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NBBC > SEC Filings for NBBC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for NEWBRIDGE BANCORP

Form 10-Q for NEWBRIDGE BANCORP


14-Nov-2012

Quarterly Report


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

The discussion presented herein is intended to provide an overview of the changes in financial condition and results of operations during the time periods 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) the successful completion of the recently announced capital raise; (2) the receipt of customary regulatory approvals and determinations related to the recently announced capital raise; (3) receipt of the shareholder approvals related to the recently announced capital raise; (4) recently enacted legislation, or legislation enacted in the future, or any proposed federal programs may subject Bancorp to increased regulation and may adversely affect Bancorp; (5) 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; (6) 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"); (7) inflation, deflation, interest rate, market and monetary fluctuations; (8) 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; (9) the timely development of competitive new products and services by Bancorp and the acceptance of these products and services by new and existing customers; (10) the willingness of customers to accept third party products marketed by Bancorp; (11) the willingness of customers to substitute competitors' products and services for Bancorp's products and services and vice versa; (12) the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking and securities); (13) technological changes; (14) changes in consumer spending and saving habits; (15) 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; (16) the current stresses in the financial and real estate markets, including possible continued deterioration in property values; (17) unanticipated regulatory or judicial proceedings; (18) the impact of changes in accounting policies by the Securities and Exchange Commission (the "SEC"); (19) adverse changes in financial performance and/or condition of Bancorp's borrowers which could impact repayment of such borrowers' outstanding loans; and (20) 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 13 of Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 22, 2012 (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.

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 is extremely competitive, due in large part to intrastate and interstate branching laws. Many of the Company's competitors are significantly larger and have greater resources. The Company continues to encounter significant 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, almost all of which have numerous branches in NC. The Company's competition is not limited to financial institutions based in NC. The enactment of federal legislation authorizing nationwide interstate banking has greatly increased the size and financial resources of some of the Company's competitors. Many of its competitors have substantially higher lending limits due to their greater total capitalization, and many 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.

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. A summary of the allowance for credit losses, the most complex and subjective accounting policy of the Company, is discussed under the heading "Asset Quality and Allowance for Credit Losses" as well as in Note 4 of the Notes to Consolidated Financial Statements. Income taxes and the valuation allowance against deferred tax assets are discussed in Note 5 of the Notes to Consolidated Financial Statements.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Net Interest Income

Net interest income for the third quarter of 2012, on a taxable equivalent basis, was $15.8 million, a decrease of $0.9 million, or 5.6%, from $16.7 million for the third quarter of 2011. Average earning assets in the third quarter of 2012 decreased $18.7 million, or 1.2%, to $1.56 billion, compared to $1.58 billion in the third quarter of 2011. Average interest-bearing liabilities in the third quarter of 2012 decreased $36.4 million, or 2.6%, to $1.34 billion, compared to $1.37 billion in the third quarter of 2011. Taxable equivalent net interest margin decreased to 4.02% for the third quarter of 2012, compared to 4.20% for the third quarter of 2011. The interest rate spread decreased in the third quarter of 2012 by 14 basis points compared to the third quarter of 2011.

The decrease in net interest margin and interest rate spread was driven primarily by an overall lower yield on the investment portfolio and a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. The par value of the Company's investment in U.S. government agency securities decreased to $37.0 million at September 30, 2012 from $48.0 million at September, 30, 2011 due to calls on higher yielding securities. At September 30, 2012, the par value of the Company's investment in corporate bonds was $150.8 million compared to $110.8 million at September 30, 2011. The weighted average duration of the Company's investment securities was 2.9 years at September 30, 2012, compared to 3.4 years at September 30, 2011. The sustained low interest rate environment continues to impact loan yields. The annualized average yield on loans decreased to 4.81% for the three months ended September 30, 2012 compared to 5.18% for the three months ended September 30, 2011. The average yield on earning assets during the third quarter of 2012 was 47 basis points lower than the average yield on earning assets during the comparable period in 2011, while the average rate on interest-bearing liabilities decreased by 33 basis points during the same time period. The highest cost category of deposits remains retail time deposits, which had a weighted average interest rate of 0.64% at September 30 2012. Approximately $94.9 million of retail time deposits with a weighted average rate of 0.46% will mature in the fourth quarter of 2012. The following table provides an analysis of average volumes, yields and rates and net interest income on a taxable equivalent basis for the three months ended September 30, 2012 and 2011.

(Fully taxable equivalent basis1, dollars in thousands)

                                          Three Months Ended                            Three Months Ended
                                          September 30, 2012                            September 30, 2011
                                               Interest      Annualized                      Interest      Annualized
                                 Average        Income/        Average         Average        Income/        Average
                                 Balance        Expense      Yield/Rate        Balance        Expense      Yield/Rate
Earning assets:
Loans receivable2              $ 1,165,080     $  14,084            4.81 %   $ 1,234,861     $  16,121            5.18 %
Taxable securities                 361,123         3,033            3.34         286,736         3,129            4.33
Tax exempt securities               17,464           279            6.36          16,790           283            6.69
FHLB stock                           7,163            28            1.56           8,830            18            0.83
Interest-bearing bank
balances                            10,430            10            0.38          32,709            20            0.24
Federal funds sold                       -             -               -               -             -               -

Total earning assets             1,561,260        17,434            4.44       1,579,926        19,571            4.91

Nonearning assets:
Cash and due from banks             25,439                                        25,623
Premises and equipment              36,544                                        36,387
Other assets                       120,127                                       104,938
Allowance for credit losses        (28,757 )                                     (28,456 )

 Total assets                  $ 1,714,613     $  17,434                     $ 1,718,418     $  19,571

Interest-bearing
liabilities:
Savings deposits               $    45,298     $       6            0.05 %   $    40,675     $      10            0.10 %
NOW deposits                       425,361           259            0.24         420,734           557            0.53
Money market deposits              366,213           224            0.24         364,813           657            0.71
Time deposits                      389,638           599            0.61         428,291         1,028            0.95
Other borrowings                    46,926           343            2.91          46,774           328            2.78
Borrowings from FHLB                62,259           232            1.48          70,761           276            1.55

Total interest-bearing
liabilities                      1,335,695         1,663            0.50       1,372,048         2,856            0.83

Other liabilities and
shareholders' equity:
Demand deposits                    189,979                                       163,440
Other liabilities                   18,442                                        17,849
Shareholders' equity               170,497                                       165,081
Total liabilities and
shareholders' equity           $ 1,714,613         1,663                     $ 1,718,418         2,856

Net interest income and net
interest margin3                               $  15,771            4.02 %                   $  16,715            4.20 %

Interest rate spread4                                               3.94 %                                        4.08 %

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 nondeductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $92 for 2012 and $92 for 2011.

2 The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $84 and $139 for the three months ended September 30, 2012 and 2011, 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 liability rate.

Noninterest Income and Expense

In the third quarter of 2012, noninterest income decreased to $(6.4) million, from $3.3 million during the same period in 2011. Writedowns and losses on sales of real estate acquired in settlement of loans increased to $10.6 million, from $0.8 million during the same period last year as the Company made significant progress with the asset disposition plan. See "Asset Quality and Allowance for Credit Losses" for further discussion of this plan. The Company recognized gains on the sale of investment securities of $3,000 during the third quarter of 2012, compared to $65,000 during the third quarter of 2011. Retail Banking income decreased 6.1% to $2.3 million in the third quarter of 2012 from $2.5 million in the third quarter of 2011due primarily to ongoing regulatory changes in the industry and changes in consumer behavior. Mortgage Banking revenue increased to $0.7 million in the third quarter of 2012, compared to $0.4 million in the third quarter of 2011, due to higher volume of mortgage originations.

In the third quarter of 2012, noninterest expense increased to $16.5 million from $14.9 million in the third quarter of 2011. In the third quarter of 2012, the Company expensed $1.9 million in adjustments for impairments on facilities and for other nonrecurring accruals. Federal Deposit Insurance Corporation ("FDIC") insurance expense decreased to $0.4 million in the third quarter of 2012 from $0.6 million in the third quarter of 2011. In the third quarter of 2011, the Bank received a new risk rating which reduced the Bank's assessments. Compared to the third quarter of 2011, the Company recorded decreases in personnel expense and furniture and equipment expense during the third quarter of 2012 as a result of the Company's continued focus on efficiency and a disciplined cost management culture.

The following table presents the details of Other Noninterest Expense (dollars in thousands):

                                                Three Months Ended
                                                   September 30            Percentage
                                                 2012          2011         Variance

    Other noninterest expense:
    Advertising                               $      367      $   346              6.1 %
    Bankcard expense                                 117          166            (29.5 )
    Postage                                          186          225            (17.3 )
    Telephone                                        182          164             11.0
    Amortization of core deposit intangible          182          182              0.0
    Stationery, printing and supplies                 97          125            (22.4 )
    Other expense                                  2,094        1,274             64.4
    Total other noninterest expense           $    3,225      $ 2,482             29.9

Income Taxes

The Company recorded income tax benefit of $3.7 million for the third quarter of 2012, compared to income tax expense of $501,000 for the third quarter of 2011. The Company's effective tax rate was 10.2% for the three-month period ended September 30, 2012, compared to 31.6% for the third quarter of 2011. The change in the effective tax rate is primarily a result of an increase of $11.0 million in the valuation allowance against deferred tax assets in 2012.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net Interest Income

Net interest income for the first nine months of 2012, on a taxable equivalent basis, was $48.5 million, a decrease of $2.4 million, or 4.6%, from $50.8 million for the first nine months of 2011. Average earning assets in the first nine months of 2012 decreased $39.9 million, or 2.5%, to $1.58 billion, compared to $1.62 billion in the first nine months of 2011. Average interest-bearing liabilities in the first nine months of 2012 decreased $63.5 million, or 4.5%, to $1.35 billion, compared to $1.41 billion in the first nine months of 2011. Taxable equivalent net interest margin decreased to 4.11% for the nine months of 2012, compared to 4.21% for the first nine months of 2011, a decrease of 10 basis points. The interest rate spread decreased in the first nine months of 2012 by six basis points compared to the first nine months of 2011.

The decrease in net interest margin and interest rate spread was driven primarily by an overall lower yield on the investment portfolio and a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. The par value of the Company's investment in U.S. government agency securities decreased to $37.0 million at September 30, 2012 from $48.0 million at September 30, 2011 due to calls on higher yielding securities. At September 30, 2012, the par value of the Company's investment in corporate bonds was $150.8 million compared to $110.8 million at September 30, 2011. The weighted average duration of the Company's investment securities was 2.9 years at September 30, 2012, compared to 3.4 years at September 30, 2011. For the nine months ended September 30, 2012, the annualized average yield on loans decreased to 4.95% from 5.19% for the nine months ended September 30, 2011. The net interest margin is also impacted by changes in interest income from nonaccrual loans. For the nine months ended September 30, 2012, nonaccrual interest decreased the net interest margin by nine basis points compared to 11 basis points for the nine months ended September 30, 2011. The average yield on earning assets during the first nine months of 2012 was 39 basis points lower than the average yield on earning assets during the comparable period in 2011, while the average rate on interest-bearing liabilities decreased by 33 basis points during the same time period. The following table provides an analysis of average volumes, yields and rates and net interest income on a taxable equivalent basis for the nine months ended September 30, 2012 and 2011.

(Fully taxable equivalent basis1, dollars in thousands)

                                           Nine Months Ended                             Nine Months Ended
                                          September 30, 2012                            September 30, 2011
                                               Interest      Annualized                      Interest      Annualized
                                 Average        Income/        Average         Average        Income/        Average
                                 Balance        Expense      Yield/Rate        Balance        Expense      Yield/Rate
Earning assets:
Loans receivable2              $ 1,177,334     $  43,587            4.95 %   $ 1,289,198     $  50,052            5.19 %
Taxable securities                 357,371         9,915            3.71         275,665         9,535            4.62
Tax exempt securities               17,692           852            6.43          16,247           848            6.98
FHLB stock                           7,302            79            1.45           9,625            60            0.83
Interest-bearing bank
balances                            15,462            30            0.26          24,359            44            0.24
Federal funds sold                       -             -               -               -             -               -

Total earning assets             1,575,161        54,463            4.62       1,615,094        60,539            5.01

Nonearning assets:
Cash and due from banks             26,132                                        29,815
Premises and equipment              36,522                                        37,579
Other assets                       122,271                                       106,483
Allowance for credit losses        (28,635 )                                     (29,446 )

Total assets                   $ 1,731,451     $  54,463                     $ 1,759,525     $  60,539

Interest-bearing
liabilities:
Savings deposits               $    44,155     $      20            0.06 %   $    40,823     $      30            0.10 %
NOW deposits                       433,546         1,015            0.31         433,346         2,018            0.62
Money market deposits              373,158         1,024            0.37         347,244         1,912            0.74
Time deposits                      379,106         2,158            0.76         443,166         3,553            1.07
Other borrowings                    47,016         1,032            2.93          56,712         1,313            3.10
Borrowings from FHLB                74,532           760            1.36          93,701           907            1.29

Total interest-bearing
liabilities                      1,351,513         6,009            0.59       1,414,992         9,733            0.92

Other liabilities and
shareholders' equity:
Demand deposits                    192,100                                       164,047
Other liabilities                   19,372                                        16,657
Shareholders' equity               168,466                                       163,829
Total liabilities and
shareholders' equity           $ 1,731,451         6,009                     $ 1,759,525         9,733

Net interest income and net
interest margin3                               $  48,454            4.11 %                   $  50,806            4.21 %

Interest rate spread4                                               4.03 %                                        4.09 %

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 nondeductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $281 for 2012 and $276 for 2011.

2 The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $373 and $422 for the nine months ended September 30, 2012 and 2011, 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 liability rate.

Noninterest Income and Expense

In the first nine months of 2012, noninterest income decreased to $(2.4) million, from $10.2 million during the same period in 2011. Writedowns and losses on sales of real estate acquired in settlement of loans increased to $14.6 million, from $3.9 million during the same period last year as the Company made significant progress with the asset disposition plan. See "Asset Quality and Allowance for Credit Losses" for further discussion of this plan. The Company recognized gains on the sale of investment securities of $3,000 during the first nine months of 2012, compared to $2.0 million during the first nine months of 2011. Retail Banking income decreased 8.3% to $6.9 million in the first nine months of 2012 from $7.5 million in the first nine months of 2011due primarily to ongoing regulatory changes in the industry and changes in consumer behavior. Mortgage Banking revenue increased to $1.8 million in the first nine months of 2012, compared to $1.1 million in the first nine months of 2011, due to higher volume of mortgage originations.

In the first nine months of 2012, noninterest expense was $43.9 million, the same as for the first nine months of 2011. In the third quarter of 2012, the Company expensed $1.9 million in adjustments for impairments on facilities and for other nonrecurring accruals. FDIC insurance expense decreased to $1.3 million in the first nine months of 2012 from $2.0 million in the first nine months of 2011. On February 7, 2011, the FDIC adopted a new assessment formula, which became effective in the second quarter of 2011. The application of the new assessment formula had the effect of reducing the Bank's assessments. In the third quarter of 2011, the Bank received a new risk rating which further reduced the Bank's assessments. Compared to the first nine months of 2011, the Company recorded decreases in personnel expense and furniture and equipment expense during the first nine months of 2012 as a result of the Company's continued focus on efficiency and a disciplined cost management culture.

The following table presents the details of Other Noninterest Expense (dollars in thousands):

                                                Nine Months Ended
                                                   September 30           Percentage
                                                 2012         2011         Variance
. . .
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