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NBBC > SEC Filings for NBBC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for NEWBRIDGE BANCORP


9-Aug-2013

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 (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 the Company including but not limited to the Company'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 the Company to increased regulation and may adversely affect the Company; (2) the strength of the United States economy generally, and the strength of the local economies in which the Company conducts operations, may be different than expected, resulting in, among other things, a continued deterioration in credit quality, including the resultant effect on the Company'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 the Company's capital markets and capital management activities;
(6) the timely development of competitive new products and services by the Company 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 the Company; (8) the willingness of customers to substitute competitors' products and services for the Company'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 the Company's borrowers which could impact repayment of such borrowers' outstanding loans; and (17) the Company's success at managing the risks involved in the foregoing. The Company 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 the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 25, 2013 (the "Annual Report"). The Company 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 the Company.

Introduction

The Company is a bank holding company incorporated under the laws of North Carolina and registered under the Bank Holding Company Act of 1956, as amended. The Company'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 June 30, 2013 Compared to Three Months Ended June 30, 2012

Net Interest Income

Net interest income for the second quarter of 2013, on a taxable equivalent basis, was $15.5 million, a decrease of $0.9 million, or 5.6%, from $16.4 million for the second quarter of 2012. Average earning assets in the second quarter of 2013 decreased $19.3 million, or 1.2%, to $1.57 billion, compared to $1.59 billion in the second quarter of 2012. Average interest-bearing liabilities in the second quarter of 2013 decreased $77.7 million, or 5.7%, to $1.28 billion, compared to $1.35 billion in the second quarter of 2012. Taxable-equivalent net interest margin decreased to 3.97% for the second quarter of 2013, compared to 4.16% for the second quarter of 2012, a decrease of 19 basis points. The interest rate spread decreased to 3.89% in the second quarter of 2013, compared to 4.07% in the second quarter of 2012, a decrease of 18 basis points.

The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on taxable investment securities and a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. The average yield on earning assets during the second quarter of 2013 decreased 37 basis points to 4.30% from 4.67% during the comparable period in 2012, while the average rate on interest-bearing liabilities decreased 18 basis points to 0.41% from 0.59%. 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 June 30, 2013 and 2012.

(Fully taxable equivalent basis1, dollars in thousands)

                                                   Three Months Ended                            Three Months Ended
                                                      June 30, 2013                                 June 30, 2012
                                                        Interest      Annualized                      Interest      Annualized
                                          Average        Income/        Average         Average        Income/        Average
                                          Balance        Expense      Yield/Rate        Balance        Expense      Yield/Rate
Earning assets:
Loans receivable2                       $ 1,180,844     $  13,740            4.67 %   $ 1,176,015     $  14,581            4.99 %
Taxable securities                          357,732         2,739            3.06         373,176         3,517            3.79
Tax exempt securities                        16,058           271            6.75          17,806           281            6.35
FHLB stock                                    6,319            40            2.53           7,559            27            1.44
Interest-bearing bank balances                6,317             6            0.38          12,033             5            0.17

Total earning assets                      1,567,270        16,796            4.30       1,586,589        18,411            4.67

Non-earning assets:
Cash and due from banks                      25,187                                        26,616
Premises and equipment                       34,999                                        36,578
Other assets                                101,311                                       121,922
Allowance for credit losses                 (26,516 )                                     (27,963 )

Total assets                            $ 1,702,251     $  16,796                     $ 1,743,742     $  18,411

Interest-bearing liabilities:
Savings deposits                        $    47,865     $       6            0.05 %   $    44,707     $       6            0.05 %
NOW deposits                                424,568           170            0.16         434,307           349            0.32
Money market deposits                       333,532           145            0.17         375,501           344            0.37
Time deposits                               328,514           401            0.49         364,675           686            0.76
Other borrowings                             47,349           330            2.80          47,282           342            2.91
Borrowings from Federal Home Loan
Bank                                         94,490           244            1.04         87,505,           269            1.24

Total interest-bearing liabilities        1,276,318         1,296            0.41       1,353,977         1,996            0.59

Other liabilities and shareholders'
equity:
Demand deposits                             222,243                                       201,997
Other liabilities                            18,271                                        19,154
Shareholders' equity                        185,419                                       168,614
Total liabilities and shareholders'
equity                                  $ 1,702,251         1,296                     $ 1,743,742         1,996

Net interest income and net interest
margin3                                                 $  15,500            3.97 %                   $  16,415            4.16 %

Interest rate spread4                                                        3.89 %                                        4.07 %

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 $90 for 2013 and $92 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 $111 and $120 for the three months ended June 301, 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 second quarter of 2013, noninterest income increased 378.3% to $4.8 million, from $1.0 million during the same period in 2012. The Company recognized gains on the sale of investment securities of $70,000 during the second quarter of 2013. No investment securities were sold during the three months ended June 30, 2012. Retail banking income increased 9.8% to $2.6 million in the second quarter of 2013 from $2.3 million in the second quarter of 2012due 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 8.4% to $608,000 in the second quarter of 2013, from $561,000 in the second quarter of 2012. Writedowns and gains (losses) on sales of real estate acquired in settlement of loans ("OREO") was a net gain of $611,000 in the second quarter of 2013, compared to a net loss of $3.0 million during the same period last year. The Company also had a net gain of $18,000 on other equity investments, which is reflected within other noninterest income.

In the second quarter of 2013, noninterest expense increased 3.2% to $14.2 million, from $13.7 million in the second quarter of 2012. Personnel expense increased 3.9% to $7.5 million, from $7.2 million in the prior year second 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 32.7% to $138,000, from $205,000 in the same period last year.

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

                                                Three Months Ended
                                                      June 30              Percentage
                                                 2013          2012         Variance

    Other noninterest expense:
    Advertising                               $      455      $   386             17.9 %
    Bankcard expense                                 124          103             20.4
    Postage                                          161          189            (14.8 )
    Telephone                                        199          172             15.7
    Amortization of core deposit intangible          182          182              0.0
    Stationery, printing and supplies                126          100             26.0
    Other expense                                  1,165        1,121              3.9
    Total noninterest expense                 $    2,412      $ 2,253              7.1

Income Taxes

The effective tax rate for the second quarter of 2013 is (131.4)%, as the Company recorded the reversal of a substantial portion of the valuation allowance against its deferred tax asset (refer to Note 5 of the Notes to Consolidated Financial Statements). The Company recorded income tax expense of $312,000 for the second quarter of 2012 at an effective tax rate of 25.3%.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net Interest Income

Net interest income for the first half of 2013, on a taxable equivalent basis, was $30.7 million, a decrease of $2.0 million, or 6.2%, from $32.7 million for the first half of 2012. Average earning assets in the first half of 2013 decreased $13.9 million, or 0.9%, to $1.57 billion, compared to $1.58 billion in the first half of 2012. Average interest-bearing liabilities in the first half of 2013 decreased $83.5 million, or 6.1%, to $1.28 billion, compared to $1.36 billion in the first half of 2012. Taxable equivalent net interest margin decreased to 3.94% for the first half of 2013, compared to 4.15% for the first half of 2012, a decrease of 21 basis points. The interest rate spread decreased to 3.86% in the first half of 2013, compared to 4.06% in the first half of 2012, a decrease of 20 basis points.

The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on taxable investment securities and a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. The average yield on earning assets during the first half of 2013 decreased 43 basis points to 4.28% from 4.71%during the comparable period in 2012, while the average rate on interest-bearing liabilities decreased 22 basis points to 0.42% from 0.64%. For the six months ended June 30, 2013, the annualized average yieldon loans decreased to 4.66% from 5.01% for the six months ended June 30, 2012. The net interest margin is also impacted by changes in interest income from nonaccrual loans. For the six months ended June 30,2013, nonaccrual interest decreased the net interest margin by five basis points compared to nine basis points for the six months ended June 30, 2012. The following table provides an analysis of average volumes, yields and rates and net interest income on a taxable equivalent basis for the six months ended June 30, 2013 and 2012.

(Fully taxable equivalent basis1, dollars in thousands)

                                                    Six Months Ended                              Six Months Ended
                                                      June 30, 2013                                 June 30, 2012
                                                        Interest      Annualized                      Interest      Annualized
                                          Average        Income/        Average         Average        Income/        Average
                                          Balance        Expense      Yield/Rate        Balance        Expense      Yield/Rate
Earning assets:
Loans receivable2                       $ 1,174,877     $  27,166            4.66 %   $ 1,183,528     $  29,503            5.01 %
Taxable securities                          361,283         5,488            3.04         355,474         6,882            3.89
Tax exempt securities                        16,326           570            6.98          17,807           573            6.47
FHLB stock                                    6,695            83            2.48           7,372            51            1.39
Interest-bearing bank balances                9,143            13            0.29          18,005            20            0.22

Total earning assets                      1,568,324        33,320            4.28       1,582,186        37,029            4.71

Non-earning assets:
Cash and due from banks                      24,801                                        26,482
Premises and equipment                       35,221                                        36,510
Other assets                                100,761                                       123,357
Allowance for credit losses                 (26,671 )                                     (28,573 )

 Total assets                           $ 1,702,436     $  33,320                     $ 1,739,962     $  37,029

Interest-bearing liabilities:
Savings deposits                        $    46,666     $      12            0.05 %   $    43,577     $      14            0.06 %
NOW deposits                                421,617           371            0.18         437,683           755            0.35
Money market deposits                       329,085           300            0.18         376,668           801            0.43
Time deposits                               333,949           827            0.50         373,783         1,559            0.84
Other borrowings                             47,138           656            2.81          47,061           689            2.94
Borrowings from Federal
Home Loan Bank                               97,551           497            1.03          80,737           528            1.32

Total interest-bearing liabilities        1,276,006         2,663            0.42       1,359,509         4,346            0.64

Other liabilities and shareholders'
equity:
Demand deposits                             215,918                                       193,172
Other liabilities                            19,307                                        19,841
Shareholders' equity                        191,205                                       167,440
Total liabilities and shareholders'
equity                                  $ 1,702,436         2,663                     $ 1,739,962         4,346

Net interest income and net interest
margin3                                                 $  30,657            3.94 %                   $  32,683            4.15 %

Interest rate spread4                                                        3.86 %                                        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 $190 for 2013 and $188 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 $112 and $289 for the six months ended June 30, 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 half of 2013, noninterest income increased to $9.6 million, from $4.0 million during the same period in 2012. The Company recognized gains on the sale of investment securities of $278,000 during the first half of 2013, whereas no investment securities were sold during the six months ended June 30, 2012. Retail banking income increased 8.7% to $5.0 million in the first half of 2013 from $4.6 million in the first half 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 8.2% to $1.3 million in the first six months of 2013, from $1.2 million in the same period last year. Writedowns and gains (losses) on sales of OREO was a net gain of $736,000 in the first six months of 2013, compared to a net loss of $4.0 million during the same period last year. The Company also had a net gain of $287,000 on other equity investments during the first six months of 2013, which is reflected within other noninterest income.

In the first half of 2013, noninterest expense increased 3.6% to $28.3 million from $27.3 million in the first half of 2012. Personnel expense increased 7.3% to $15.3 million, from $14.3 million in the first half of 2012. 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 42.8% to $299,000, from $523,000 in the same period last year.

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

                                                 Six Months Ended
                                                      June 30            Percentage
                                                 2013         2012        Variance

     Other noninterest expense:
     Advertising                               $     804     $   783             2.7 %
     Bankcard expense                                234         212            10.4
     Postage                                         353         386            (8.5 )
     Telephone                                       407         343            18.7
     Amortization of core deposit intangible         363         363             0.0
     Stationery, printing and supplies               242         215            12.6
     Other expense                                 2,221       2,259            (1.7 )
     Total noninterest expense                 $   4,624     $ 4,561             1.4

Income Taxes

The effective tax rate for the first half of 2013 is (67.7)%, as the Company recorded the reversal of a substantial portion of the valuation allowance against its deferred tax asset (refer to Note 5 of the Notes to Consolidated Financial Statements). The Company recorded income tax expense of $929,000 for the first half of 2012 at an effective tax rate of 27.6%.

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 . . .

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