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NBBC > SEC Filings for NBBC > Form 10-Q on 13-May-2013All Recent SEC Filings

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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) 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; (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 13 of Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission (the "SEC") on March 25, 2013 (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.


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 March 31, 2013 Compared to Three Months Ended March 31, 2012

Net Interest Income

Net interest income for the first quarter of 2013, on a taxable-equivalent basis, was $15.2 million, a decrease of $1.1 million, or 6.8%, from $16.3 million for the first quarter of 2012. Average earning assets in the first quarter of 2013 decreased $8.4 million, or 0.5%, to $1.57 billion, compared to $1.58 billion in the first quarter of 2012. Average interest-bearing liabilities for the first quarter of 2013 decreased $89.3 million, or 6.5%, to $1.28 billion, compared to $1.37 billion for the first quarter of 2012.
Taxable-equivalent net interest margin decreased to 3.92% for the first quarter of 2013, compared to 4.15% for the first quarter of 2012, a decrease of 23 basis points. The interest rate spread decreased to 3.83% in the first quarter of 2013, compared to 4.06% in the first quarter of 2012, a decrease of 23 basis points.

The decrease in net interest margin and interest rate spread was driven primarily by lower yields on investment securities and a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. The weighted average duration of the Company's investment securities was 4.5 years at March 31, 2013. The average yield on earning assets during the first quarter of 2013 decreased 48 basis points to 4.27% from 4.75% during the comparable period in 2012, while the average rate on interest-bearing liabilities decreased 25 basis points to 0.44% from 0.69%. 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 March 31, 2013 and 2012.

(Fully taxable-equivalent basis1,dollars in thousands)

                                             Three Months Ended                               Three Months Ended
                                               March 31, 2013                                   March 31, 2012
                                                 Interest       Annualized                        Interest       Annualized
                                  Average        Income/          Average          Average        Income/          Average
                                  Balance        Expense        Yield/Rate         Balance        Expense        Yield/Rate
Earning assets:
Loans receivable2               $ 1,168,844     $   13,426              4.66 %   $ 1,191,042     $   14,922              5.04 %
Taxable securities                  364,874          2,749              3.01         337,773          3,365              4.01
Tax exempt securities                16,597            299              7.21          17,808            292              6.59
FHLB stock                            7,075             43              2.43           7,185             24              1.34
Interest-bearing bank
balances                             11,999              7              0.24          23,978             15              0.25

Total earning assets              1,569,389         16,524              4.27       1,577,786         18,618              4.75

Non-earning assets:
Cash and due from banks              24,412                                           26,348
Premises and equipment               35,446                                           36,442
Other assets                        100,203                                          124,789
Allowance for credit losses         (26,827 )                                        (29,182 )

Total assets                    $ 1,702,623     $   16,524                       $ 1,736,183     $   18,618

Interest-bearing liabilities:
Savings deposits                $    45,453     $        6              0.05 %   $    42,447     $        9              0.09 %
NOW deposits                        418,634            201              0.19         441,058            406              0.37
Money market deposits               324,589            155              0.19         377,836            457              0.49
Time deposits                       339,445            426              0.51         382,891            872              0.92
Other borrowings                     46,925            326              2.82          46,840            259              2.98
Borrowings from Federal
Home Loan Bank                      100,647            253              1.02          73,968            347              1.41

Total interest-bearing
liabilities                       1,275,693          1,367              0.44       1,365,040          2,350              0.69

Other liabilities and
shareholders' equity:
Demand deposits                     209,522                                          184,347
Other liabilities                    20,354                                           20,529
Shareholders' equity                197,054                                          166,267
Total liabilities and
shareholders' equity            $ 1,702,623          1,367                       $ 1,736,183          2,350

Net interest income and net
interest margin3                                $   15,157              3.92 %                   $   16,268              4.15 %

Interest rate spread4                                                   3.83 %                                           4.06 %

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 $100 for 2013 and $96 for 2012.

2 The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $1 and $169 for the three months ended March 31, 2013 and 2012, 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 quarter of 2013, noninterest income increased 59.9% to $4.8 million, from $3.0 million during the same period in 2012. The Company recognized gains on the sale of investment securities of $208,000 during the first quarter of 2013. No investment securities were sold during the three months ended March 31, 2012. Service charge income increased 7.6% to $2.4 million in the first quarter of 2013 from $2.3 million in the first quarter of 2012 due primarily to changes in the rate and fee structures the Company applied to certain product offerings in the fourth quarter of 2012. Wealth management revenue increased 8.1% to $642,000 in the first quarter of 2013, from $594,000 in the first quarter of 2012. Writedowns and gains (losses) on sales of real estate acquired in settlement of loans ("OREO") was a net gain of $125,000 in the first quarter of 2013, compared to a net loss of $1.0 million during the same period last year. The Company also had a net gain of $269,000 on other equity investments, which is reflected within other noninterest income.

In the first quarter of 2013, noninterest expense increased 4.0% to $14.1 million, from $13.6 million in the first quarter of 2012. Personnel expense increased 10.8% to $7.8 million, from $7.1 million in the prior year first quarter. The increase is due primarily to the Company's investments in its Charlotte and Raleigh commercial banking teams and, to a lesser extent, other key banking team additions in the Triad market. OREO expense declined 49.4% to $161,000, from $318,000 in the same period last year. Other noninterest expense declined $96,000, or 4.2%, to $2.2 million, compared to $2.3 million in the first quarter of 2012 due to the Company's continued focus on efficiency and a disciplined cost management culture.

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

                                               Three Months Ended
                                                    March 31,             Percentage
                                                2013          2012         Variance

   Other operating expenses:
   Advertising                               $      349      $   397            (12.1 )%
   Bankcard expense                                 110          109              0.9
   Postage                                          192          197             (2.5 )
   Telephone                                        208          171             21.6
   Amortization of core deposit intangible          182          182              0.0
   Stationery, printing and supplies                116          115              0.9
   Other expense                                  1,055        1,137             (7.2 )
                                             $    2,212      $ 2,308             (4.2 )

Income Taxes

The effective tax rate for the first quarter of 2013 is 0.0% as the Company recorded the reversal of a portion of the impairment of its deferred tax asset to carry it at estimated realizable value. The Company recorded income tax expense of $617,000 for the first quarter of 2012 at an effective tax rate of 29.0%.

Asset Quality and Allowance for Credit Losses

The Company's allowance for credit losses, which is utilized to absorb actual losses in the loan portfolio,is analyzed monthly by management. This analysis includes a methodology that segments the loan portfolio into risk graded loans and homogeneous loan classifications and considers the current status of the portfolio, historical chargeoff experience, current levels of delinquent, impaired and nonperforming loans and their underlying collateral values, as well as economic and other risk factors. It is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology employed and other analytical measures in comparison to a group of peer banks. The Bank, like many financial institutions, has recently faced a challenging credit environment and could continue to face similar challenges in the coming months unless there is a significant improvement in regional and national economic conditions. The majority of the Bank's loan portfolio is comprised of loans secured by real estate and is therefore subject to risk as a result of the weak real estate market. No assurances can be given that future economic conditions will not adversely affect borrowers and result in increases in credit losses and nonperforming asset levels.

The allowance for credit losses is maintained at a level consistent with management's best estimate of probable credit losses incurred as of the balance sheet date. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. Management analyzes loans in the portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. The process of determining the allowance for credit losses is driven by the risk grade system and the loss experience on non risk graded homogeneous types of loans. While management uses the best information available to make evaluations, future adjustments may be needed if economic or other conditions differ substantially from the assumptions used.

At March 31, 2013, the allowance for credit losses was $26.1 million, or 2.23% of loans held for investment, compared to $26.6 million, or 2.30% of loans held for investment at December 31, 2012, and $27.9 million, or 2.38% of loans held for investment, at March 31, 2012. At March 31, 2013, the allowance for credit losses was 134.27% of nonperforming loans, 124.67% at December 31, 2012 and 63.87% at March 31, 2012. Based on analysis of the current loan portfolio and levels of problem assets and potential problem loans, management believes the allowance for credit losses is adequate. Additional information regarding the allowance for credit losses is presented in the table headed "Asset Quality Analysis" on the page 32.

Nonperforming loans totaled $19.4 million at March 31, 2013, compared to $21.4 million at December 31, 2012 and $43.7 million at March 31, 2012. OREO was $4.8 million at March 31, 2013, $5.4 million at December 31, 2012, and $30.0 million at March 31, 2012. The decreases from the prior year first quarter reflect the successful completion of the Company's asset disposition plan in 2012, which resulted in a $106 million reduction in adversely classified assets. Approximately $1.0 million was transferred from loans into OREO and approximately $1.3 million of OREO was disposed of during the first three months of 2013. A net gain of $125,000 has been recorded on the disposition and writedowns of OREO in the current year, through March 31, 2013, compared to a net loss of $1.0 million in the first quarter of 2012. The Company recorded $161,000 of expenses on OREO during the first three months of 2013, compared to $318,000 in the first quarter of 2012. Nonperforming assets (comprised of nonaccrual loans, restructured loans and OREO) totaled $24.2 million, or 1.41% of total assets, at March 31, 2013, compared to $26.7 million, or 1.56% of total assets, at December 31, 2012 and $73.7 million, or 4.22% of total assets, a year ago.

Classified assets are summarized in the following table (dollars in thousands):

                               March 31       December 31      March 31
                                 2013            2012            2012
Loans identified as impaired   $  15,772     $      16,400     $  35,043
Other nonperforming loans          3,642             4,960         8,668
Total nonperforming loans         19,414            21,360        43,711
Performing classified loans       23,521            26,498        75,282
Total classified loans            42,935            47,858       118,993
OREO                               4,781             5,355        30,032
Total classified assets        $  47,716     $      53,213     $ 149,025
Classified percentage(1)           26.59 %           30.53 %       72.09 %

(1) Percentage of classified assets to the Bank's Tier 1 capital and reserves.

The Bank is well within the regulatory commercial real estate high concentration guidelines in land acquisition, development and construction (the "AD&C portfolio") loans, as well as total commercial real estate loans. At March 31, 2013, the Bank's concentration levels were 40.49% and 161.55%, respectively, of total regulatory capital, which compares favorably to the interagency regulatory guidance maximum concentrations of 100% and 300%, respectively. The Bank's AD&C portfolio totaled $69.1 million at March 31, 2013, including $25.0 million of speculative residential construction and residential acquisition and development. This portfolio is largely graded as classified loans.

The provision for credit losses charged to operations for the three months ended March 31, 2013 totaled $1.0 million, compared to $3.4 million for the three months ended March 31, 2012. Net chargeoffs for the three months ended March 31, 2013 were $1.5 million, or 0.54% of average loans held for investment on an annualized basis, compared to net chargeoffs of $4.4 million, or 1.48% of average loans held for investment on an annualized basis, for the three months ended March 31, 2012.

Asset Quality Analysis

(Dollars in thousands)

                                                     Three                              Three
                                                    Months                             Months
                                                     Ended          Year Ended          Ended
                                                   March 31,       December 31,       March 31,
Allowance for credit losses:                         2013              2012             2012
Balance, beginning of period                      $    26,630     $       28,844     $    28,844
Loans charged off:
Secured by owner-occupied nonfarm
nonresidential properties                                 132              9,297             919
Secured by other nonfarm nonresidential
properties                                                  -              3,634             105
Other commercial and industrial                            91              4,375             311
Total Commercial                                          223             17,306           1,335

Construction loans - 1-4 family residential                 -                439               -
Other construction and land development                   304              8,335             848
Total Real estate - construction                          304              8,774             848

Closed-end loans secured by 1 to 4 family
residential properties                                    227              8,342             499
Lines of credit secured by 1 to 4 family
residential properties                                    808              4,205           1,869
Loans secured by 5 or more family residential
properties                                                  -                790               -
Total Real estate - mortgage                            1,035             13,337           2,368

Credit cards                                               52                348             112
Other consumer loans                                      402                843             171
Total consumer                                            454              1,191             283

Total other                                                 -                  3               -

Total chargeoffs                                        2,016             40,611           4,834

Recoveries of loans previously charged off:
Total Commercial                                           69                879              75
Total Real estate - construction                          102                423             175
Total Real estate - mortgage                              195                766             130
Total Consumer                                             73                314              73
Total Other                                                35                122              12
Total Recoveries                                          474              2,504             465
Net loans charged off                                   1,542             38,107           4,369
Provision for credit losses                               979             35,893           3,443

Balance, end of period                            $    26,067     $       26,630     $    27,918
Nonperforming Assets:
Commercial nonaccrual loans, not restructured     $     4,593     $        5,528     $    10,258
Commercial nonaccrual loans, restructured                 636                670           3,530
Non-commercial nonaccrual loans, not
restructured                                            9,318              9,855          17,685
Non-commercial nonaccrual loans, restructured           1,366              1,459           5,576
Total nonaccrual loans                                 15,913             17,512          37,049
Troubled debt restructured, accruing                    3,472              3,804           6,633
Loans 90 days or more past due and still
accruing                                                   29                 44              29
Total nonperforming loans                              19,414             21,360          43,711
OREO                                                    4,781              5,355          30,032
Total nonperforming assets                        $    24,195     $       26,715     $    73,743
Asset Quality Percentages:
. . .
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