "Premises and Equipment" and Note K "Leases" in the "Notes to Consolidated Financial Statements" in this report.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company is a party, or of which any of its property is the subject other than routine litigation that is incidental to its business.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

The Company's stock is traded on the ~~NASDAQ~~NYSE ~~Global~~MKT, ~~Market~~LLC under the symbol ~~“CRFN~~"VSB".” There were 35,754,247 shares outstanding as of December 31, ~~2012~~2013 owned by approximately ~~700~~1,000 stockholders of record. The Company’s stock is ~~considered~~not ~~thinly~~heavily traded with fewer than 1040,000 shares traded, on average, per day. The table below sets forth the quarterly high and low trading prices and closing sales prices for the last two years.

	High		Low		Last
2013
First Quarter	$	4.77	$	3.91	$	3.94
Second Quarter	4.41		3.77		4.38
Third Quarter	5.98		4.26		5.31
Fourth Quarter	5.45		4.51		5.27
2012
First Quarter	$	4.60	$	2.88	$	3.85
Second Quarter	6.28		3.28		4.52
Third Quarter	5.59		4.46		4.55
Fourth Quarter	5.49		3.51		4.59
2011
First Quarter	$	4.25	$	2.01	$	4.05
Second Quarter	4.19		3.56		4.05
Third Quarter	4.10		2.04		3.00
Fourth Quarter	4.64		2.27		3.44

The Company's ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital, the availability of liquid assets for distribution, and other factors determined relevant by the Company's Board of Directors. The Company's ability to generate liquid assets for distribution is dependent on the ability of ~~VantageSouth~~the Bank to pay dividends to ~~Crescent~~the ~~Financial~~Company. The Company has not historically declared or paid any cash dividends on its common stock and does not anticipate paying a dividend in ~~2013~~2014. Dividend restrictions are described in the "Supervision and Regulation - Payment of Dividends" section in Item 1 of this report.

InThe ~~the second quarter of 2012, the~~ Company ~~received~~maintains ~~approval~~certain ~~from~~employee ~~the~~and ~~Federal~~director ~~Reserve~~benefit ~~Bank~~plans ofunder ~~Richmond~~which toequity ~~resume~~securities ~~payment~~ of ~~preferred dividends on its Series A Preferred Stock issued to~~ the ~~U.S.~~Company ~~Treasury~~may ~~pursuant~~be ~~to the TARP CPP ("TARP Preferred Stock")~~awarded. ~~The~~See ~~Company~~Note ~~had~~Q ~~deferred~~"Employee ~~dividend~~and ~~payments~~Director onBenefit ~~its~~Plans" ~~TARP~~in ~~Preferred~~Item ~~Stock~~8 ~~beginning with the payment due February 15, 2011, but it paid all deferred cumulative preferred dividends plus current dividends on the quarterly payment date~~ of ~~May~~this ~~15, 2012~~report. ~~The Company is current on all TARP Preferred Stock dividend payments, which is a requirement to pay any common stock dividends.~~

3029

Stock Performance Graph

The following graph compares the cumulative total stockholder return on the Company’s common stock since the last trading day of ~~2007~~2008 with the cumulative return for the same period of: (i) the ~~NASDAQ~~NYSE Composite Index and (ii) the SNL Bank $1B-$5B Index. The graph assumes an investment of $100 on the last trading day of ~~2007~~2008 in the Company’s common stock and in each index and that all dividends, if any, were reinvested.

3130

ITEM 6. SELECTED FINANCIAL DATA

The table below presents summary financial data for the periods presented. The Company's financial ~~data~~results ~~was~~were significantly impacted by ~~Piedmont's~~the acquisitions of Community Bank of Rowan and Crescent Financial ~~in 2011~~Bancshares, ~~the~~Inc. ~~two common control mergers~~ in ~~2012, and push-down accounting that was applied to Legacy VantageSouth's financial statements in February 2012. Financial data for~~ 2011 and ~~2012~~ECB ~~has~~Bancorp, ~~been retrospectively adjusted to combine results of operations for all companies from the time they became commonly controlled by Piedmont~~Inc. ~~Predecessor~~ ~~financial~~in ~~data prior to the periods the companies became under common control reflects historical financial data for Legacy VantageSouth only since it was the first company acquired by Piedmont~~2013.

	SuccessorCompany				PredecessorCompany
	Successor Company							Predecessor Company
(Dollars in thousands, except per share data)	~~February~~As 1of toand ~~December~~for the Year EndedDecember 31,			Period from February 1 to December 31,	~~January 1 to January 31,~~			AsPeriod offrom ~~and~~January ~~for~~1 ~~the~~to ~~Years~~January ~~EndedDecember~~ 31,			As of and for the Years EndedDecember 31,
	2012				2012			2011			2010			2009			2008
	2013			2012				2012			2011			2010			2009
Summary of Operations
Interest income	$	4378,~~519~~742		$	$43,519	~~4,206~~		$	144,~~334~~206		$	414,~~319~~334		$	4,~~945~~319		$	54,~~025~~945
Interest expense	68,~~170~~653			6,170	~~633~~			~~2,778~~633			12,~~181~~778			1,~~909~~181			21,~~784~~909
Net interest income	3770,~~349~~089			37,349	~~3,573~~			113,~~556~~573			311,~~138~~556			3,~~036~~138			23,~~241~~036
Provision for loan losses	5,~~159~~469			5,159	~~195~~			~~880~~195			~~3,172~~880			13,~~792~~172			1,~~050~~792
Net interest income (loss) after the provision for loan losses	3264,~~190~~620			32,190	~~3,378~~			103,~~676~~378			~~(34~~10,676		)	~~1,244~~(34		)	1,~~191~~244
Non-interest income	1125,~~327~~180			11,327	~~657~~			~~1,716~~657			~~(824~~1,716		)	~~280~~(824		)	~~364~~280
Non-interest expense	4380,~~210~~612			43,210	~~3,236~~			113,236			311,~~953~~236			3,~~066~~953			23,~~935~~066
Income (loss) before income taxes	~~307~~9,188			307	~~799~~			~~1,156~~799			(41,~~811~~156		)	(14,~~542~~811		)	(1,~~380~~542		)
Income tax expense (benefit)	(32,~~486~~014		)	(3,486	~~270~~	)		~~188~~270			—188			—			—
Net income (loss)	37,~~793~~174			3,793	~~529~~			~~968~~529			~~(4,811~~968		)	(14,~~542~~811		)	(1,~~380~~542		)
Dividends and accretion on preferred stock	12,~~346~~493			1,346	~~122~~			~~182~~122			—182			—			—
Net income (loss) available to common stockholders	$	24,~~447~~681		$	$2,447	~~407~~		$	~~786~~407		$	~~(4,811~~786	)	$	(14,~~542~~811	)	$	(1,~~380~~542	)
Per Common Share
Net income (loss), basic	$	0.0711		$	$0.07	~~0.01~~		$	0.0701		$	(0.7707	)	$	(0.2777	)	$	(0.2427	)
Net income (loss), diluted	$	0.0711		$	$0.07	~~0.01~~		$	0.0701		$	(0.7707	)	$	(0.2777	)	$	(0.2427	)
Book value	$	4.1812		$	NA4.18			$NA	~~4.08~~		$	04.7208		$	10.0972		$	1.3209
Tangible book value	$	3.3742		$	NA3.37			$NA	~~3.27~~		$	03.7227		$	10.0972		$	1.3209
Weighted average shares outstanding:
Basic	3543,~~724~~473,~~513~~096			35,724,513	~~35,511,770~~			1035,~~858~~511,~~223~~770			610,~~241~~858,~~901~~223			56,~~732~~241,~~356~~901			5,732,356
Diluted	3543,~~796~~636,~~731~~498			35,796,731	~~35,534,050~~			1035,~~916~~534,~~115~~050			610,~~241~~916,~~901~~115			56,~~732~~241,~~356~~901			5,732,356
Common shares outstanding	3546,~~754~~037,~~247~~685			35,549,785	~~35,549,785~~			35,566,535			1135,~~831~~566,~~770~~535			511,~~732~~831,~~356~~770			5,732,356
Balance Sheet Data
Total assets	$	12,~~085~~119,~~225~~948		$	NA1,085,225			$NA	~~1,087,621~~		$	811,~~140~~087,621		$	9481,~~766~~140		$	94,~~997~~766
Cash and cash equivalents	50100,~~463~~779			50,463	NA			~~46,472~~NA			246,~~722~~472			102,~~475~~722			210,~~630~~475
Investment securities(1)	~~136~~404,~~491~~888			136,491	NA			~~170,004~~NA			10170,~~454~~004			610,~~731~~454			106,~~483~~731
Loans(2)	~~779~~1,~~855~~398,329			779,855	NA			~~740,303~~NA			63740,~~402~~303			7363,~~535~~402			7773,~~996~~535
Allowance for loan losses	37,~~998~~043			3,998	NA			~~2,131~~NA			12,~~880~~131			1,~~964~~880			1,~~174~~964
Deposits	~~873~~1,~~222~~675,309			873,222	NA			~~886,244~~NA			63886,~~766~~244			7863,~~620~~766			7778,~~559~~620
Stockholders’ equity	~~173~~232,~~941~~299			173,941	NA			~~169,509~~NA			8169,~~564~~509			68,~~262~~564			76,~~595~~262
Selected Performance Ratios
Return on average assets	0.3940		%	0.39	~~0.58~~	%	%	0.3258		%	(50.4132		)%	(15.6141		)%	(1.5861		)%
Return on average stockholders’ equity	23.4128		%	2.41	~~3.67~~	%	%	23.5667		%	~~(42~~2.4956		)%	(2042.6949		)%	(1620.6269		)%
Net interest margin	4.4043		%	4.40	~~4.55~~	%	%	4.1955		%	34.7819		%	3.3878		%	23.7338		%
Efficiency ratio(3)	8884.7762		%	88.77	~~76.50~~	%	%	8476.6650		%	~~101~~84.9666		%	92101.4696		%	~~112~~92.6746		%
Asset Quality Ratios
Net charge-offs to average loans	0.3720		%	0.37	—	%	%	~~0.31~~—		%	40.7731		%	14.2877		%	01.6528		%
Allowance for loan losses to loans	0.5251		%	0.52	NA	%		~~0.29~~NA		%	20.9829		%	2.6798		%	12.5067		%
Nonperforming loans to loans	21.4451		%	1.67	NA	%		~~5.09~~NA		%	05.7109		%	80.4671		%	28.2346		%
Nonperforming assets to total assets	1.7150		%	1.71	NA	%		~~3.44~~NA		%	13.6544		%	81.0765		%	38.1307		%
Capital Ratios
Total risk-based capital(4)	12.70		%	14.96		%		NA			11.85		%	14.65		%	9.18		%
Tier 1 risk-based capital(4)	11.85		%	13.66		%		NA			10.59		%	13.38		%	7.91		%
Tier 1 leverage(4)	10.16		%	11.45		%		NA			8.49		%	10.47		%	6.29		%
Tangible common equity to tangible assets	7.54		%	11.42		%		NA			10.99		%	10.55		%	6.61		%

3231

	SuccessorCompany		PredecessorCompany
(Dollars in thousands, except per share data)	February 1 to December 31,		January 1 to January 31,	As of and for the Years EndedDecember 31,
	2012		2012	2011		2010		2009		2008
Capital Ratios
Total risk-based capital(4)	14.96	%	NA	11.85	%	14.65	%	9.18	%	10.48	%
Tier 1 risk-based capital(4)	13.66	%	NA	10.59	%	13.38	%	7.91	%	9.23	%
Tier 1 leverage(4)	11.45	%	NA	8.49	%	10.47	%	6.29	%	7.31	%
Tangible common equity to tangible assets	11.42	%	NA	10.99	%	10.55	%	6.61	%	7.99	%


(1)	Investment securities include available-for-sale and held-to-maturity securities.


(2)	Loans include loans held for sale.


(3)	Efficiency ratio is non-interest expense divided by the sum of net interest income and non-interest income.


(4)	Regulatory capital ratios reflect the Bank's capital ratios. Predecessor periods reflect regulatory capital ratios of Legacy VantageSouth only, which was the predecessor company due to the change in reporting entity.

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

~~Crescent~~The ~~Financial Bancshares, Inc. (the “~~Company” ~~or "Crescent Financial"),~~ is a bank holding company incorporated under the laws of Delaware in 2011. ~~and~~The Company is a ~~successor~~majority-owned ~~company~~subsidiary toof Piedmont. On July 22, 2013, the Company changed its name from Crescent Financial ~~Corporation~~Bancshares, ~~which~~Inc. to ~~was~~VantageSouth aBancshares, ~~bank~~Inc. ~~holding~~and ~~company~~transferred ~~incorporated~~the ~~under~~listing of its common stock to the ~~laws~~NYSE ofMKT, ~~North~~LLC ~~Carolina~~under inthe ~~2001~~ticker symbol "VSB." The Company conducts its business operations primarily through its ~~commercial~~wholly-owned bank subsidiary, VantageSouth Bank ~~(formerly known as Crescent State Bank)~~. The Company's headquarters are located in Raleigh, North Carolina. ~~Crescent~~ ~~Financial~~The isBank was incorporated in 1998 as a ~~subsidiary~~North ofCarolina-chartered ~~Piedmont~~commercial ~~Community~~bank ~~Bank~~and ~~Holdings,~~operates ~~Inc.~~forty-five ~~("Piedmont")~~banking offices in central and eastern North Carolina.

~~VantageSouth~~Mergers Bank (or the "Bank") was incorporated in 1998 as a North Carolina-chartered commercial bank. The Bank serves central North Carolina to the coast with twenty full service branch offices located in Apex, Burlington (2), Cary (2), China Grove, Clayton, Fayetteville, Garner, Holly Springs, Knightdale, Pinehurst, Raleigh (3), Salisbury, Sanford, Southern Pines and ~~Wilmington (2), North Carolina.~~Acquisitions

In 2010 and 2011, Piedmont ~~Acquisition~~acquired ofcontrolling ~~Crescent~~interests ~~Financial~~in three financial institutions which are summarized below.



Acquired Institution	Acquisition Date	Percentage of Institution Initially Acquired		Purchase Price		Total Assets Acquired		Total Deposits Acquired
VantageSouth Bank	February 19, 2010	62	%	$	7,694	$	99,189	$	76,031,000
Community Bank of Rowan	April 19, 2011	100	%	9,500,000		139,353,000		125,741,000
Crescent Financial Bancshares, Inc.	November 18, 2011	88	%	75,000		995,156		678,289,000

~~Crescent~~On ~~Financial's~~February ~~financial~~1, ~~condition~~2012, ~~and~~Piedmont ~~results~~merged ofCommunity ~~operations~~Bank ~~were~~of ~~significantly~~Rowan ~~impacted~~("Rowan") byinto ~~Piedmont's~~VantageSouth ~~investment. Because~~Bank of("Legacy ~~the~~VantageSouth") ~~level~~and ofsimultaneously ~~Piedmont's~~purchased ~~ownership~~the ~~and~~remaining ~~control~~equity ~~following~~interests ~~the~~in ~~controlling~~Legacy ~~investment,~~VantageSouth ~~push~~from non-~~down~~controlling ~~accounting was applied~~shareholders. ~~Accordingly~~Then, ~~Crescent~~on ~~Financial's~~November ~~assets~~30, ~~liabilities~~2012, ~~and~~Piedmont ~~non-controlling~~merged ~~interests~~the ~~were~~combined ~~adjusted~~Legacy toVantageSouth ~~estimated~~into ~~fair~~Crescent ~~value~~State ~~at the acquisition date~~Bank, ~~and~~which ~~the~~was ~~allowance~~immediately ~~for~~rebranded ~~loan~~as ~~losses~~VantageSouth ~~was eliminated~~Bank.

~~Piedmont~~In ~~Acquisition~~2013, ofthe ~~VantageSouth~~combined ~~Bank~~Company acquired another financial institution which is summarized below.



Acquired Institution	Acquisition Date	Percentage of Institution Initially Acquired		Purchase Price		Total Assets Acquired at Fair Value		Total Deposits Acquired at Fair Value
ECB Bancorp, Inc.	April 1, 2013	100	%	$	40,629	$	856,076	$	736,114

ECB Bancorp, Inc. Merger

On April 1, 2013, the Company completed the merger of ECB Bancorp, Inc. ("ECB") with and into the Company (the "ECB Merger"). The ECB Merger was completed pursuant to an Agreement and Plan of Merger dated as of September 25, 2012 (the "ECB Merger Agreement"). Immediately following the ECB Merger, The East Carolina Bank, a wholly-owned subsidiary of ECB, was merged with and into VantageSouth Bank. Upon the closing of the ECB Merger, each outstanding share of ECB common stock was converted into the right to receive 3.55 shares of the Company's common stock. The aggregate merger consideration consisted of 10.3 million shares of the Company’s common stock. Based upon the market price of the Company’s common stock at the ECB Merger date, the aggregate purchase price was $40.6 million.

In connection with the ECB Merger, the Company applied the acquisition method of accounting to ECB's balance sheet. Therefore, all acquired assets and liabilities were adjusted to fair value, and the historical allowance for loan losses was eliminated. The Company recorded a one-time acquisition gain of $7.8 million in the second quarter of 2013, which reflected the amount by which the fair value of acquired net assets exceeded the combined purchase price and fair value of other equity interests. The Company has a one-year measurement period from the acquisition date to finalize the recorded fair values of net assets acquired. The acquisition gain may change if initial fair value estimates are revised within the measurement period. The acquisition of ECB increased the Company's total assets by 43 percent, deposits by 45 percent, and stockholders' equity by 28 percent at the merger date. Therefore, the Company's results of operations and financial position were significantly impacted in 2013 by the ECB Merger.

~~Piedmont~~Proposed ~~Acquisition~~Merger ofWith ~~Community~~Yadkin ~~Bank~~Financial ~~of Rowan~~Corporation

On January 27, 2014, the Company and Piedmont entered into an Agreement and Plan of Merger with Yadkin Financial Corporation (“Yadkin”) under which the Company and Piedmont will each merge with and into Yadkin (referred to collectively as the “Yadkin Merger”). Immediately following the completion of ~~Community~~the Yadkin Merger, VantageSouth Bank ofwill ~~Rowan~~merge with and into ~~Legacy~~Yadkin ~~VantageSouth~~Bank, Yadkin’s wholly-owned banking subsidiary.

OnIn ~~April~~the ~~19,~~Yadkin ~~2011~~Merger, ~~Piedmont~~each ~~acquired~~outstanding ~~Community~~share ~~Bank~~ of ~~Rowan,~~the aCompany's ~~North~~common ~~Carolina-chartered~~stock, ~~bank~~other ~~(“Rowan”). Piedmont~~than ~~purchased~~shares ~~all~~held ~~813~~by Piedmont,~~083~~ ~~shares~~will ofbe ~~Rowan’s~~converted ~~common~~into ~~stock~~the ~~for~~right anto ~~aggregate~~receive ~~purchase~~0.3125 ~~price~~shares of ~~$9.5~~Yadkin ~~million~~common stock. ~~Immediately~~ ~~following~~Pursuant to the ~~acquisition~~Yadkin Merger Agreement, ~~Piedmont~~Yadkin ~~purchased~~will anbe ~~additional~~the ~~569~~legal acquirer,~~158~~ ~~shares~~but ofthe ~~newly~~Company ~~issued~~(consolidated ~~common~~with ~~stock~~Piedmont) ~~for~~will anbe ~~aggregate~~the ~~price~~accounting ofacquirer ~~$7.0~~due ~~million. Since~~to ~~Piedmont~~the ~~owned~~Company ~~100%~~controlling ofa ~~Rowan~~larger ~~following~~percentage ~~its~~of ~~acquisition,~~outstanding ~~purchase~~shares ~~accounting~~of ~~fair~~the ~~value~~combined ~~adjustments~~company. ~~were~~As ~~pushed~~of ~~down~~December to31, ~~Rowan’s~~2013, ~~financial~~Yadkin ~~statements~~had attotal ~~that~~assets ~~date~~of $1. In8 ~~addition~~billion, ~~Legacy~~deposits ~~VantageSouth~~of $1.5 billion, and ~~Rowan~~shareholders' ~~became~~equity ~~commonly~~of ~~controlled~~$184.5 bymillion. ~~Piedmont~~The ~~beginning~~Yadkin onMerger ~~the~~is ~~date~~subject ofto ~~Piedmont’s~~all ~~acquisition~~stockholder ofand ~~Rowan~~regulatory approvals.

OnYadkin ~~February~~Bank 1,is ~~2012,~~ a ~~transaction~~full-service ~~was~~community ~~completed~~bank ~~whereby~~with ~~Piedmont~~thirty-three ~~purchased~~branches ~~the~~throughout ~~remaining~~its ~~non-controlling~~two ~~interests~~regions in ~~Legacy~~North ~~VantageSouth~~ and ~~simultaneously~~South ~~merged~~Carolina. ~~Rowan~~The ~~into~~Western ~~Legacy~~Region ~~VantageSouth. Piedmont~~serves ~~purchased~~Avery, ~~all~~Watauga, ~~remaining~~Ashe, ~~shares~~Surry, ofWilkes, ~~Legacy~~Yadkin, ~~VantageSouth~~Durham, ~~common~~and ~~stock~~Orange ~~from~~Counties ~~non-controlling~~in ~~shareholders~~Nort ~~for~~Carolina. anThe ~~aggregate~~Southern ~~purchase~~Region ~~price~~serves ofIredell, ~~$4.8 million~~Mecklenburg, orand ~~$4.35~~Union ~~per~~Counties ~~share. Following~~in ~~this~~North ~~transaction~~Carolina, ~~Piedmont~~and ~~wholly~~Cherokee ~~owned~~and ~~the~~York ~~combined~~Counties ~~Legacy~~in ~~VantageSouth~~South ~~except for directors' qualifying shares~~Carolina. ~~Because~~ ~~Piedmont~~Yadkin ~~purchased~~Bank ~~the~~provides ~~remaining~~mortgage ~~non-controlling~~lending ~~common~~services ~~stock~~through ofits ~~Legacy~~mortgage ~~VantageSouth~~division, ~~with~~Yadkin ~~this transaction~~Mortgage, ~~push-down~~headquartered ~~accounting was applied to Legacy VantageSouth so that the basis reported~~ in ~~Legacy~~Greensboro, ~~VantageSouth’s~~North ~~financial~~Carolina. ~~statements~~Securities ~~from~~brokerage ~~that~~services ~~date~~are ~~forward~~provided ~~reflected~~by ~~Piedmont’s~~Yadkin ~~basis~~Wealth, ~~in Legacy VantageSouth~~Inc. ~~The~~, ~~merger of Rowan into Legacy VantageSouth was~~ a ~~merger~~Yadkin ofBank ~~commonly~~subsidiary ~~controlled~~with ~~companies~~offices ~~and~~located ~~was~~throughout ~~accounted~~the ~~for~~branch ~~in a manner similar to a pooling of interests transaction~~network.

Merger of Legacy VantageSouth into Crescent Financial and Change in Reporting Entity

Proposed ECB Bancorp, Inc. Merger

Executive Summary

The following is a summary of the Company's financial results and significant ~~events~~accomplishments in ~~2012~~2013 and the beginning of 2014:

• ~~Net~~In ~~income~~January ~~totaled~~2014, ~~$3.8 million in~~ the ~~successor~~Company ~~period~~announced ~~from~~a ~~February~~proposed 1merger-of-equals towith ~~December~~Yadkin 31Financial Corporation, ~~2012~~which ~~("2012~~will ~~successor~~create ~~period") and $529 thousand in~~ the ~~predecessor~~largest ~~period~~community ~~from~~bank ~~January 1 to January 31, 2012 ("2012 predecessor period"). Net income~~ in ~~the~~North ~~predecessor year ended December 31, 2011 totaled $968 thousand~~Carolina.


•	In January 2014, the Company completed a private placement of $46.9 million of its common stock, the proceeds of which were used in February 2014 to repurchase its outstanding preferred stock issued to the U.S. Treasury.


•	The Company completed the ECB merger and system conversion in the second quarter of 2013.


•	Net income was $7.2 million for the year ended December 31, 2013, $3.8 million in the 2012 successor period, and $529 thousand in the 2012 predecessor period


•	Pre-tax, pre-provision operating earnings totaled $20.3 million for the year ended December 31, 2013, $7.4 million in the 2012 successor period, and $1.1 million in the 2012 predecessor period.


•	Net interest margin was 4.43 percent for the year ended December 31, 2013 compared to 4.40 percent in the 2012 successor period and 4.55 percent in the 2012 predecessor period.


•	The Company was named the top small business lender in North Carolina by the Small Business Administration ("SBA").


•	Operating efficiency ratio improved to 75.40 percent for the year ended December 31, 2013 from 82.27 percent in the 2012 successor period. The operating efficiency ratio was 74.66 percent in the 2012 predecessor period.

The following discussion and analysis includes descriptions of significant transactions, trends and other factors affecting the Company’s operating results and financial condition for the year ended December 31, 2013, the 2012 successor period, and the 2012 predecessor period. Because of the separate reporting for predecessor and successor periods in 2012, the Company's results of operations between these periods are not comparable. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this report.

•Non-GAAP ~~After~~Financial ~~preferred~~Measures stock dividends, the Company recognized net income of $0.07 per basic and diluted common share in the 2012 Successor Period and net income of $0.01 per common share during the 2012 predecessor period. Net income per common share equaled $0.07 for the predecessor year ended December 31, 2011.

•Statements ~~Merger,~~included ~~conversion~~in this management's discussion and reanalysis include non-~~branding~~GAAP ~~costs~~financial ~~totaled~~measures ~~$3.4~~and ~~million~~should inbe read along with the ~~2012~~accompanying ~~successor~~tables ~~period~~which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company's management uses these non-GAAP financial measures, ~~which~~including: ~~reduced~~(i) net operating earnings (loss); (ii) pre-tax, pre-provision operating earnings; (iii) operating non-interest income, by(iv) $2operating non-interest expense, (v) operating efficiency ratio, (vi) adjusted allowance for loan losses to loans; and (vii) tangible common equity, in its analysis of the Company's performance.1 ~~million~~The onadjusted anallowance ~~after~~for loan losses non-~~tax~~GAAP ~~basis~~reconciliation is presented within the allowance for loan losses section of management's Analysis of Financial Condition below. The tangible common equity non-GAAP reconciliations, which include tangible book value per share and the tangible common equity to tangible assets ratio, are presented within the capital section of management's Analysis of Financial Condition below.

• Annualized net loan growth in the last six months of 2012 was 19 percent, which was driven by loan originations for the second half of 2012 totaling $162.3 million, a significant increase from $82.9 million in the first half of 2012. Fourth quarter 2012 loan originations totaled $87.6 million.



	Successor Company						Predecessor Company
(Dollars in thousands, except per share data)	Year Ended December 31, 2013			Period from February 1 to December 31, 2012			Period from January 1 to January 31, 2012
OPERATING EARNINGS
Net income (GAAP)	$	7,174		$	3,793		$	529
Securities gains	(1,215		)	(1,251		)	—
Gain on acquisition	(7,773		)	—			—
Merger and conversion costs	14,638			3,164			78
Income tax effect of adjustments	(5,175		)	(185		)	(30		)
Deferred tax asset valuation allowance reversal	—			(3,300		)	—
Deferred tax asset revaluation from reduction in state income tax rates	1,218			—			—
Net operating earnings (Non-GAAP)	8,867			2,221			577
Dividends and accretion on preferred stock	2,493			1,346			122
Net operating earnings available to common stockholders (Non-GAAP)	$	6,374		$	875		$	455

OPERATING EARNINGS PER COMMON SHARE
Basic (Non-GAAP)	$	0.15		$	0.02		$	0.01
Diluted (Non-GAAP)	$	0.15		$	0.02		$	0.01

PRE-TAX, PRE-PROVISION OPERATING EARNINGS
Net income (GAAP)	$	7,174		$	3,793		$	529
Provision for loan losses	5,469			5,159			195
Income tax expense (benefit)	2,014			(3,486		)	270
Pre-tax, pre-provision income	14,657			5,466			994
Securities gains	(1,215		)	(1,251		)	—
Gain on acquisition	(7,773		)	—			—
Merger and conversion costs	14,638			3,164			78
Pre-tax, pre-provision operating earnings (Non-GAAP)	$	20,307		$	7,379		$	1,072

OPERATING NON-INTEREST INCOME
Non-interest income (GAAP)	$	25,180		$	11,327		$	657
Gain on acquisition	(7,773		)	—			—
Operating non-interest income (Non-GAAP)	$	17,407		$	11,327		$	657

OPERATING NON-INTEREST EXPENSE
Non-interest expense (GAAP)	$	80,612		$	43,210		$	3,236
Merger and conversion costs	(14,638		)	(3,164		)	(78		)
Operating non-interest expense (Non-GAAP)	$	65,974		$	40,046		$	3,158

OPERATING EFFICIENCY RATIO
Efficiency ratio (GAAP)	84.62		%	88.77		%	76.50		%
Effect to adjust for gain on acquisition	7.51		%	—		%	—		%
Effect to adjust for merger and conversion costs	(16.73		)%	(6.50		)%	(1.84		)%
Operating efficiency ratio (Non-GAAP)	75.40		%	82.27		%	74.66		%

• Net interest margin improved to 4.40 percent in the 2012 successor period and 4.55 percent in the 2012 predecessor period from 4.19 percent in the predecessor year ended December 31, 2011.

• Asset quality improved as nonperforming assets to total assets declined to 1.71 percent as of December 31, 2012 from 3.44 percent as of December 31, 2011.

• Rowan was successfully merged into Legacy VantageSouth in February 2012.

• Legacy VantageSouth was successfully merged into Crescent State Bank in November 2012.

• The combined bank was re-branded as VantageSouth Bank, which now operates on a single technology platform and utilizes common business processes and policies.

• The Company signed a merger agreement with ECB and expects to consummate the transaction in April 2013.

The following discussion and analysis includes descriptions of significant transactions, trends and other factors affecting the Company’s operating results and financial condition for the 2012 successor period, the 2012 predecessor period, and the predecessor year ended December 31, 2011. Because of the separate reporting for predecessor and successor periods in 2012 as well as the two mergers between entities under common control in 2012 and change in reporting entity, the Company's results of operations between these periods are not comparable. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this report.

Analysis of Results of Operations

Net income totaled $3.8 million in the 2012 successor period and $529 thousand in the 2012 predecessor period. Net income in the predecessor year ended December 31, 2011 totaled $968 thousand. Net income in the 2012 successor period was significantly influenced by merger, conversion and re-branding costs as well as a tax benefit from the reversal of a valuation allowance on deferred taxes generated by Legacy VantageSouth. After dividends and accretion on preferred stock, the Company recognized net income available to common stockholders of $2.4 million, or $0.07 per basic and diluted common share, in the 2012 successor period and net income available to common stockholders of $407 thousand, or $0.01 per basic and diluted common share, during the 2012 predecessor period. Net income available to common stockholders equaled $786 thousand, or $0.07 per basic and diluted common share, in 2011.

Two commonly used measures of bank profitability are return on average assets (net income as a percentage of average total assets)and return on average stockholders' equity (net income as a percentage of average stockholders' equity). Annualized return on average assets was 0.39 percent for the 2012 successor period, 0.58 percent for the 2012 predecessor period, and 0.32 percent in 2011. Annualized return on average stockholders' equity was 2.41 percent for the 2012 successor period, 3.67 percent for the 2012 predecessor period, and 3.67 percent in 2011.

Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company without regard to transactional activities. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.

Analysis of Results of Operations

Net income was $7.2 million in 2013 while net income was $3.8 million in the 2012 successor period and $529 thousand in the 2012 predecessor period. After dividends and accretion on preferred stock, net income available to common stockholders was $4.7 million, or $0.11 per common share, in 2013 while net income available to common stockholders was $2.4 million, or $0.07 per common share, in the 2012 successor period and $407 thousand, or $0.01 per common share, in the 2012 predecessor period. Net income in 2013 was significantly influenced by the ECB merger.

Net operating earnings, which exclude securities gains, merger and conversion costs, and non-recurring income tax adjustments, was $8.9 million in 2013, $2.2 million in the 2012 successor period, and $577 thousand in the 2012 predecessor period.

Two commonly used measures of bank profitability are return on average assets (net income as a percentage of average total assets)and return on average stockholders' equity (net income as a percentage of average stockholders' equity). Annualized return on average assets was 0.40 percent in 2013, 0.39 percent for the 2012 successor period, and 0.58 percent in the 2012 predecessor period. Annualized return on average stockholders' equity was 3.28 percent in 2013, 2.41 percent for the 2012 successor period, and 3.67 percent in the 2012 predecessor period.

Net Interest Income

Net interest income in 2013 totaled $70.1 million while net interest income totaled $37.3 million in the 2012 successor period and $3.6 million in the 2012 predecessor period. Average earning assets totaled $1.58 billion in 2013, which was a significant increase from $934.1 million in the 2012 successor period and $934.3 million in the 2012 predecessor period. The increase in average earning assets was primarily the result of assets acquired in the ECB merger as well as organic loan growth.

Net interest ~~income~~margin ~~totaled~~was ~~$37~~4.343 ~~million~~percent in 2013, which was an increase from 4.40 percent in the 2012 successor period~~. Taxable~~ ~~equivalent~~but ~~net~~a ~~interest~~decline ~~margin~~from ~~("NIM") was~~ 4.4055 percent in the 2012 predecessor period. The increase in net interest margin from the 2012 successor period ~~compared~~was primarily due to 4a reduction in the cost of interest-bearing liabilities which fell from 0.5586 percent in the 2012 ~~predecessor~~successor period ~~and~~to 40.1962 percent in ~~2011~~2013. ~~The~~ ~~yield~~Declining yields on interest-earning assets ~~was~~partially ~~5.12~~offset ~~percent~~the improvement in the ~~2012~~cost ~~successor~~of ~~period~~interest-bearing ~~compared~~liabilities due to the origination of new loans at lower current market rates and the reinvestment of principal paydowns and proceeds from sales of securities at lower current market rates. The average yield on loans decreased from 5.3597 percent in the 2012 ~~predecessor~~successor period and 56.2015 percent in ~~2011~~the 2012 Predecessor Period to 5. ~~Funding~~92 ~~costs~~percent ~~declined~~in as2013, and the ~~cost~~average ofyield ~~interest-bearing~~on ~~liabilities~~investment ~~improved~~securities todeclined 0from 2.8666 percent in the 2012 successor period ~~from~~and 02.9574 percent in the 2012 predecessor period ~~and~~to 12.1514 percent in ~~2011~~2013.

Income accretion on purchased loans totaled $1420.76 million in ~~the 2012 successor period~~2013, which consisted of $13.96 million of accretion on purchased credit-impaired ("PCI") loans and $~~832~~7.0 ~~thousand~~million of accretion income on purchased non-impaired loans. ~~PCI~~ ~~loan~~Income accretion ~~represents all interest income recorded for those loans in the period while accretion income~~ on purchased ~~non-impaired~~ loans ~~represents~~totaled ~~accretion~~$14.7 ofmillion ~~the~~and ~~fair~~$1.6 ~~value~~million ~~discount~~in on the ~~effective~~2012 ~~yield~~successor ~~method,~~and ~~which~~predecessor ~~increased~~periods, ~~interest income above contractual yields~~respectively. Time deposit premium amortization totaled $23.70 million in 2013, which reduced interest expense, ~~while~~and ~~accretion~~net premium amortization of ~~the~~short-term ~~discount~~borrowings onand long-term debt totaled $~~136~~3 thousand, which ~~increased~~also reduced interest expense. ~~The~~ ~~net~~Acquisition ~~decrease~~accounting ~~in interest expense related to time deposit~~ amortization ~~and long-term debt accretion~~ reduced the Company's cost of interest-bearing liabilities by 0.3822 percent in ~~the 2012 successor period~~2013.

Average earning assets totaled $934.1 million in the 2012 successor period, which included $727.3 million in average loans, $164.1 million in average investment securities, and $42.6 million in average federal funds sold and interest-earning cash in other banks. Average loan balances in the period were positively impacted by strong loan growth in the last half of 2012. Annualized net loan growth in the last six months of 2012 was 19 percent, which was driven by loan originations for the second half of 2012 totaling $162.3 million, a significant increase from $82.9 million in the first half of 2012.

Average interest-bearing liabilities totaled $785.8 million in the 2012 successor period, which included $759.5 million in average interest-bearing deposits, $3.4 million in average short-term borrowings, and $23.0 million in average long-term debt.

2012 predecessor period

Net interest income totaled $3.6 million in the 2012 predecessor period. NIM was 4.55 percent in the 2012 predecessor period, which was an increase from 4.19 percent in 2011. The yield on earning assets was 5.35 percent in the 2012 predecessor period compared to 5.20 percent in 2011. Funding costs declined as the cost of interest-bearing liabilities improved to 0.95 percent in the 2012 predecessor period from 1.15 percent in 2011.

Income accretion on purchased loans totaled $1.6 million in the 2012 predecessor period, which consisted of $1.4 million of accretion on PCI loans and $203 thousand of accretion income on purchased non-impaired loans. Time deposit premium amortization totaled $311 thousand, which reduced interest expense, while accretion of the discount on long-term debt totaled $12 thousand, which increased interest expense. The net decrease in interest expense related to time deposit amortization and long-term debt accretion reduced the cost of interest-bearing liabilities by 0.46 percent in the 2012 predecessor period.

Average earning assets totaled $934.3 million in the 2012 predecessor period, which included $762.1 million in average loans, $180.2 million in average investment securities, and $23.7 million in average federal funds sold and interest-earning cash. Average interest-bearing liabilities totaled $787.3 million in the 2012 predecessor period, which included $759.5 million in average interest-bearing deposits, $968 thousand in average short-term borrowings, and $24.2 million in average long-term debt.

Predecessor year ended December 31, 2011

Net interest income totaled $11.6 million in the predecessor year ended December 31, 2011. In 2011, NIM was 4.19 percent, the yield on earning assets was 5.20 percent, and the cost of interest-bearing liabilities was 1.15 percent. Piedmont's acquisitions of Rowan in 2011 significantly impacted the Company's balance sheet and NIM.

Income accretion on purchased loans totaled $3.7 million in 2011, which consisted of $2.4 million of accretion on PCI loans and $1.3 million of accretion income on purchased non-impaired loans. Time deposit premium amortization totaled $632 thousand, which reduced interest expense, while accretion of the discount on long-term debt totaled $17 thousand, which increased interest expense. The net decrease in interest expense related to time deposit amortization and long-term debt accretion reduced the cost of interest-bearing liabilities by 0.29 percent in 2011.

Average earning assets totaled $276.3 million in 2011, which included $201.1 million in average loans, $29.8 million in average investment securities, and $45.4 million in average federal funds sold and interest-earning cash. The mix of average earning assets in 2011 was heavily impacted by Crescent Financial's investment portfolio restructuring following its acquisition in November 2011. This portfolio restructuring elevated the average balance of low-yielding federal funds sold and interest-earning cash in the period. Average interest-bearing liabilities totaled $241.1 million in 2011, which included $211.8 million in average interest-bearing deposits, $1.4 million in average short-term borrowings, and $27.9 million in average long-term debt.

The following table summarizes the major components of net interest income and the related yields and costs for the periods presented.

	Successor Company							~~Predecessor Company~~								Predecessor Company
	February 1 to December 31, 2012							January 1 to January 31, 2012								Year Ended December 31, 2011
	Year Ended December 31, 2013						Period from February 1 to December 31, 2012									Period from January 1 to January 31, 2012
	AverageBalance		Interest*		Yield/Cost*			AverageBalance			Interest*			Yield/Cost*		AverageBalance		Interest*		Yield/Cost*
(Dollars in thousands)	AverageBalance		Interest*		Yield/Cost*		AverageBalance			Interest*			Yield/Cost*			AverageBalance		Interest*		Yield/Cost*
Assets:
Loans	$	~~727~~1,~~339~~210,102	$	3971,~~717~~627	5.9792	%	$	$727,339	~~730,387~~	$	$39,717	~~3,807~~	5.97	~~6.15~~%	%	$	~~201~~730,~~106~~387	$	133,~~362~~807	6.6415	%
Investment securities	~~164~~331,~~113~~459		37,~~990~~090		2.6614	%	164,113	~~180,220~~		3,990	~~419~~		2.66	~~2.74~~%	%	29180,~~827~~220		~~903~~419		32.0374	%
Federal funds and other interest-earning assets	4240,~~603~~911		8589		0.22	%	42,603	~~23,719~~		85	4		0.22	~~0.20~~%	%	4523,~~384~~719		~~102~~4		0.2220	%
Total interest-earning assets	~~934~~1,~~055~~582,472		4378,~~792~~806		54.1298	%	934,055	~~934,326~~		43,792	~~4,230~~		5.12	~~5.35~~%	%	~~276~~934,~~317~~326		144,~~367~~230		5.2035	%
Non-interest-earning assets	~~127~~204,~~572~~522						127,572	~~134,240~~								28134,~~430~~240
Total assets	$	1,~~061~~786,~~627~~994					$	$1,061,627	~~1,068,566~~							$	~~304~~1,~~747~~068,566
Liabilities and Equity:
Interest-bearing demand	$	~~149~~298,~~394~~292	~~540~~645		0.3922	%	$	$149,394	~~172,363~~	540	~~109~~		0.39	~~0.75~~%	%	$	36172,~~756~~363	~~338~~109		0.9275	%
Money market and savings	~~236~~422,~~735~~543		1,~~333~~362		0.6232	%	236,735	~~184,716~~		1,333	96		0.62	~~0.61~~%	%	59184,~~813~~716		~~565~~96		0.9461	%
Time deposits	~~373~~557,~~337~~853		34,~~213~~195		0.9475	%	373,337	~~404,999~~		3,213	~~325~~		0.94	~~0.95~~%	%	~~115~~404,~~245~~999		~~1,132~~325		0.9895	%
Total interest-bearing deposits	~~759~~1,~~466~~278,688		56,~~086~~202		0.7349	%	759,466	~~762,078~~		5,086	~~530~~		0.73	~~0.82~~%	%	~~211~~762,~~814~~078		~~2,035~~530		0.9682	%
Short-term borrowings	360,~~351~~098		19165		0.6227	%	3,351	~~968~~		19	—		0.62	—%	%	~~1,429~~968		18—		~~1.26~~—	%
Long-term debt	2251,~~966~~239		12,~~065~~285		54.0746	%	22,966	~~24,217~~		1,065	~~103~~		5.07	~~5.02~~%	%	2724,~~850~~217		~~725~~103		25.6002	%
Total interest-bearing liabilities	~~785~~1,~~783~~390,025		68,~~170~~652		0.8662	%	785,783	~~787,263~~		6,170	~~633~~		0.86	~~0.95~~%	%	~~241~~787,~~093~~263		~~2,778~~633		10.1595	%
Non interest-bearing deposits	97,250							107,156								24,549
Non-interest-bearing deposits	168,597						97,250									107,156
Other liabilities	69,~~858~~541						6,858	~~4,184~~								14,~~266~~184
Total liabilities	~~889~~1,~~891~~568,163						889,891	~~898,603~~								~~266~~898,~~908~~603
Stockholders’ equity	~~171~~218,~~736~~831						171,736	~~169,963~~								37169,~~839~~963
Total liabilities and stockholders’ equity	$	1,~~061~~786,~~627~~994					$	$1,061,627	~~1,068,566~~							$	~~304~~1,~~747~~068,566
Net interest income			$	37,622							$	3,597						$	11,589
Net interest income, taxable equivalent			$	70,154						$	37,622							$	3,597
Interest rate spread					4.2636	%							4.26	~~4.40~~%	%					4.0540	%
Net interest margin					4.40	%								4.55	%					4.19	%
Tax equivalent net interest margin					4.43	%							4.40	%						4.55	%
Percentage of average interest-earning assets to average interest-bearing liabilities					113.84	%							118.87	%						118.68	%
* Taxable equivalent basis


(1)	Loans include loans held for sale in addition to nonaccrual loans.


(2)	Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $64 thousand, $273 thousand, and $24 thousand for 2013 and the 2012 Successor and Predecessor Periods, respectively.


(3)	Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.


(4)	Net interest margin represents annualized net interest income divided by average interest-earning assets.

The Company has not included a standard table presenting the variances between the periods caused by changes in interest rates versus changes in volumes because of the incomparability of the periods, which is due to the difference in the number of days in each period and the difference in the basis of accounting between the periods.

Provision for Loan Losses

~~2012~~The ~~successor~~following ~~period~~table summarizes the changes in the allowance for loan losses ("ALLL") for both PCI and non-PCI loans for the periods presented.

Provision for loan losses totaled $5.2 million for the 2012 successor period. Annualized net charge-offs in this period were 0.37 percent of average loans. The allowance for loan losses ("ALL") and related provision were calculated in separate models for the Company's following three portfolio categories: (1) new loans, (2) purchased non-impaired loans, and (3) PCI loans. The following table summarizes the changes in ALL for each loan category in the 2012 successor period.



(Dollars in thousands)	Non-PCI Loans			PCI Loans		Total

2013
Balance at January 1, 2013	$	2,720		$	1,278	$	3,998
Net charge-offs	(2,424		)	—		(2,424		)
Provision for loan losses	4,386			1,083		5,469
Balance at December 31, 2013	$	4,682		$	2,361	$	7,043

2012 Successor Period
Balance at February 1, 2012	$	1,276		$	—	$	1,276
Net charge-offs	(2,437		)	—		(2,437		)
Provision for loan losses	3,881			1,278		5,159
Balance at December 31, 2012	$	2,720		$	1,278	$	3,998

(Dollars in thousands)	New Loans		Purchased Non-Impaired			PCI		Total
Balance at February 1, 2012	$	1,276	$	—		$	—	$	1,276
Net charge-offs	—		(2,437		)	—		(2,437		)
Provision for loan losses	1,389		2,492			1,278		5,159
Balance at December 31, 2012	$	2,665	$	55		$	1,278	$	3,998

Provision for loan losses was $5.5 million in 2013, $5.2 million in the 2012 successor period, and $195 thousand in the 2012 predecessor period. The 2013 provision for loan losses was comprised of $4.4 million in provision expense on non-PCI loans and $1.1 million of impairment on PCI loan pools. The ALLL was $7.0 million, or 0.51 percent of total loans as of December 31, 2013, compared to $4.0 million, or 0.52 percent of total loans as of December 31, 2012. Adjusted ALLL, which includes the ALLL and net acquisition accounting fair value adjustments for acquired loans, represented 2.75 percent of total loans as of December 31, 2013 compared to 2.70 percent as of December 31, 2012.

~~The~~Nonperforming ~~ALL~~loans as a percentage of $2total loans was 1.751 ~~million~~percent onas ~~new~~of ~~loans~~December 31, 2013, which was a decline from 1.67 percent as of December 31, 2012. Total nonperforming assets (which include nonaccrual loans, loans past due 90 days or more and still accruing, and foreclosed assets) as a percentage of total assets was 01.9350 percent as of ~~related~~December 31, ~~outstanding~~2013 ~~new~~compared ~~loan~~to ~~balances~~1. ~~There~~71 ~~were~~percent noas ~~charge-offs~~of onDecember 31, ~~this~~2012. ~~portfolio~~The decline in the ~~2012~~nonperforming ~~successor~~assets ~~period~~ratio over the past year was due to the ECB merger as well as the Company's continuing efforts to resolve legacy problem assets while maximizing value. These resolution efforts have included a combination of asset sales through various channels and successful loan workout plans.

~~Although~~Loans ~~purchased~~acquired ~~non-impaired~~with ~~loans~~evidence ~~were~~of ~~adjusted~~credit todeterioration ~~fair~~since ~~value~~origination atare ~~each~~accounted ~~respective~~for as PCI loans. Subsequent to acquisition of these loans, ~~the~~estimates ~~Company~~of ~~records~~cash ~~charge-offs~~flows ~~for~~expected ~~losses~~to ~~and~~be ~~provides~~collected ~~reserves~~are ~~for~~updated ~~deterioration~~each inreporting ~~credit~~period ~~quality~~based on ~~these~~assumptions ~~loans. Due~~regarding todefault ~~their~~rates, ~~nature~~loss severities, ~~all~~and ~~revolving~~other ~~loans~~factors ~~were~~that ~~classified~~reflect ascurrent ~~purchased~~market ~~non-impaired~~conditions. atIf ~~acquisition~~the ~~and~~Company ahas ~~majority~~probable ofdecreases ~~the~~in ~~charge-offs~~cash ~~and~~flows ~~provision~~expected into ~~the~~be ~~2012~~collected ~~successor~~(other ~~period~~than ~~relate~~due to ~~acquired~~decreases ~~revolving~~in ~~home~~interest ~~equity~~rates), ~~lines~~the ofprovision ~~credit. The~~for ~~Company~~loan ~~recognized~~losses ~~provisions~~is charged, resulting in an increase to the allowance for loan losses. If there are probable and ~~charge-offs~~significant ofincreases ~~$1.6~~in ~~million~~cash onflows ~~home~~expected ~~equity~~to ~~loans~~be ~~and~~collected, ~~lines~~the ofCompany ~~credit. The~~will ~~elevated~~first ~~charge-offs~~reverse ~~recorded~~any onpreviously ~~this~~established ~~portfolio~~allowance infor ~~the~~loan ~~2012~~losses ~~successor~~and ~~period~~then ~~were~~increase ~~primarily~~interest ~~related~~income toas ~~three~~a ~~loans~~prospective ~~where~~yield adjustment over the ~~borrowers~~remaining ~~defaulted~~life inof the ~~period~~loans.

The ~~ALL~~Company's onquarterly ~~the~~PCI ~~purchased~~cash ~~non~~flow re-~~impaired~~estimations ~~portfolio~~resulted isin ~~calculated~~total byprovision ~~first~~expense ~~estimating~~of ~~losses~~$1.1 onmillion ~~loans~~in ~~evaluated~~2013 ~~individually for impairment~~ and ~~loans evaluated collectively for impairment~~$1. ~~Consistent~~3 ~~with~~million ~~the~~in ~~Company’s policy, estimated losses for loans evaluated individually for impairment are determined by~~ the ~~use~~2012 ofsuccessor ~~current appraisals for collateral dependent loans or discounted expected cash flows for loans that are not collateral dependent~~period. ~~Estimated~~ ~~losses~~There ~~for~~was ~~loans~~no ~~evaluated~~provision ~~collectively~~expense ~~for~~on ~~impairment~~PCI ~~are determined by grouping similar~~ loans ~~together~~in ~~and~~the ~~applying~~2012 ~~annualized~~predecessor ~~historical loss rates (using a trailing two-year historical loss~~ period~~), adjusted for certain qualitative factors, to outstanding principal balances~~. The ~~unpaid~~ALLL ~~principal~~related ~~balance less estimated incurred losses is then compared~~ to ~~the~~PCI ~~carrying value of the~~ loans, ~~and~~as ~~any deficit is recorded to provision and ALL. As~~ of December 31, ~~2012,~~2013 ~~the~~was ~~Company~~$2.4 ~~had~~million. ~~home~~Of ~~equity~~this ~~loans~~amount, ~~and~~$1.0 ~~lines~~million ofwas ~~credit~~related ~~with~~to ~~unpaid~~a ~~principal~~residential ~~balances~~real ~~and~~estate ~~carrying~~loan ~~values totaling $66.6 million and $63.5 million~~pool, ~~respectively. The~~ $3.1.0 million ~~discount~~was related to ~~unpaid~~a ~~principal~~commercial ~~combined~~real ~~with~~estate ~~the~~loan pool, $85261 thousand ofwas ~~ALL~~related onto ~~this~~a ~~portfolio~~construction ~~represented~~and ~~4.85~~development ~~percent~~loan ofpool, ~~unpaid~~$53 ~~principal~~thousand ~~balances~~was asrelated ofto ~~December 31,~~a ~~2012,~~home orequity ~~208.58~~loan ~~percent~~pool, ofand ~~nonperforming~~$22 ~~home~~thousand ~~equity~~was ~~loans~~related ~~and~~to ~~lines~~a ofconsumer ~~credit~~loan pool.

Because the Company has experienced more credit deterioration in the home equity portfolio compared to other sectors of the loan portfolio, additional credit risk monitoring on this sector has been implemented. In addition to closely monitoring payment history, credit scores on the borrowers are reviewed and routinely refreshed, which allows the Company to more timely identify non-performers and freeze open lines of credit, if necessary.

Loans acquired with evidence of credit deterioration since origination were grouped into pools of loans with similar risk characteristics at acquisition and are accounted for as PCI loans. Subsequent to acquisition of these loans, estimates of pool-level cash flows expected to be collected are updated each reporting period based on assumptions regarding default rates, loss severities, and other factors that reflect current market conditions. If the Company has probable decreases in pool-level cash flows expected to be collected, the provision for loan losses is charged, resulting in an increase to the allowance for loan losses. If there are probable and significant increases in pool-level cash flows expected to be collected, the Company will first reverse any previously established ALL and then increase interest income as a prospective yield adjustment over the remaining life of the loans. The Company's quarterly PCI cash flow re-estimations resulted in total provision in the 2012 successor period of $1.3 million. Of this amount, $552 thousand was related to a residential real estate loan pool, $443 thousand was related to a commercial real estate loan pool, $267 thousand was related to a construction and development loan pool, and $16 thousand was related to a consumer loan pool.

2012 predecessor period

Provision for loan losses totaled $195 thousand in the 2012 predecessor period, which was all related to new loans and Legacy VantageSouth loans. There was no provision in this one-month period related to the purchased non-impaired or PCI loan portfolios. Legacy VantageSouth's loan portfolio, prior to that company's combination with Rowan and Crescent Financial, did not reflect Piedmont's basis in this period. Therefore, all of these loans were subjected to the same ALL model based on whether they were individually or collectively evaluated for impairment. There were no net charge-offs in this one-month period.

Year ended December 31, 2011

Provision for loan losses totaled $880 thousand in the predecessor year ended December 31, 2011. Net charge-offs in this period totaled $629 thousand, and annualized net charge-offs were 0.31 percent of average loans.

Non-Interest Income

The following table provides a summary of non-interest income for the periods presented.

	Successor Company			~~Predecessor Company~~		Predecessor Company
(Dollars in thousands)	~~February~~Year 1Ended to December 31, ~~2012~~2013		Period from February 1 to December 31, 2012	~~January 1 to January 31, 2012~~		~~Year~~Period ~~Ended~~from ~~December~~January 1 to January 31, ~~2011~~2012
Mortgage banking income	$	3,164		$	225	$	440
Service charges and fees on deposit accounts	$	4,959	$	1,937		$	194
Government-guaranteed lending	3,061			98		476
Mortgage banking income	2,265		3,164			225
Service charges and fees on deposit accounts	1,937			194		516
Government-guaranteed lending	5,586		3,061			98
Bank-owned life insurance income	~~760~~1,226		760	70		~~103~~70
Gain (loss) on sale of available-for-sale securities	1,251			—		(38		)
Gain on sales of available for sale securities	1,215		1,251			—
Other	1,154			70		219
Gain on acquisition	7,773		—			—
Total non-interest income	$	11,327		$	657	$	1,716
Other	2,156		1,154			70
Total non-interest income	$	25,180	$	11,327		$	657

Non-interest income totaled $25.2 million in 2013 while non-interest income totaled $11.3 million in the 2012 successor period and $657 thousand in the 2012 predecessor period. Non-interest income in 2013 included a one-time acquisition gain of $7.8 million related to the ECB merger. Securities gains totaled $1.2 million as the Company recognized gains upon selling the majority of its municipal bonds for balance sheet management and tax purposes. Government-guaranteed, small business lending income, which includes gains on sales of the guaranteed portion of certain SBA loans originated by the Company as well as servicing fees on previously sold SBA loans, totaled $5.6 million. The Company sells the guaranteed portion of certain SBA loans in the secondary market without recourse and recognizes gains as those loans are sold at a premium. Additionally, service charges and fees, mortgage banking income, and bank-owned life insurance income totaled $5.0 million, $2.3 million, and $1.2 million, respectively, in 2013 and were all significantly impacted by the ECB merger during the year.

Non-interest income totaled $11.3 million in the 2012 successor period. Mortgage banking was the largest component of non-interest income. The Company restructured its mortgage lending business following Piedmont's acquisition of Crescent Financial in November 2011 and hired additional experienced mortgage lenders. The Company also benefited from the improving housing market in the Raleigh, North Carolina and surrounding areas as well as the currently low interest rate environment that has encouraged refinancings.

Government-guaranteed lending income includes servicing fees and gains on the sale of the guaranteed portion of certain U.S. Small Business Administration ("SBA") loans originated by the Company. The Company entered the government-guaranteed lending business following Piedmont's acquisition of Rowan in April 2011 and sells the guaranteed portion of certain SBA loans in the secondary market without recourse and recognizes gains as those loans are sold at a premium. Government-guaranteed lending and sales volumes increased significantly throughout 2012 while secondary market premiums also rose due to investor demand.

Service charges and fees on deposit accounts as well as bank-owned life insurance income were impacted by Piedmont's acquisition of Crescent Financial in November 2011. The Crescent Financial acquisition added significantly more deposit accounts and deposit-related activity. Additionally, all of the Company's bank-owned life insurance policies were acquired in the Crescent Financial acquisition. Other non-interest income includes dividends from non-marketable equity investments, non-yield enhancing loan fees, investment brokerage fees, and net gains in the fair value of non-effective interest rate swaps that are marked-to-market through earnings. Securities gains of $1.3 million also contributed to non-interest income in the 2012 successor period.

2012 predecessor period

Non-interest income totaled $657 thousand in the 2012 predecessor period. Mortgage banking income was the largest component of non-interest income followed by service charges and fees on deposit accounts, government-guaranteed lending, bank-owned life insurance, and other.

Predecessor year ended December 31, 2011

Non-interest income totaled $1.7 million in 2011 and was benefited by gains on the sale of the guaranteed portion of certain SBA loans originated by the Company. These SBA loans were sold at a premium in the secondary market without recourse. Mortgage banking income, service charges and fees on deposit accounts, bank-owned life insurance income, and other also contributed to non-interest income in 2011. Securities losses of $38 thousand reduced non-interest income in 2011.

Non-Interest Expense

The following table provides a summary of non-interest expense for the periods presented.

	Successor Company			~~Predecessor Company~~		Predecessor Company
(Dollars in thousands)	~~February~~Year 1Ended to December 31, ~~2012~~2013		Period from February 1 to December 31, 2012	~~January 1 to January 31, 2012~~		~~Year~~Period ~~Ended~~from ~~December~~January 1 to January 31, ~~2011~~2012
Salaries and employee benefits	$	2136,~~276~~486	$	$21,249	~~1,737~~	$	51,~~786~~737
Occupancy and equipment	49,~~920~~052		4,868	~~396~~		~~953~~396
Data processing	23,~~972~~920		2,381	~~271~~		~~1,000~~212
FDIC insurance premiums	~~926~~1,486		927	~~141~~		~~373~~141
Foreclosed asset expenses	1,303			11		(191		)
Professional services	2,789		2,609			144
Other loan related expense	1,524			162		337
Foreclosed asset expenses	473		1,303			11
Professional services	4,691			144		867
Loan, collection, and repossession expense	2,964		1,523			162
Advertising and business development	1,~~083~~185		1,083	73		~~723~~73
Printing, postage, and supplies	~~786~~1,111		786	47		~~210~~47
Other	3,729			254		1,178
Merger and conversion costs	14,638		3,164			78
Total non-interest expense	$	43,210		$	3,236	$	11,236
Other	6,508		3,317			235
Total non-interest expense	$	80,612	$	43,210		$	3,236

~~2012 successor period~~39

Non-interest expense totaled $4380.26 million in ~~the~~2013 ~~2012~~while ~~successor period. Expenses were significantly impacted by the Company's various strategic corporate activities throughout the period, which included Piedmont's purchase of the remaining~~ non-~~controlling~~interest ~~shares~~expense of Legacy VantageSouth's outstanding common stock in February 2012, the Rowan/Legacy VantageSouth merger and system conversion in February 2012, the Legacy VantageSouth/Crescent State Bank merger and system conversion in November 2012, the re-branding of Crescent State Bank into VantageSouth Bank, and the proposed merger with ECB. Merger, conversion, and re-branding costs totaled $343.42 million in the 2012 successor period, ofand ~~which~~ $23.2 million ~~was~~ in ~~professional~~the ~~services,~~2012 ~~$536~~predecessor ~~thousand~~period. ~~was~~Salaries ~~in data processing, $228 thousand was in advertising~~ and ~~business development, $152 thousand was in salaries and~~ employee benefits, ~~$52 thousand was in~~ occupancy and equipment, ~~and~~data ~~the~~processing, ~~remainder~~and ~~was in~~ other non-interest expense~~. These~~ ~~merger~~categories ~~and~~in ~~conversion~~2013 ~~activities~~were ~~elevated~~all ~~expenses~~significantly inimpacted ~~the~~by ~~2012~~ECB ~~successor~~merger ~~period,~~which ~~but~~added ~~they~~employees, ~~simplified~~branch ~~the~~and ~~organizational~~other ~~structure~~facilities, and ~~allowed~~equipment to the ~~combined~~Company's ~~Bank~~expense tobase. ~~begin~~Direct ~~operating~~merger, ontransaction ~~single~~and ~~technology~~system ~~platform~~conversion costs, which ~~management~~totaled ~~believes~~$14.6 ~~will~~million, ~~create~~as ~~significant~~well ~~operational~~as ~~efficiencies~~a ~~and~~higher ~~cost~~general ~~savings~~expense ~~and~~run ~~will~~rate ~~better~~following ~~position~~ the ~~Company~~ECB ~~for~~merger ~~future~~significantly ~~growth~~impacted non-interest expenses in 2013.

~~Salaries~~The ~~and~~Company's ~~employee~~operating ~~benefits~~efficiency ratio, which isexcludes ~~the~~non-recurring ~~largest~~merger ~~component~~and ofconversion ~~non-interest expense~~costs, ~~was~~improved ~~impacted~~from 82.27 percent in the 2012 successor period byto ~~stock-based~~75.40 ~~compensation~~percent ~~expense~~in ~~totaling~~2013. ~~$850~~Much ~~thousand,~~of ~~which~~the ~~was~~improvement ~~primarily~~in ~~related~~the tooperating ~~compensation~~efficiency ~~costs~~ratio ~~associated~~was ~~with~~due ~~Piedmont's~~to ~~stock~~increased ~~warrant~~scale ~~plan~~and inoperating ~~which~~leverage ~~certain~~provided ~~members~~by of the ~~Company's~~ECB ~~management~~merger ~~participate. Year-end~~combined ~~2012~~with ~~performance~~cost ~~incentive~~cutting ~~payments~~measures ~~also~~which ~~impacted~~should ~~salaries~~continue ~~and~~to ~~employee~~benefit ~~benefits~~the inCompany ~~the~~going ~~period~~forward. As ofFor ~~December 31~~example, ~~2012, the Company employed 267~~ full- time equivalent employees atfor ~~twenty~~the ~~full-service~~combined ~~branch~~Company ~~offices~~decreased ~~and~~from ~~various~~520 ~~administrative~~at ~~support~~the ~~departments. Occupancy~~ECB ~~and~~merger ~~equipment~~date ~~expenses~~to ~~include~~455 ~~the~~as ~~cost~~ of ~~leasing branch and administrative facilities~~December 31, ~~depreciation on fixed assets, repairs and maintenance on facilities and assets as well as other technology equipment costs~~2013.

Net losses on the sale and write-down of foreclosed assets totaled $1.3 million as the Company worked to aggressively dispose of legacy foreclosed assets. Foreclosed assets declined by $5.2 million, or 47 percent, in 2012, which reflects the Company's efforts to liquidate properties and limit inflows. Other loan-related expenses totaled $1.5 million in the 2012 successor period, which was primarily related to loan collection, foreclosure, appraisal and other carrying costs on problem loans managed by the special assets function. The Company seeks to manage these costs by aggressively resolving problem loans in a cost-effective manner.

2012 predecessor period

Non-interest expense totaled $3.2 million in the 2012 predecessor period, which reflects operating costs for the Company in January 2012. Data processing was impacted in this period by $59 thousand of expenses related to the Rowan/Legacy VantageSouth system conversion.

Predecessor year ended December 31, 2011

Non-interest expense totaled $11.2 million in 2011. Expenses were impacted in every category by Piedmont's acquisition of Rowan and Crescent Financial during the year. Additionally, salaries and employee benefits included $1.1 million of severance and contract termination payments to former employees. Advertising and business development was impacted by higher shareholder communications costs incurred in 2011 related to Piedmont's purchase of the remaining non-controlling shares of Legacy VantageSouth's outstanding common stock in February 2012. Data processing was impacted by costs incurred in 2011 related to the conversion of Rowan's data processing system to Legacy VantageSouth's system in early 2012, which was completed to provide the combined company operating and processing efficiencies. Other non-interest expense included a $237 thousand prepayment penalty on FHLB advances.

Income Taxes

Income tax expense was $2.0 million in 2013, which included a $1.2 million charge in the third quarter as a result of recently enacted decreases in North Carolina corporate income tax rates which are effective in future tax years. The income tax benefit in the 2012 successor period was $3.5 million, which included a $3.3 million reversal of a deferred tax valuation allowance, and $270 thousand in the 2012 predecessor period. Taxable income is calculated using pre-tax net income adjusted for non-deductible merger costs as well as non-taxable municipal investment income and bank-owned life insurance income.

~~The~~Based Company recorded an income tax benefit of $3.5 million in the 2012 successor period, which was primarily due to the reversal of a $3.3 million valuation allowance in the fourth quarter of 2012 related to deferred tax assets generated by Legacy VantageSouth before and after Piedmont's acquisition of that company. This valuation allowance reversal was based on the Company's analysis of positive and negative evidence regarding future realization of its deferred tax assets, which included an evaluation of historical and forecasted pre-tax earnings, net operating loss ~~periods~~carryforward ~~available~~periods, ~~potential~~ merger costs and savings, asset quality trends, capital levels, and potential tax planning strategies~~. Based on this analysis~~, the Company determined that there was sufficient positive evidence to indicate that it would likely realize the full value of its deferred tax assets over time and therefore it was determined that no valuation allowance on its deferred tax assets was ~~necessary~~needed as of December 31, ~~2012~~2013.

2012 predecessor period

Income tax expense was $270 thousand in the 2012 predecessor period, which reflected a 33.8% effective tax rate. The effective tax rate was lower than the Company's statutory rate in this period due to non-taxable income such as earnings on bank-owned life insurance and municipal bonds.

Predecessor year ended December 31, 2011

Income tax expense was $188 thousand in 2011, which reflected a 16.3% effective tax rate. The effective tax rate was lower than the Company's statutory rate in this period due to non-taxable income such as earnings on bank-owned life insurance and municipal bonds.

Analysis of Financial Condition

Total assets were $2.12 billion as of December 31, 2013 and $1.09 billion as of ~~both~~ December 31, 2012. ~~and~~The ~~2011,~~ECB ~~and~~merger ~~earning~~provided $856.1 million of asset growth in 2013. Earning assets totaled $~~953~~1.488 ~~million~~billion asor 89 percent of ~~both~~total assets as of December 31, ~~2012~~2013 and ~~2011~~$953. ~~While~~4 ~~earning~~million or 88 percent of total assets ~~remained~~as ~~largely~~of ~~unchanged~~December 31, ~~the~~2012. ~~composition~~Earning ~~shifted~~assets as of December 31, 2013 consisted of $1.39 billion in gross loans, ~~including~~$8.7 million in loans held for sale, ~~grew by~~ $39413.68 million, orin 5investment ~~percent~~securities, ~~while~~including ~~investment~~FHLB ~~securities~~stock, ~~including~~and ~~Federal~~$71.7 ~~Home~~million ~~Loan~~in ~~Bank~~federal ~~("FHLB")~~funds ~~stock,~~sold ~~decreased~~and ininterest-earning ~~aggregate~~deposits bywith ~~$41~~correspondent banks. Deposits were $1.68 ~~million~~billion as of December 31, or2013, 23which ~~percent~~was an increase of $802. ~~Earning~~1 ~~assets~~million from deposits as of December 31, 2012. ~~consisted~~The ofECB merger provided $~~779~~736.91 million of deposit growth in ~~gross~~2013. ~~loans,~~Short-term borrowings increased by $~~138~~119.80 million inwhile ~~investment~~long-term ~~securities~~debt ~~and~~increased ~~FHLB~~by ~~stock~~$53.1 million. Stockholders' equity increased by $58.4 million, ~~and~~which was primarily due to $3466.71 million of net assets acquired in ~~interest-earning~~the ~~deposits~~ECB ~~and~~merger, ~~federal~~partially ~~funds~~offset ~~sold~~by a decline in accumulated other comprehensive income.

Total deposits were $873.2 million as of December 31, 2012, which was a decline of $13.0 million, or 1 percent, from December 31, 2011. Short-term borrowings and long-term debt totaled $27.4 million as of December 31, 2012, which was an increase of $3.1 million, or 13 percent, from year-end 2011. Stockholders’ equity increased by $4.4 million in 2012 and totaled $173.9 million as of December 31, 2012.40

41Since the ECB merger significantly impacted each component of the Company's balance sheet, the table below has been provided to summarize the year-to-date changes in major balance sheet components including and excluding the acquired ECB balances.



(Dollars in thousands)	December 31, 2013			December 31, 2012			YTD Change			Acquired ECB Balances April 1, 2013		YTD Change Excluding Acquired ECB Balances

Cash and cash equivalents	$	100,779		$	50,463		$	50,316		$	24,008	$	26,308
Investment securities available for sale	404,888			136,491			268,397			289,359		(20,962		)
Loans held for sale	8,663			16,439			(7,776		)	13,456		(21,232		)
Loans	1,389,666			763,416			626,250			453,054		173,196
Allowance for loan losses	(7,043		)	(3,998		)	(3,045		)	—		(3,045		)
Other assets	222,995			122,414			100,581			76,199		24,382
Total assets	$	2,119,948		$	1,085,225		$	1,034,723		$	856,076	$	178,647

Deposits	$	1,675,309		$	873,222		$	802,087		$	736,114	$	65,973
Short-term borrowings	126,500			7,500			119,000			34,284		84,716
Long-term debt	72,921			19,864			53,057			16,460		36,597
Other liabilities	12,919			10,698			2,221			3,131		(910		)
Total liabilities	1,887,649			911,284			976,365			789,989		186,376
Stockholders' equity (1)	232,299			173,941			58,358			66,087		(7,729		)
Total liabilities and stockholders' equity	$	2,119,948		$	1,085,225		$	1,034,723		$	856,076	$	178,647


(1)	Acquired ECB stockholders' equity balance includes an acquisition gain of $7.8 million which was recorded in earnings in the second quarter of 2013.

Investment Securities

The amortized cost and fair value of the available-for-sale securities portfolio was $~~132~~415.91 million and $~~136~~404.34 million, respectively, as of December 31, ~~2012~~2013 compared with $~~169~~132.09 million and $~~169~~136.63 million, respectively, as of December 31, ~~2011~~2012. ~~Marketable~~ ~~investment~~Excluding ~~securities~~acquired ~~are~~ECB ~~accounted~~investments, ~~for as~~ available for sale ~~and~~securities ~~are~~declined ~~recorded~~by ~~at fair value with unrealized gains and losses charged to accumulated other comprehensive income~~$21. ~~The~~0 ~~investment~~million ~~securities~~during ~~portfolio as of December 31~~2013, ~~2012 consisted of residential mortgage-backed securities,~~ which ~~were~~partially ~~all~~funded issued by government-sponsored enterprises ("GSEs"), investment grade commercial mortgage-backed securities issued by financial institutions, investment grade taxable and non-taxable municipal bonds, investment grade corporate bonds, and the ~~common~~Company's ~~stock~~core ofloan ~~a community bank~~growth. As ofThe ~~December 31,~~Company ~~2012~~also ~~and~~drew ~~2011,~~down ~~the~~its ~~securities~~investment portfolio ~~had~~to ~~$3.5~~properly ~~million~~manage ~~and~~its ~~$1.1~~liquidity ~~million, respectively, of unrealized gains~~ and ~~$96~~interest ~~thousand~~rate ~~and~~risk ~~$523 thousand, respectively, of unrealized losses. None of these securities had been in an unrealized loss~~ position ~~for~~following ~~more~~the ~~than~~ECB ~~twelve months at either date~~merger.

~~Available-for-sale~~Marketable investment securities ~~not~~are ~~issued~~accounted orfor ~~guaranteed~~as byavailable ~~GSEs~~for ~~totaled~~sale ~~approximately~~and 43are ~~percent~~recorded ofat ~~the~~fair ~~portfolio~~value aswith ofunrealized ~~December 31,~~gains ~~2012~~and ~~compared~~losses charged to 26accumulated ~~percent~~other comprehensive income. The investment securities portfolio as of December 31, ~~2011~~2013 consisted of U. ~~The~~S. ~~Company~~government-sponsored ~~closely~~enterprise ~~monitors~~("GSE") securities, securities guaranteed by the SBA, residential mortgage-backed securities (“MBS”), which were all issued by GSEs, investment grade corporate bonds, investment grade commercial MBS issued by financial ~~condition~~institutions, ofinvestment grade non-~~GSE~~taxable ~~issuers. Gross~~municipal ~~unrealized~~obligations, ~~losses~~and onthe ~~such~~common ~~securities~~stock ~~was~~of ~~$50~~other ~~thousand~~financial asinstitutions. As of December 31, 2013 and 2012, the securities portfolio had $2. ~~The~~4 ~~Company~~million ~~sold~~and ~~substantially~~$3.5 ~~all~~million, respectively, of ~~its~~unrealized ~~municipal~~gains ~~bonds~~and in$13.0 ~~the~~million ~~first~~and ~~quarter~~$96 thousand, respectively, of ~~2013~~unrealized ~~for~~losses. ~~tax~~None ~~planning~~of ~~and~~these ~~balance~~securities ~~sheet~~had ~~management~~been ~~purposes~~in ~~and~~an ~~recognized~~unrealized noloss ~~losses~~position ~~upon~~for ~~liquidation.~~more than twelve months at either date.

The ~~amortized~~Company ~~cost~~sold ~~and~~most ~~fair value~~ of ~~the~~its ~~Company's~~municipal ~~one~~bonds ~~held-to-maturity~~in ~~security~~the ~~was~~first ~~$180~~quarter ~~thousand and $410 thousand, respectively, as~~ of ~~December 31,~~2013 ~~2012~~for ~~compared~~tax ~~with~~planning ~~$421~~and ~~thousand~~balance ~~for~~sheet ~~both~~management ~~amortized~~purposes. ~~cost~~Proceeds ~~and~~from ~~fair~~sales ~~value as~~ of ~~December 31,~~securities ~~2011.~~in ~~This~~2013 ~~non-marketable~~totaled ~~debt~~$174.3 ~~security~~million, ~~has~~which aresulted ~~par~~in ~~value~~$1.3 million of ~~$500~~gross ~~thousand~~gains and ~~was~~thirty-five ~~issued~~thousand bygross ~~a community bank~~losses. ~~When~~Proceeds ~~push-down~~from ~~accounting~~sales ~~was~~of ~~applied~~securities ~~to Legacy VantageSouth's balance sheet~~ in ~~February~~the 2012, ~~the~~successor ~~amortized~~period ~~cost~~totaled of$86.6 ~~this~~million, ~~security~~which ~~was~~resulted ~~reduced to Piedmont's basis~~ in ~~the security~~$1. ~~Because~~3 ~~the~~million ~~fair value~~ of ~~this~~gross ~~security~~gains ~~has~~and ~~increased to~~ $~~410~~84 thousand ~~since~~of ~~Piedmont~~gross ~~wrote~~losses. ~~down~~There ~~the~~were ~~value~~no ~~upon~~securities ~~acquisition~~sold ~~of Legacy VantageSouth~~ in ~~February 2010,~~ the ~~Company~~2012 ispredecessor ~~now accreting the discount into interest income through maturity~~period.

The decrease in the investment portfolio in 2012 was primarily related to the Company's loan growth in the second half of 2012. While maintaining sufficient liquidity and investment balances for pledging requirements, the Company utilized some of the principal payments and proceeds from sales of securities for loan originations. Proceeds from sales of securities in the 2012 successor period totaled $86.6 million, which resulted in $1.3 million of gross gains and $84 thousand of gross losses. There were no securities sold in the 2012 predecessor period.41

The following table summarizes the amortized cost and fair value of the securities portfolio for the dates indicated.

	Successor Company					~~Predecessor Company~~					Predecessor Company
	December 31, 2012					December 31, 2011					December 31, 2010
	December 31, 2013				December 31, 2012						December 31, 2011
(Dollars in thousands)	AmortizedCost		FairValue		AmortizedCost	~~AmortizedCost~~		FairValue	~~FairValue~~		AmortizedCost		FairValue
U.S. government sponsored entities and agencies	$	—	$	—		$	—		$	—	$	3,485	$	3,514
Available for sale securities:
Residential mortgage-backed securities	76,249		76,777			121,816			121,901		4,934		4,967
U.S. government-sponsored enterprise securities	$	14,834	$	14,673	$	—		$	—		$	—	$	—
Commercial mortgage-backed securities	6,612		6,885			—			—		—		—
SBA-guaranteed securities	66,579		65,880		—			—			—		—
Municipal bonds - non-taxable	15,492		16,201			13,281			13,514		1,469		1,473
Residential MBS	216,818		205,260		76,249			76,777			121,816		121,901
Municipal bonds - taxable	2,583		2,725			1,464			1,632		—		—
Corporate bonds	109,423		110,740		30,861			32,508			28,042		27,966
Corporate bonds	30,861		32,508			28,042			27,966		—		—
Commercial MBS	5,867		5,938		6,612			6,885			—		—
Other debt securities	1,083		1,157			3,916			4,004		—		—
Municipal bonds - non-taxable	600		601		15,492			16,201			13,281		13,514
Marketable equity securities	37		58			520			566		—		—
Municipal bonds - taxable	—		—		2,583			2,725			1,464		1,632
Total	$	132,917	$	136,311		$	169,039		$	169,583	$	9,888	$	9,954
Other debt securities	253		253		1,083			1,157			3,916		4,004
Marketable equity securities	677		1,043		37			58			520		566
Total	$	415,051	$	404,388	$	132,917		$	136,311		$	169,039	$	169,583
Held to maturity securities:
Corporate bonds	$	500	$	500	$	180		$	410		$	421	$	421

The following table summarizes debt securities in the investment portfolio as of December 31, ~~2012~~2013, segregated by major category with ranges of maturities and average yields.



	December 31, 2013
(Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield (1)

U.S. government-sponsored enterprise securities:
One to five years	$	14,834	$	14,673	1.11	%
Total	14,834		14,673		1.11
SBA-guaranteed securities:
One to five years	8,048		8,029		1.27
Over five to ten years	57,031		56,347		1.41
After ten years	1,500		1,504		2.14
Total	66,579		65,880		1.41
Residential MBS (2):
Within one year	77		77		2.91
One to five years	57,447		55,760		1.68
Over five to ten years	103,498		97,738		2.15
After ten years	55,796		51,685		2.76
Total	216,818		205,260		2.18
Corporate bonds:
One to five years	96,328		98,060		2.10
Over five to ten years	13,095		12,680		2.32
Total	109,423		110,740		2.13
Commercial MBS (2):
One to five years	5,867		5,938		2.50
Total	5,867		5,938		2.50
Municipal bonds - taxable:
Within one year	600		601		6.44
Total	600		601		6.44
Other debt securities:
One to five years	253		253		1.69
Total	253		253		1.69
Total debt securities	$	414,374	$	403,345	2.02	%

	December 31, 2012
(Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield (1)
Residential mortgage-backed securities: (2)
Within one year	$	13,328	$	13,421	1.67	%
One to five years	33,681		33,875		1.63
Five to ten years	18,562		18,771		1.96
After ten years	10,678		10,710		2.24
Total	76,249		76,777		1.80
Commercial mortgage-backed securities: (2)
One to five years	6,612		6,885		2.73
Total	6,612		6,885		2.73
Municipal bonds - non-taxable:
One to five years	6,764		6,994		5.58
Five to ten years	4,199		4,470		6.08
After ten years	4,529		4,737		6.14
Total	15,492		16,201		5.88
Municipal bonds - taxable:
One to five years	503		551		3.50
Five to ten years	445		522		4.73
After ten years	1,635		1,652		3.25
Total	2,583		2,725		3.55
Corporate bonds:
One to five years	30,861		32,508		3.18
Total	30,861		32,508		3.18
Other debt securities:
One to five years	250		251		1.69
Five to ten years	833		906		4.11
Total	1,083		1,157		3.55
Total debt securities	$	132,880	$	136,253	2.69


(1)	Yields are calculated on a taxable equivalent basis using the statutory federal income tax rate of 34 percent. Yields are calculated based on the amortized cost of the securities.


(2)	Mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on contractual maturity. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties.

As of December 31, ~~2012~~2013, the weighted average life of the investment portfolio was 36.86 years and the effective duration ~~of the investment portfolio~~ was 23.72 years.

The Company also owned $8.9 million and $2.3 million of FHLB stock as of December 31, 2013 and December 31, 2012, respectively. This stock is recorded at cost and is classified separately from investment securities on the consolidated balance sheets.

Loans

The primary goal of the Company's lending function is to help clients achieve their financial goals by providing quality loan products that are fair to the client and profitable to the Company. In addition to the importance placed on client knowledge and continuous involvement with clients, the Company's lending process incorporates the standards of a consistent company-wide credit culture and an in-depth ~~local~~knowledge ~~market~~of ~~knowledge~~our local markets. Furthermore, the Company employs strict underwriting criteria governing the degree of assumed risk and the diversity of the loan portfolio. In this context, the Company strives to meet the credit needs of businesses and consumers in its markets while pursuing a balanced strategy of loan profitability, loan growth, and loan quality.

Loans, net of deferred loan fees, totaled $1.39 billion as of December 31, 2013, which was an increase of $626.3 million, or 45 percent, from December 31, 2012. Excluding acquired ECB loans, organic loan growth was $173.2 million in 2013. The Company generated robust net loan growth during the year which was driven by loan originations totaling $529.1 million. The following table summarizes the loan portfolio composition by category for the periods presented.



	Successor Company										Predecessor Company
	December 31, 2013					December 31, 2012					December 31, 2011					December 31, 2010					December 31, 2009
(Dollars in thousands)	Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans

Commercial real estate	$	670,084		48.20	%	$	392,955		51.47	%	$	367,598		49.92	%	$	17,122		27.14	%	$	18,125		24.64	%
Residential real estate and home equity	284,734			20.48	%	188,763			24.72	%	200,474			27.22	%	31,228			49.49	%	30,943			42.07	%
Commercial and industrial	230,614			16.59	%	98,701			12.93	%	62,417			8.48	%	6,463			10.24	%	10,367			14.09	%
Construction and development	196,390			14.13	%	78,769			10.31	%	99,897			13.56	%	7,046			11.17	%	13,116			17.83	%
Consumer	8,332			0.60	%	4,325			0.57	%	6,048			0.82	%	1,238			1.96	%	1,005			1.37	%
Total loans	1,390,154			100.00	%	763,513			100.00	%	736,434			100.00	%	63,097			100.00	%	73,556			100.00	%
Less: deferred loan fees	(488		)			(97		)			(10		)			(21		)			(35		)
Total loans, net	$	1,389,666				$	763,416				$	736,424				$	63,076				$	73,521

For each acquired loan portfolio, the Company made fair value adjustments by projecting expected future principal and interest cash flows over the remaining life of each loan and then discounting those cash flows based on then-current market rates for similar loans. Because acquired loans are marked to fair value and the legacy allowance for loan losses is eliminated at acquisition, the Company believes an analysis of the loan portfolio carrying value and unpaid borrower principal balances ("UPB") is important in evaluating the portfolio.

~~Loans, net of deferred loan fees, totaled $763.4 million as of December 31, 2012, which was an increase of $27.3 million, or 4 percent, from December 31, 2011.~~ The ~~Company~~following ~~began~~table tosummarizes ~~generate net loan growth in~~ the ~~second~~UPB ~~half of 2012. The first half of the year was marked primarily by a focus on reducing problem assets~~ and ~~building~~carrying ~~out~~amounts ~~its lending platform, which included recruiting experienced commercial and retail bankers. In the last half~~ of the ~~year, the Company was able to successfully leverage its lending platform and execute on its business plan by growing its~~ loan portfolio~~. The~~ ~~Company's 2012 loan growth also reflects its strategy to re-balance the loan portfolio~~ by ~~emphasizing commercial and industrial loans as well as owner occupied commercial real estate loans while reducing exposure to legacy speculative construction and development loans~~type. ~~As a result, construction and development loans decreased by $21.1 million, or 21 percent, from December 31, 2011 while commercial real estate and commercial and industrial loans increased in 2012.~~

The following table summarizes the loan portfolio composition by category for the periods presented.



	December 31, 2013						December 31, 2012
(Dollars in thousands)	UPB		Carrying Amount		% of UPB		UPB		Carrying Amount		% of UPB

Commercial:
Commercial real estate	$	685,336	$	670,084	97.8	%	$	402,031	$	392,955	97.7	%
Commercial and industrial	234,905		230,614		98.2		100,893		98,701		97.8	%
Construction and development	181,758		173,870		95.7		79,081		72,566		91.8	%
Consumer:
Residential real estate	195,166		190,344		97.5		128,980		125,277		97.1	%
Construction and development	24,108		22,520		93.4		6,457		6,203		96.1	%
Home equity	98,527		94,390		95.8		66,634		63,486		95.3	%
Consumer	8,697		8,332		95.8		4,382		4,325		98.7	%
Total	$	1,428,497	$	1,390,154	97.3	%	$	788,458	$	763,513	96.8	%

	Successor Company					Predecessor Company
	December 31,2012					December 31,2011					December 31,2010					December 31,2009					December 31,2008
(Dollars in thousands)	Amount			% of TotalLoans		Amount			% of TotalLoans		Amount			% of TotalLoans		Amount			% of TotalLoans		Amount			% of TotalLoans
Commercial real estate	$	392,955		51.47	%	$	367,598		49.92	%	$	17,122		27.14	%	$	18,125		24.64	%	$	21,560		27.63	%
Residential real estate and home equity	188,763			24.72	%	200,474			27.22	%	31,228			49.49	%	30,943			42.07	%	29,577			37.90	%
Commercial and industrial	98,701			12.93	%	62,417			8.48	%	6,463			10.24	%	10,367			14.09	%	6,289			8.06	%
Construction and development	78,769			10.32	%	99,897			13.56	%	7,046			11.17	%	13,116			17.83	%	19,119			24.50	%
Consumer	4,325			0.56	%	6,048			0.82	%	1,238			1.96	%	1,005			1.37	%	1,485			1.91	%
Total loans	763,513			100.00	%	736,434			100.00	%	63,097			100.00	%	73,556			100.00	%	78,030			100.00	%
Less: deferred loan fees	(97		)			(345		)			(10		)			(21		)			(35		)
Total loans, net	$	763,416				$	736,089				$	63,087				$	73,535				$	77,995

In each of Piedmont's three bank acquisitions in 2010 and 2011, the Company made fair value adjustments to each purchased loan portfolio ("legacy loans") by projecting expected future principal and interest cash flows over the remaining life of each loan and then discounting those cash flows based on then-current market rates for similar loans. Because legacy loans are marked to fair value and the legacy allowance for loan losses is eliminated at acquisition, the Company believes an analysis of the loan portfolio carrying value and gross unpaid principal balances ("UPB") is important in evaluating the portfolio.

The table below summarizes the UPB and carrying amounts of the loan portfolio by type as of December 31, 2012. Since push-down accounting had not been applied to legacy VantageSouth's portfolio as of December 31, 2011, UPB data for that period has not been included. The difference between the UPB and carrying amounts in the table represents historical charge offs on outstanding loans plus the remaining purchase accounting fair value discount at December 31, 2012.

	December 31, 2012
(Dollars in thousands)	UPB		CarryingAmount		% of UPB
Commercial real estate	$	402,031	$	392,955	97.7	%
Construction and development	85,538		78,769		92.1
Commercial and industrial	100,893		98,701		97.8
Residential real estate	128,980		125,277		97.1
Home equity	66,634		63,486		95.3
Consumer	4,382		4,325		98.7
Total loans	$	788,458	$	763,513	96.8	%

Legacy loans decreased from $664.8 million as of December 31, 2011 to $476.5 million as of December 31, 2012 while loans originated subsequent to Piedmont's respective bank acquisitions ("new loans") increased from $71.7 million as of December 31, 2011 to $287.0 million as of December 31, 2012. As the portfolio mix becomes more heavily weighted toward new loans, the portfolio more closely reflects the Company's current underwriting standards and its portfolio allocation strategy.

The following table summarizes the scheduled maturities of loans separated by fixed and variable rate loans.

December 31, 2012

December 31, 2013

(Dollars in thousands)

Commercial Real Estate

Commercial Construction and Development

Commercial and Industrial

Residential Real Estate

Consumer Construction

Home Equity

Consumer

Total

Fixed Rate: (1)

1 year or less

7435,~~302~~327

68,~~166~~946

209,~~667~~821

1812,~~375~~002

13,~~960~~789

~~1,915~~171

~~969~~1,587

~~124~~71,~~354~~643

1-5 years

~~146~~327,~~073~~883

1629,~~672~~912

2151,~~256~~524

4669,~~570~~336

112,~~828~~403

3,~~690~~468

14,~~695~~515

~~237~~499,~~784~~041

After 5 years

6580,~~935~~953

24,~~406~~162

413,~~886~~611

2023,~~745~~382

~~510~~719

~~281~~261

~~249~~523

95123,~~012~~611

Total

~~286~~444,~~310~~163

2543,~~244~~020

4674,~~809~~956

85104,~~690~~720

416,~~298~~911

53,~~886~~900

26,~~913~~625

~~457~~694,~~150~~295

Variable Rate: (1) (2)

1 year or less

2129,~~819~~368

2476,~~104~~486

3078,~~230~~863

49,~~530~~805

14,~~161~~531

~~696~~1,933

~~1,017~~689

83201,~~557~~675

1-5 years

55136,~~421~~548

2137,~~601~~589

1048,~~928~~001

914,~~590~~306

~~744~~1,078

78,~~224~~605

~~225~~682

~~105~~246,~~733~~809

After 5 years

2960,~~405~~005

116,~~617~~775

1028,~~734~~794

2561,~~467~~513

—

4979,~~680~~952

~~170~~336

~~117~~247,~~073~~375

Total

~~106~~225,~~645~~921

47130,~~322~~850

51155,~~892~~658

3985,~~587~~624

15,~~905~~609

5790,~~600~~490

1,~~412~~707

~~306~~695,~~363~~859

Total loans

~~392~~670,~~955~~084

72173,~~566~~870

98230,~~701~~614

~~125~~190,~~277~~344

622,~~203~~520

6394,~~486~~390

48,~~325~~332

~~763~~1,~~513~~390,154


(1)	Loan maturities are presented based on the final contractual maturity of each loan and do not reflect contractual principal payments prior to maturity on amortizing loans.

(2) As of December 31, ~~2012~~2013, the Company had approximately $~~227~~261 million of variable rate loans with interest rate floors in effect (i.e., floor rate exceeded variable rate). Interest rates on these loans will not reset until the underlying index plus any spread increase above the floor rate.

Nonperforming Assets

Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. Loans are generally classified as nonaccrual if they are past due for a period of 90 days or more, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or as partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower in accordance with the contractual terms.

PCI loans with common risk characteristics are grouped in pools at acquisition. These loans are evaluated for accrual status at the pool level rather than the individual loan level and performance is based on management's ability to reasonably estimate the amount and timing of future cash flows rather than a borrower's ability to repay contractual loan amounts. Since management is able to reasonably estimate the amount and timing of future cash flows on the Company's PCI loan pools, none of these loans have been identified as nonaccrual. However, PCI loans included in pools are identified as nonperforming if they become past due 90 days or more.

While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Assets acquired as a result of foreclosure are recorded at estimated fair value in other real estate (or foreclosed assets). Any excess of cost over estimated fair value at the time of foreclosure is charged to the allowance for loan losses. Valuations are periodically performed on these properties, and any subsequent write-downs are charged to earnings. Routine maintenance and other holding costs are included in non-interest expense.

A loan is classified as a troubled debt restructuring (“TDR”) by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company grants concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company does not generally grant concessions through forgiveness of principal or accrued interest.

The Company’s policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual ~~going~~until ~~forward~~there ~~until~~is demonstrated performance under new terms. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on non-accrual status. The Company closely monitors these loans and ceases accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms.

The following table summarizes the Company's nonperforming assets for the periods presented.

	Successor Company			~~Predecessor Company~~		Predecessor Company
(Dollars in thousands)	December 31, ~~2012~~2013		December 31, 2012	~~December 31, 2011~~		December 31, ~~2010~~2011		December 31, ~~2009~~2010		December 31, ~~2008~~2009
Nonaccrual loans:
Commercial real estate	$	14,~~763~~747	$	$1,763	~~731~~	$	~~380~~731	$	~~2,448~~380	$	~~338~~2,448
Construction and development	~~553~~3,285		553	~~1,558~~		—1,558		~~2,644~~—		12,~~295~~644
Commercial and industrial	642,154		64	45		—45		~~670~~—		75670
Residential real estate and home equity	34,~~392~~378		3,392	~~1,173~~		671,173		~~461~~67		35461
Consumer	~~223~~164		223	1		—1		—		—
Total nonaccrual loans	514,~~995~~728		5,995	~~3,508~~		~~447~~3,508		~~6,223~~447		16,~~743~~223
Accruing loans past due 90 days or more (1)	6,~~775~~197		6,775	~~22,888~~		—22,888		—		—
Total nonperforming loans	1220,~~770~~925		12,770	~~26,396~~		~~447~~26,396		~~6,223~~447		16,~~743~~223
Foreclosed assets	510,~~837~~823		5,837	~~11,066~~		~~890~~5,837		~~1,421~~890		1,~~233~~421
Total nonperforming assets	$	1831,~~607~~748	$	$18,607	~~37,462~~	$	132,~~337~~233	$	71,~~644~~337	$	27,~~976~~644
Restructured loans not included above	$	~~104~~534	$	$104	~~782~~	$	—782	$	—	$	—

Filing Compare · VANTAGESOUTH BANCSHARES, INC.