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NBBC > SEC Filings for NBBC > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for NEWBRIDGE BANCORP

Form 10-Q for NEWBRIDGE BANCORP


8-Nov-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 September 30, 2013 Compared to Three Months Ended September 30, 2012

Net Interest Income

Net interest income for the third quarter of 2013, on a taxable equivalent basis, was $15.9 million, an increase of $0.1 million, or 0.8%, from $15.8 million for the third quarter of 2012. Average earning assets in the third quarter of 2013 increased $55.5 million, or 3.6%, to $1.62 billion, compared to $1.56 billion in the third quarter of 2012. Average interest-bearing liabilities in the third quarter of 2013 increased $12.6 million, or 0.9%, to $1.35 billion, compared to $1.34 billion in the third quarter of 2012. Taxable-equivalent net interest margin decreased to 3.90% for the third quarter of 2013, compared to 4.02% for the third quarter of 2012, a decrease of 12 basis points. The interest rate spread decreased to 3.83% in the third quarter of 2013, compared to 3.94% in the third quarter of 2012, a decrease of 11 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 third quarter of 2013 decreased 21 basis points to 4.23% from 4.44% during the comparable period in 2012, while the average rate on interest-bearing liabilities decreased 10 basis points to 0.40% from 0.50%. 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, 2013 and 2012.

(Fully taxable equivalent basis1, dollars in thousands)

                                 Three Months Ended                          Three Months Ended
                                 September 30, 2013                          September 30, 2012
                                      Interest     Annualized                     Interest     Annualized
                         Average       Income/       Average         Average       Income/       Average
                         Balance       Expense     Yield/Rate        Balance       Expense     Yield/Rate
Earning assets:
Loans receivable2      $ 1,226,469   $    13,969          4.52 %   $ 1,165,080   $    14,084          4.81 %
Taxable securities         365,035         2,935          3.22         361,123         3,033          3.34
Tax exempt
securities                  14,796           294          7.95          17,464           279          6.36
FHLB stock                   8,277            40          1.93           7,163            28          1.56
Interest-bearing
bank balances                2,213             2          0.36          10,430            10          0.38

Total earning assets     1,616,790        17,240          4.23       1,561,260        17,434          4.44

Non-earning assets:
Cash and due from
banks                       23,658                                      25,439
Premises and
equipment                   34,671                                      36,544
Other assets               109,994                                     120,127
Allowance for credit
losses                    (26,176)                                    (28,757)

Total assets           $ 1,758,937   $    17,240                   $ 1,714,613   $    17,434

Interest-bearing
liabilities:
Savings deposits       $    48,834   $         6          0.05 %   $    45,298   $         6          0.05 %
NOW deposits               418,106           169          0.16         425,361           259          0.24
Money market
deposits                   337,777           141          0.17         366,213           224          0.24
Time deposits              355,766           421          0.47         389,638           599          0.61
Other borrowings            49,757           338          2.70          46,926           343          2.91
Borrowings from the
Federal
Home Loan Bank             138,080           271          0.78          62,259           232          1.48

Total
interest-bearing
  liabilities            1,348,320         1,346          0.40       1,335,695         1,663          0.50

Other liabilities
and
shareholders'
equity:
Demand deposits            229,972                                     189,979
Other liabilities           19,644                                      18,442
Shareholders' equity       161,001                                     170,497
Total liabilities
and
shareholders' equity   $ 1,758,937         1,346                   $ 1,714,613         1,663

Net interest income
and net
interest margin3                     $    15,894          3.90 %                 $    15,771          4.02 %

Interest rate
spread4                                                   3.83 %                                      3.94 %

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 $98 for 2013 and $93 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 $7 and $84 for the three months ended September 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 third quarter of 2013, noninterest income increased 7.5% to $4.5 million, from $4.2 million during the same period in 2012. The Company recognized gains on the sale of investment securities of $458,000 during the third quarter of 2013, compared to $3,000 during the third quarter of 2012. Retail banking income increased 13.3% to $2.6 million in the third quarter of 2013 from $2.3 million in the third 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 5.7% to $682,000 in the third quarter of 2013 from $645,000 in the third quarter of 2012 as the division continued to increase assets under management to $215.5 million at September 30, 2013 from $190.4 million at September 30, 2012.

In the third quarter of 2013, noninterest expense decreased 46.9% to $14.4 million, from $27.1 million in the third quarter of 2012. Personnel expense increased 7.2% to $8.1 million, from $7.5 million in the prior year third 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. Other real estate owned ("OREO") expense declined 98.6% to $152,000, from $11.1 million in the same period last year during which period the Company made significant progress in the execution of its asset disposition plan. In the third quarter of 2012, the Company expensed $1.9 million in adjustments for impairments on facilities and for other nonrecurring accruals.

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

                                                 Three Months Ended
                                                    September 30        Percentage
                                                  2013         2012      Variance

     Other noninterest expense:
     Advertising                               $      324    $    367       (11.7) %
     Bankcard expense                                 130         117         11.1
     Postage                                          177         186        (4.8)
     Telephone                                        121         182       (33.5)
     Amortization of core deposit intangible          176         182        (3.3)
     Stationery, printing and supplies                105          97          8.2
     Other expense                                  1,221       2,094       (41.7)
     Total other noninterest expense           $    2,254    $  3,225       (30.1)

Income Taxes

The Company recorded income tax expense of $2.9 million for the third quarter of 2013, compared to an income tax benefit of $3.7 million for the third quarter of 2012. For the three-month period ended September 30, 2013, the Company's effective tax rate was 48.9%. The effective tax rate was 36.3% before recording the estimated effect of a reduction in North Carolina corporate income tax rates. The Company's effective tax rate was (10.2)% for the three-month period ended September 30, 2012, primarily a result of an increase of $11.0 million in the valuation allowance against deferred tax assets in that quarter. (Refer to Note 5 of the Notes to Consolidated Financial Statements.)

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Net Interest Income

Net interest income for the first nine months of 2013, on a taxable equivalent basis, was $46.6 million, a decrease of $1.9 million, or 3.9%, from $48.5 million for the first nine months of 2012. Average earning assets in the first nine months of 2013 increased $9.5 million, or 0.6%, compared to the first nine months of 2012. Average interest-bearing liabilities in the first nine months of 2013 decreased $51.1 million, or 3.8%, to $1.30 billion, compared to $1.35 billion in the first nine months of 2012. Taxable equivalent net interest margin decreased to 3.93% for the first nine months of 2013, compared to 4.11% for the first nine months of 2012, a decrease of 18 basis points. The interest rate spread decreased to 3.86% in the first nine months of 2013, compared to 4.03% in the first nine months of 2012, a decrease of 17 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 nine months of 2013 decreased 35 basis points to 4.27% from 4.62% during the comparable period in 2012, while the average rate on interest-bearing liabilities decreased 18 basis points to 0.41% from 0.59%. For the nine months ended September 30, 2013, the annualized average yield on loans decreased to 4.61% from 4.95% for the nine months ended September 30, 2012. The net interest margin is also impacted by changes in interest income from nonaccrual loans. For the nine months ended September 30, 2013, nonaccrual interest decreased the net interest margin by four basis points compared to nine basis points for the nine months ended September 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 nine months ended September 30, 2013 and 2012.

(Fully taxable equivalent basis1, dollars in thousands)

                                  Nine Months Ended                           Nine Months Ended
                                 September 30, 2013                          September 30, 2012
                                      Interest     Annualized                     Interest     Annualized
                         Average       Income/       Average         Average       Income/       Average
                         Balance       Expense     Yield/Rate        Balance       Expense     Yield/Rate
Earning assets:
Loans receivable2      $ 1,192,263   $    41,135          4.61 %   $ 1,177,334   $    43,587          4.95 %
Taxable securities         362,548         8,423          3.10         357,371         9,915          3.71
Tax exempt
securities                  15,810           863          7.28          17,692           852          6.43
FHLB stock                   7,228           123          2.27           7,302            79          1.45
Interest-bearing
bank balances                6,807            15          0.29          15,462            30          0.26

Total earning assets     1,584,656        50,559          4.27       1,575,161        54,463          4.62

Non-earning assets:
Cash and due from
banks                       24,416                                      26,132
Premises and
equipment                   35,036                                      36,522
Other assets               103,872                                     122,271
Allowance for credit
losses                    (26,504)                                    (28,635)

Total assets           $ 1,721,476   $    50,559                   $ 1,731,451   $    54,463

Interest-bearing
liabilities:
Savings deposits       $    47,397   $        18          0.05 %   $    44,155   $        20          0.06 %
NOW deposits               420,434           540          0.17         433,546         1,015          0.31
Money market
deposits                   332,014           441          0.18         373,158         1,024          0.37
Time deposits              341,301         1,248          0.49         379,106         2,158          0.76
Other borrowings            48,021           994          2.77          47,016         1,032          2.93
Borrowings from the
Federal
Home Loan Bank             111,209           768          0.92          74,532           760          1.36

Total
interest-bearing
  liabilities            1,300,376         4,009          0.41       1,351,513         6,009          0.59

Other liabilities
and
shareholders'
equity:
Demand deposits            220,654                                     192,100
Other liabilities           19,420                                      19,372
Shareholders' equity       181,026                                     168,466
Total liabilities
and
shareholders' equity   $ 1,721,476         4,009                   $ 1,731,451         6,009

Net interest income
and net
interest margin3                     $    46,550          3.93 %                 $    48,454          4.11 %

Interest rate
spread4                                                   3.86 %                                      4.03 %

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 $287 for 2013 and $281 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 $119 and $373 for the nine months ended September 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 nine months of 2013, noninterest income increased to $13.4 million, from $12.2 million during the same period in 2012. The Company recognized gains on the sale of investment securities of $736,000 during the first nine months of 2013, compared to $3,000 during the first nine months of 2012. Retail banking income increased 10.2% to $7.6 million in the first nine months of 2013 from $6.9 million in the first nine months 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 7.3% to $1.9 million in the first nine months of 2013 from $1.8 million in the same period last year as the division continued to increase assets under management to $215.5 million at September 30, 2013 from $190.4 million at September 30, 2012. The Company also had a net gain of $308,000 on other equity investments during the first nine months of 2013, which is reflected within other noninterest income, compared to a net gain of $46,000 in the prior year period.

In the first nine months of 2013, noninterest expense decreased 28.2% to $42.0 million, from $58.5 million in the first nine months of 2012. Personnel expense increased 7.3% to $23.4 million, from $21.8 million in the first nine months 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 to $(285,000), from $15.6 million in the same period last year due to significant progress by the Company in the execution of its asset disposition plan. In the third quarter of 2012, the Company expensed $1.9 million in adjustments for impairments on facilities and for other nonrecurring accruals.

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

                                                 Nine Months Ended
                                                   September 30        Percentage
                                                  2013        2012      Variance

     Other noninterest expense:
     Advertising                               $    1,128    $ 1,150        (1.9) %
     Bankcard expense                                 364        329         10.6
     Postage                                          530        572        (7.3)
     Telephone                                        528        525          0.6
     Amortization of core deposit intangible          539        545        (1.1)
     Stationery, printing and supplies                347        312         11.2
     Other expense                                  3,442      4,353       (20.9)
     Total other noninterest expense           $    6,878    $ 7,786       (11.7)

Income Taxes

The effective tax rate for the first nine months of 2013 is (24.0)%, as the Company recorded the reversal of a substantial portion of the valuation allowance against its deferred tax asset in the second quarter (see Note 5 of the Notes to Consolidated Financial Statements) and the estimated effect of a reduction in North Carolina corporate income tax rates during the third quarter. The Company recorded an income tax benefit of $2.8 million for the first nine months of 2012 at an effective tax rate of (8.5)%, primarily as a result of losses during that period offset by an increase of $11.0 million in the valuation allowance against deferred tax assets in 2012.

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 . . .

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