The discussion presented herein is intended to provide an overview of the changes in financial condition and results of operations during the time periods presented as required by Item 303 of Regulation S-K for NewBridge Bancorp ("Bancorp" or the "Company") and its wholly-owned subsidiary, NewBridge Bank (the "Bank").
The consolidated financial statements also include the accounts and results of operations of the Bank's wholly-owned subsidiaries. This discussion and analysis is intended to complement the unaudited financial statements, notes and supplemental financial data in this Quarterly Report on Form 10-Q, and should be read in conjunction therewith.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of Bancorp including but not limited to Bancorp's operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as "expects", "anticipates", "should", "estimates", "believes" and variations of these words and other similar statements. For this purpose, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation: (1) in October of 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law, followed in February 2009 by the American Recovery and Reinvestment Act of 2009 (the "ARRA"). In addition, the U.S. Department of the Treasury (the "U.S. Treasury") and federal banking regulators are implementing a number of programs to address capital and liquidity issues in the banking system, all of which may have significant effects on Bancorp and the banking industry, the exact nature and extent of which cannot be determined at this time; (2) the strength of the United States economy generally, and the strength of the local economies in which Bancorp conducts operations, may be different than expected, resulting in, among other things, a continued deterioration in credit quality, including the resultant effect on Bancorp's loan portfolio and allowance for credit losses;
(3) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve"); (4) inflation, deflation, interest rate, market and monetary fluctuations; (5) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate and market liquidity conditions) and the impact of such conditions on Bancorp's capital markets and capital management activities; (6) the timely development of competitive new products and services by Bancorp and the acceptance of these products and services by new and existing customers; (7) the willingness of customers to accept third party products marketed by Bancorp;
(8) the willingness of customers to substitute competitors' products and services for Bancorp's products and services and vice versa; (9) the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking and securities); (10) technological changes; (11) changes in consumer spending and saving habits; (12) the effect of corporate restructurings, acquisitions and/or dispositions, and the failure to achieve the expected revenue growth and/or expense savings from such corporate restructurings, acquisitions and/or dispositions; (13) the current stresses in the financial and real estate markets, including possible continued deterioration in property values; (14) unanticipated regulatory or judicial proceedings; (15) the impact of changes in accounting policies by the Securities and Exchange Commission (the "SEC"); (16) adverse changes in financial performance and/or condition of Bancorp's borrowers which could impact repayment of such borrowers' outstanding loans; and (17) Bancorp's success at managing the risks involved in the foregoing. Bancorp cautions that the foregoing list of important factors is not exhaustive. See also those risk factors identified in the section headed "Risk Factors", beginning on page 14 of Bancorp's Annual Report on Form 10-K for the fiscal year ended

December 31, 2008, filed with the SEC on March 16, 2009 (the "Annual Report"). Bancorp undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time by or on behalf of Bancorp.
Introduction
Bancorp is a bank holding company incorporated under the laws of North Carolina ("NC") and registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Bancorp's principal asset is the stock of its banking subsidiary, the Bank.
Bancorp is the successor entity to LSB Bancshares, Inc., which was incorporated on December 8, 1982 ("LSB"). On July 31, 2007, FNB Financial Services Corporation ("FNB"), a bank holding company, also incorporated in NC and registered under the BHCA, merged with and into LSB in a merger of equals (the "Merger"). LSB's name was then changed to "NewBridge Bancorp".
The Bank, a NC chartered non-member bank, is the successor entity to Lexington State Bank ("LSB Bank"), which was incorporated on July 5, 1949. As a result of the Merger, Bancorp acquired FNB Southeast, a NC chartered member bank, the sole banking subsidiary of FNB. On November 12, 2007, FNB Southeast merged with and into LSB Bank and the surviving bank changed its name to "NewBridge Bank". The Company's results of operations are dependent primarily on the results of operations of the Bank and thus are dependent to a significant extent on net interest income, which is the difference between the income earned on the Bank's loan and investment portfolios and cost of funds, consisting of interest paid on deposits and borrowings. Results of operations are also affected by the Company's provision for credit losses, mortgage loan sales activities, service charges and other fee income, and noninterest expense. The Company's noninterest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing, professional fees, and advertising and business promotion expenses. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.
Commercial banking in North Carolina and Virginia ("VA") is extremely competitive, due in large part to intrastate and interstate branching laws. Currently, many of the Company's competitors are significantly larger and have greater resources. The Company encounters competition from a number of sources, including bank holding companies, financial holding companies, commercial banks, thrift institutions, credit unions and other financial institutions and financial intermediaries. The Company competes in its market areas with some of the largest banking organizations in the Southeast and nationally, several of which have numerous branches in NC and VA. The Company's competition is not limited to financial institutions based in NC and VA. The enactment of federal legislation authorizing nationwide interstate banking has greatly increased the size and financial resources of some of the Company's competitors. Consequently, many of its competitors have substantially higher lending limits due to their greater total capitalization, and some may perform functions for their customers that the Company generally does not offer. The Company primarily relies on providing quality products and services at a competitive price within its market areas. As a result of interstate banking legislation, the Company's market is open to future penetration by banks located in other states, provided that the other states also permit de novo branching and acquisitions by NC and VA banking institutions, thereby increasing competition.
The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company's operations and significant changes in its results of operations for the periods presented. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report.

Application of Critical Accounting Policies The accounting and reporting policies of the Company and its subsidiary comply with accounting principles generally accepted in the United States and conform to standards within the banking industry. The preparation of the financial information contained in this Quarterly Report on Form 10-Q requires the Company's management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company's management evaluates these estimates on an ongoing basis. The following is a summary of the policy regarding the allowance for credit losses, one of the most complex and subjective accounting policies of the Company.
The allowance for credit losses, which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with management's best estimate of probable credit losses incurred as of the balance sheet date. The Company's allowance for credit losses is analyzed monthly by management. This analysis includes a methodology that separates the total loan portfolio into loans deemed impaired and homogeneous loan classifications for purposes of evaluating risk, as well as analysis of certain individually identified loans. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. The required allowance for impaired loans is determined based on expected future cash flows to be received from the borrower, and the fair value of the underlying collateral. Management also analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While management uses the best information to make evaluations, future adjustments may be needed if economic or other conditions differ substantially from the assumptions used. Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Net Interest Income
The primary source of earnings for the Bank is net interest income, which represents the dollar amount by which interest generated from earning assets exceeds the cost of funds. Earning assets consist primarily of loans and investment securities and cost of funds is the interest paid on interest-bearing deposits and borrowed funds.
Net interest income for the third quarter of 2009, on a taxable equivalent basis, was $15.6 million, a decrease of $0.2 million or 1.5%, from $15.8 million for the third quarter of 2008. This was primarily due to a slight decline in net interest margin. The taxable-equivalent net interest margin for the third quarter of 2009 was 3.27%, compared to 3.34% for the same period of 2008, a decline of 7 basis points. The average yield on earning assets during the third quarter of 2009 was 82 basis points lower than the average yield on earning assets during the comparable period in 2008, while the average rate on interest-bearing liabilities decreased by 79 basis points during the same time period, which resulted in a decrease in the interest rate spread in the third quarter of 2009 of 3 basis points compared to the third quarter of 2008. Approximately $483 million of time deposits will mature and reprice during the fourth quarter of 2009 from a current weighted average interest rate of 3.15%. Average earning assets in the third quarter of 2009 increased $5.4 million, or 0.3%, to $1.89 billion, compared to $1.88 billion in the third quarter of 2008. Average interest-bearing liabilities for the third quarter of 2009 decreased $23.6 million, or 1.4%, to $1.67 billion, compared to $1.69 billion for the third quarter of 2008. The following table provides an analysis of average volumes, yields and rates and net interest income on a tax-equivalent basis for the three months ended September 30, 2009 and 2008.

(Fully taxable equivalent basis1, in thousands)

                                           Three Months Ended                                     Three Months Ended
                                           September 30, 2009                                     September 30, 2008
                                                Interest         Annualized                            Interest         Annualized
                               Average           Income/           Average            Average           Income/           Average
                               Balance           Expense         Yield/Rate           Balance           Expense         Yield/Rate
Earning assets:
Loans receivable2            $ 1,518,257        $  20,736               5.42 %      $ 1,601,183        $  25,100               6.24 %
Taxable securities               203,993            2,478               4.82            142,782            1,797               5.01
Tax exempt securities            107,410            1,728               6.38            115,089            1,672               5.78
Equity securities                 11,190                -               0.00              8,721               63               2.87
Interest-bearing bank
balances                          39,129               31               0.31              9,494               55               2.30
Federal funds sold                 6,809               17               0.99              4,167               20               1.91


Total earning assets           1,886,788           24,990               5.25          1,881,436           28,707               6.07

Non-earning assets:
Cash and due from banks           31,362                                                 37,075
Premises and equipment            42,687                                                 45,760
Other assets                     101,751                                                122,466
Allowance for credit
losses                           (44,401 )                                              (31,946 )


Total assets                 $ 2,018,187        $  24,990                           $ 2,054,795        $  28,707


Interest-bearing
liabilities:
Savings deposits             $    41,016        $      10               0.10 %      $    40,998        $      16               0.16 %
NOW deposits                     184,194              132               0.28            176,264              204               0.46
Money market deposits            392,633              935               0.94            425,669            2,419               2.26
Time deposits                    851,089            6,571               3.06            849,750            8,257               3.87
Other borrowings                  72,017              620               3.42             86,843              849               3.89
Borrowings from Federal
Home Loan Bank                   128.537            1,172               3.62            113,543            1,168               4.09


Total interest-bearing
liabilities                    1,669,486            9,440               2.24          1,693,067           12,913               3.03

Other liabilities and
shareholders' equity:
Demand deposits                  157,889                                                161,367
Other liabilities                 22,870                                                 12,739
Shareholders' equity             167,942                                                187,622

Total liabilities and
shareholders' equity         $ 2,018,187            9,440                           $ 2,054,795           12,913


Net interest income and
net interest margin3                            $  15,550               3.27 %                         $  15,794               3.34 %


Interest rate spread4                                                   3.01 %                                                 3.04 %

1 Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $519 for 2009 and $451 for 2008.

2 The average loans receivable balances include non-accruing loans. Amortization of loan fees, net of deferred costs, of $313 and $528 for the three months ended September 30, 2009 and 2008, respectively, are included in interest income.

3 Net interest margin is computed by dividing net interest income by average earning assets.

4 Earning assets yield minus interest-bearing liabilities rate.

Noninterest Income and Expense
In the third quarter of 2009, noninterest income increased to $5.6 million, from $4.6 million during the same period in 2008. The Company recorded a net pre-tax gain of $1.2 million during the third quarter of 2009 from the sale of its merchant services portfolio. Service charge income decreased to $2.2 million in the third quarter of 2009 from $2.4 million in the third quarter of 2008. Income on bank-owned life insurance decreased to $156,000 in the third quarter of 2009 from $290,000 in the third quarter of 2008.
In the third quarter of 2009, noninterest expense increased to $19.8 million from $17.6 million in the third quarter of 2008. The increase was primarily the result of $2.9 million of one-time charges, including $1.2 million related to the recently announced plan to restructure operations in the Piedmont Triad region of North Carolina, $1.1 million for the Company's decision to upgrade to a new core processing system, and $580,000 to terminate certain non-executive employment agreements. In addition, insurance premiums to the Federal Deposit Insurance Corporation (the "FDIC") increased to $965,000 in the third quarter of 2009 from $332,000 in the third quarter of 2008, as a result of an increase in risk-based assessment rates, as well as the expiration of a one-time credit issued by the FDIC. These charges were partially offset by savings from a reduction in the number of employees, as well as lower costs for legal and professional fees, advertising, telephone, travel and printing and supplies expense.
The following table presents the details of Other Operating Income and Expenses. Other Operating Income and Expenses (dollars in thousands)

                                                 Three Months Ended
                                                    September 30,           Percentage
                                                  2009          2008         Variance
 Other operating income:
 Bankcard income                               $      643      $   653             (1.6 )%
 Fee income                                           983          707             39.0
 Investment services commissions                      345          221             55.9
 Insurance commissions                                 16           21            (24.8 )
 Trust income                                         135          151            (10.5 )
 Gain (loss) on sale of real estate                  (309 )        (37 )          735.7
 Income on bank-owned life insurance                  156          290            (46.2 )
 Gain on sale of merchant services portfolio        1,177            -              N/A
 Other income                                         157          123             27.7

                                               $    3,302        2,129             55.1

 Other operating expenses:
 Advertising                                   $      374      $   479            (21.9 )%
 Automated services                                 1,434        1,595            (10.1 )
 Bankcard expense                                     598          661             (9.6 )
 Legal and professional fees                          771        1,082            (28.7 )
 Postage                                              206          234            (12.2 )
 Stationery, printing and supplies                     53          175            (69.9 )
 OREO expense                                         191          101             89.2
 OREO write-down                                      659          348             89.3
 Other expense                                      1,831        1,633             12.1

                                               $    6,117      $ 6,308             (3.0 )

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net Interest Income
Net interest income for the first nine months of 2009, on a taxable equivalent basis, was $44.4 million, a decrease of $6.0 million or 12.0%, from $50.4 million for the first nine months of 2008. This was primarily due to a decline in net interest margin, which was due, in part, to irrational deposit pricing that occurred in the Bank's markets last fall, as a number of financial institutions entered a period of liquidity crisis. The taxable-equivalent net interest margin for the first nine months of 2009 decreased to 3.03%, compared to 3.55% for the same period in 2008, a decline of 52 basis points. In the first nine months of 2009, the average yield on earning assets decreased by 122 basis points from the first nine months of 2008, while the average rate on interest-bearing liabilities decreased by 75 basis points during the same time period. This resulted in a decrease in the interest rate spread in the first nine months of 2009 of 47 basis points compared to the same period of 2008. The decline in net interest margin was partially offset by an increase in average earning assets of $57.0 million, or 3.0%, to $1.96 billion in the first nine months of 2009 from $1.90 billion in the first nine months of 2008. Average interest-bearing liabilities for the first nine months of 2009 increased $24.6 million, or 1.4%, to $1.73 billion, compared to $1.70 billion for the first nine months of 2008. The following table provides an analysis of average volumes, yields and rates and net interest income on a tax-equivalent basis for the nine months ended September 30, 2009 and 2008.

(Fully taxable equivalent basis1, in thousands)

                                            Nine Months Ended                                      Nine Months Ended
                                           September 30, 2009                                     September 30, 2008
                                                Interest         Annualized                            Interest         Annualized
                               Average           Income/           Average            Average           Income/           Average
                               Balance           Expense         Yield/Rate           Balance           Expense         Yield/Rate

Earning assets:
Loans receivable2            $ 1,555,566        $  63,990               5.50 %      $ 1,560,476        $  77,377               6.62 %
Taxable securities               189,333            6,749               4.77            204,819            8,323               5.45
Tax exempt securities            110,349            5,116               6.20            114,130            4,906               5.70
Equity securities                 11,161                4               0.05              9,883              368               4.97
Interest-bearing bank
balances                          64,738              112               0.23              7,011              224               4.27
Federal funds sold                25,071               97               0.52              2,878               52               2.41


Total earning assets           1,956,218           76,068               5.20          1,899,197           91,250               6.42

Non-earning assets:
Cash and due from banks           22,648                                                 42,403
Premises and equipment            43,842                                                 45,310
Other assets                      96,339                                                122,305
Allowance for credit
losses                           (40,761 )                                              (30,954 )


Total assets                 $ 2,078,286        $  76,068                           $ 2,078,261        $  91,250


Interest-bearing
liabilities:
Savings deposits             $    40,876        $      30               0.10 %      $    41,691        $      51               0.16 %
NOW deposits                     180,367              405               0.30            171,964              626               0.49
Money market deposits            395,354            3,461               1.17            434,278            7,942               2.44
Time deposits                    888,512           22,330               3.36            825,159           25,297               4.10
Other borrowings                  73,411            1,949               3.55             90,812            2,769               4.07
Borrowings from Federal
Home Loan Bank                   149,399            3,515               3.15            139,366            4,153               3.98


Total interest-bearing
liabilities                    1,727,919           31,690               2.45          1,703,270           40,838               3.20

Other liabilities and
shareholders' equity:
Demand deposits                  157,196                                                166,940
Other liabilities                 21,084                                                 15,489
Shareholders' equity             172,087                                                192,562

Total liabilities and
shareholders' equity         $ 2,078,286           31,690                           $ 2,078,261           40,838


Net interest income and
net interest margin3                            $  44,378               3.03 %                         $  50,412               3.55 %


Interest rate spread4                                                   2.75 %                                                 3.22 %

1 Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $1,501 for 2009 and $1,335 for 2008.

2 The average loans receivable . . .