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NBBC > SEC Filings for NBBC > Form 10-K on 12-Mar-2014All Recent SEC Filings

Show all filings for NEWBRIDGE BANCORP

Form 10-K for NEWBRIDGE BANCORP


12-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following presents management's discussion and analysis of the Company's financial condition and results of operations and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of the Company.

Executive Overview

The Company achieved record earnings in 2013 through the successful implementation of its operating plan. Earnings to common shareholders totaled $18.9 million in 2013, an 11.8% return on common equity. As a consequence of the recession that began in 2008, the Company's earnings suffered from elevated levels of problem assets and high credit related costs. In 2012, the Company addressed the lingering effects of the recession. It raised $56.3 million in additional capital and implemented a plan to reduce problem assets and normalize future credit related costs. While the plan resulted in extraordinary high credit costs in 2012, it was very successful. The Company eliminated $106 million of substandard classified assets in 2012. With improved asset quality, credit costs fell sharply in 2013. Provision for credit losses declined 93%, or $33.2 million, to $2.7 million in 2013. Losses on real estate acquired in settlement of loans declined as well, resulting in a $49 million improvement in total credit costs.

The Company has built upon the actions it took in 2012 to move forward with implementing its growth strategies. During 2013, the Company solidified its capital position in preparation for growth. It converted recently issued shares of preferred stock to common stock as intended under the prior year's capital raise. It redeemed $37.4 million of preferred shares, and the dilutive 2.6 million share warrant, previously issued to the U.S. Department of the Treasury (the "U.S. Treasury") under its Capital Purchase Program (the "CPP"). In addition, the Company experienced strong loan and deposit growth. Vitally important organic loan growth totaled 12% for the year and was supplemented by the acquisition of Security Savings Bank, SSB, an expansion of the Company's Cape Fear Region market share. In total, loan balances outstanding increased 22% for the year. In November, the Company announced plans for a second acquisition with CapStone Bank, which is expected to close early in the second quarter of 2014.

The positive results from 2013 evidence our commitment to drive value through our strategic and operating plans. The Company is focused on maintaining asset quality, on building efficient and profitable operations and on growth of the balance sheet and other revenues. These three tenets of the Company's operating plan, Quality, Profitability and Growth, are the focus of the Company's efforts to increase earnings and our shareholders' long term value.

Quality
Nonperforming loans declined 56% to $9.4 million;

As a percentage of assets, nonperforming loans declined to 0.48% from 1.25%;

Allowance for credit losses to nonperforming loans improved to 261% from 125%; and

Total nonperforming assets to total assets declined to 0.89% from 1.56%

Profitability
Earnings to common shareholders totaled $18.9 million;

Provision for credit costs declined $33.2 million to $2.7 million;

Loss on real estate acquired in settlement of loans improved $15.9 million to a gain of $126,000;

Return on common equity improved to 11.8%;

Average earning assets increased $58.6 million offsetting a decline in the net interest margin;

Cost on core deposits of $1.1 billion declined to 0.12% at year end; and

Core deposits represented 71% of total deposits at year end

Growth
Loan balances increased 22.6%;

Organic loan growth totaled 12%;

Core deposits, excluding time deposits, expanded 10%;

Charlotte and Raleigh loan production offices became full service commercial banking centers;

Security Savings Bank, SSB merger completed; and

CapStone Bank merger announced

Quality. In 2013, nonperforming assets fell below 1% of total assets. As part of our robust credit culture, our internal and external loan review functions are independent of loan production teams. Our appraisal and specialized lines of business functions are dedicated to competence and independence. In addition, we employ prudent lending exposure limits and concentration limits.

Under our 2012 asset disposition plan, we projected that the Company would dispose of $71 million in classified assets. The plan targeted both nonperforming and potential problem assets. By year end, the Company had reduced total classified assets by $96 million. Total classified assets were $53 million at December 31, 2012, one-third the level of the 2011 year-end balance of $159 million.

Asset quality trends continued to improve in 2013. Nonperforming loans declined 56% during the year to $9.4 million from $21.3 million at December 31, 2012. As a percentage of total assets, nonperforming loans represented 0.48% at December 31, 2013 compared to 1.25% the prior year.

Profitability. The Company's ability to achieve sustained profitability depends not only on the maintenance of a high level of asset quality but on careful management of interest income, interest expense and other expense. Management has implemented a number of steps to increase net interest and fee income, preserve an acceptable net interest margin and control our controllable expenses. During 2013:

Our pre-tax net income improved $46 million;

We experienced a $49 million improvement in total credit costs;

We reorganized our lending teams into specialty groups, expanding staff and expertise in commercial real estate, commercial and industrial, and construction development loans in each of the four major North Carolina metropolitan markets we serve;

We expanded our presence into key North Carolina markets and redeployed resources previously dedicated to less vibrant areas. The Company converted two successful loan production offices in Charlotte and Raleigh, NC into full service commercial centers. These markets are the two largest and fastest growth markets in North Carolina;

We continued our annual franchise validation plan so that the Company's resources are appropriately allocated to align with short- and long-term strategic goals. Over the past several years, this planning has resulted in the opening of the commercial banking centers in Charlotte and Raleigh, the sale of the Harrisonburg, Virginia operations and the closure of 11 branches that were not meeting the Company's profitability requirements;

We reduced the Company's dependence on high cost time deposits in favor of lower cost core accounts. Our average cost of deposits totaled 0.26%;

We took further steps to better evaluate risk-based and relationship pricing to include deposit and other relationships. Management has also focused on maintaining consistency on loan pricing relative to credit characteristics of loans;

We continued to grow our trust and wealth management services. Revenue increased 9.4% to $2.6 million; and

We remained focused on a disciplined and accountable budget process that includes monitoring loan, investment and deposit yields; carefully reviewing variances every month; and reviewing controllable expenses every month.

Expense management is critical to the achievement of our profitability goals. Management has implemented a disciplined cost management culture where "that which is within our control is controlled." A key element of this culture is our line item accountable budget process based upon our "CAST" philosophy:

Conservative in forecasts and expectations

Accountable on an account by account basis

Specific to each individual in the organization so goals and budgets are understood

Timely so that continued monitoring and adjustments can be made

Growth. NewBridge is a regional community bank providing banking services in the major North Carolina metropolitan markets of the Piedmont Triad Region, Charlotte, Raleigh, and Cape Fear Region, as well as smaller markets. Our conservative management philosophy focuses on increasing shareholder value through specialized lines of business that promote core organic growth primarily throughout these major markets. This focus is supplemented by a disciplined acquisition strategy targeted at expanding the Company's presence in select metropolitan markets in North and South Carolina and Virginia. We are focused on a balanced approach to promoting growth in valuable core transaction deposits, commercial and private bank lending and expansion of fee income services. Our goal is to provide excellence in value to our customers and shareholders as we grow.

The Company experienced significant organic and inorganic growth in 2013. Loan balances increased 22.6%, or $261 million. Vitally important organic loan growth increased 12%, or $140 million, for the year. Expansion efforts were strengthened as loan production offices in Charlotte and Raleigh became full-service bank locations.

As previously noted, we also witnessed meaningful growth through the acquisition of Security Savings Bank, SSB. With the closing of the transaction, NewBridge Bank became a $2.0 billion institution with 36 branches and a number of loan production offices throughout North Carolina. The acquisition also established the Company as an active acquirer in the industry and solidified the Bank as one of the largest community banks in Greater Wilmington, the hub of the State's Cape Fear Region.

Financial Condition at December 31, 2013 and 2012

The Company's consolidated assets of $1.97 billion at year end 2013 reflect an increase of 15.0% from year end 2012. The increase was partially a result of the acquisition of Securities Savings Bank, SSB on October 1, 2013. Total average assets increased 3.1% from $1.72 billion in 2012, to $1.78 billion in 2013, while average earning assets increased 3.7%, from $1.58 billion in 2012, to $1.63 billion in 2013. The increases in total average assets and average earning assets were primarily the result of an increase in loans outstanding.

Loans (excluding loans held for sale) increased $261.3 million during 2013, or 22.6%, compared to a decrease of 3.7% in 2012, primarily due to organic loan growth ($140 million) but also due to the acquisition of Security Savings Bank, SSB (which accounted for $121 million of loans outstanding at December 31, 2013). Loans secured by real estate totaled $1.27 billion at year end 2013 and represented 89.5% of total loans (excluding loans held for sale), compared with 87.5% at year end 2012. Within this category, residential real estate loans increased 21.7% to $610.2 million, and land acquisition, development and construction loans increased 52.5% to $115.4 million. Commercial loans totaled $656.4 million at year end 2013, an increase of 20.4% from the end of 2012. Consumer loans decreased 1.7% during 2013, ending the year at $26.4 million.

Investment securities available for sale (at amortized cost) totaled $297.5 million at year end 2013, a 21.5% decrease from $379.1 million at year end 2012. U.S. government agency securities totaled $49.1 million, or 16.5% of the available for sale portfolio, at year end 2013, compared to $67.1 million, or 17.7% of the portfolio one year earlier. Mortgage backed securities totaled $52.6 million, or 17.7% of the available for sale portfolio, at December 31, 2013, compared to $64.7 million, or 17.1% of the portfolio, at the previous year end. Available for sale state and municipal obligations totaled $15.8 million at year end 2013, and comprised 5.3% of the available for sale portfolio, compared to $18.0 million, or 4.7% of the portfolio, a year earlier. Corporate bonds totaled $155.7 million, or 52.4% of the available for sale portfolio at December 31, 2013, of which $49.9 million were covered bonds, compared to corporate bonds of $195.5 million, or 51.6% of the portfolio at December 31, 2012, of which $44.9 million were covered bonds. Collateralized mortgage obligations ("CMOs") totaled $6.6 million, or 2.2% of the available for sale portfolio at year end 2013, compared to $10.4 million, or 2.7% of the portfolio, at the end of the previous year.

As a result of a continuing low interest rate environment and the potential for interest rate risk, the Company classified a number of its investment security purchases as held to maturity status during 2013. The weighted average life of investment securities classified as held to maturity does not exceed seven years. The Company believes it has the capacity to hold these investments to maturity. Investment securities held to maturity (at amortized cost) totaled $67.3 million at year end 2013. U.S. government agency securities totaled $28.7 million, or 42.7% of the held to maturity portfolio, at year end 2013. Mortgage backed securities totaled $32.4 million, or 48.2% of the held to maturity portfolio, at December 31, 2013. Held to maturity state and municipal obligations amounted to $1.1 million at year end 2013, and comprised 1.7% of the held to maturity portfolio. Corporate bonds totaled $5.0 million, or 7.4% of the held to maturity portfolio at December 31, 2013. The Company had no investment securities held to maturity at December 31, 2012.

The Company's investment strategy is to achieve acceptable total returns through investments in securities with varying maturity dates, cash flows and yield characteristics. U.S. government agency securities are generally purchased for liquidity and collateral purposes, mortgage backed securities are purchased for yield and cash flow purposes, corporate bonds are purchased for yield, and longer maturity municipal bonds are purchased for yield and income tax advantage. The table, "Investment Securities," on page 52, presents the composition of the securities portfolio for the last three years, as well as information about cost and fair value, and the table "Investment Securities Portfolio Maturity Schedule" presents the maturities, fair values and weighted average yields.

Total deposits increased $221.5 million to $1.55 billion at December 31, 2013, a 16.6% increase from a total of $1.33 billion one year earlier. The increase in deposits was due partially to the acquisition of Security Savings Bank, SSB, which accounted for $154 million of deposits at December 31, 2013. Retail time deposits increased $20.6 million for the year. Noninterest-bearing deposits increased $35.0 million for the year to $241.0 million.

To supplement core deposit growth, the Bank uses several different sources such as brokered certificates of deposit secured through broker/dealer arrangements and deposits obtained through the Certificate of Deposit Account Registry Service ("CDARS"), a service of Promontory InterFinancial Network, LLC. CDARS increased $100.9 million, from $42.4 million at year end 2012 to $143.3 million at year end 2013, while brokered deposits decreased $4.3 million, from $17.7 million at year end 2012 to $13.4 million at year end 2013.

The Bank also has a credit facility available with the FHLB of Atlanta. The credit line at December 31, 2013 was $360.2, compared to $342.5 million at December 31, 2012. FHLB borrowings totaled $170.0 million at year end 2013, and based on collateral pledged, an additional $91.3 million was available. At December 31, 2012, FHLB borrowings totaled $113.0 million with an additional $95.3 million available. In addition to the credit line at the FHLB of Atlanta, at December 31, 2013 the Bank had borrowing capacity at the Federal Reserve Bank of Richmond ("Federal Reserve Bank") totaling $3.9 million, and had federal funds lines of $30.0 million of which $13.0 million was outstanding. At December 31, 2012, the Bank had borrowing capacity at the Federal Reserve Bank totaling $7.7 million, and had federal funds lines of $25.0 million, of which there were no borrowings outstanding. Management believes these credit lines are a cost effective and prudent alternative to deposit balances, since particular amounts, terms and structures may be selected to meet changing needs.

Financial Condition at December 31, 2012 and 2011

The Company's consolidated assets of $1.71 billion at year end 2012 reflect a decrease of 1.5% from year end 2011. The decrease was primarily a result of a decline in the Company's loan portfolio. Total average assets decreased 1.4% from $1.75 billion in 2011, to $1.72 billion in 2012, while average earning assets decreased 1.6%, from $1.60 billion in 2011, to $1.58 billion in 2012. The decreases in total average assets and average earning assets were also primarily the result of a decrease in loans outstanding.

Loans (excluding loans held for sale) decreased $44.6 million during 2012, or 3.7%, compared to a decrease of 4.8% in 2011. The decline in loans was due primarily to our asset disposition plan. In our Quarterly Report on Form 10-Q for the second quarter of 2012, we disclosed that a plan was being developed to accelerate the workout and disposition of a substantial portion of remaining problem assets. During the third quarter, management initiated the asset disposition plan.

Using March 31, 2012 problem asset levels, management established the following goals:

Nonperforming Loans - Reduce by $20.0 million to $23.7 million

Performing Classified Loans - Reduce by $26.0 million to $49.3 million

Real Estate Acquired in Settlement of Loans - Reduce by $25.0 million to $5.0 million

Total Classified Assets - Reduce by $71.0 million to $78.0 million

Classified Assets - Reduce to 45.00% of Tier 1 capital plus allowance for credit losses

Nonperforming Assets - Reduce to 2.00% or less of total assets

By December 31, 2012, the asset disposition plan was completed. As of that date, total problem assets were reduced by approximately $95.8 million from the March 31, 2012 levels as follows:

Nonperforming Loans - Reduced by $22.4 million to $21.3 million

Performing Classified Loans - Reduced by $48.8 million to $26.5 million
Real Estate Acquired in Settlement of Loans - Reduced by $24.7 million to $5.4 million

Total Classified Assets - Reduced by $95.8 million to $53.2 million

Classified Assets - Reduced to 30.53% of Tier 1 capital plus allowance for credit losses

Nonperforming Assets - Reduced to 1.56% of total assets

The results achieved through the asset disposition plan are reflected in the amounts reported for December 31, 2012 and for the periods then ended and are the principal reasons for changes from prior period amounts.

Loans secured by real estate totaled $1.27 billion at year end 2012 and represented 89.5% of total loans (excluding loans held for sale), compared with 86.4% at year end 2011. Within this category, residential real estate loans decreased 4.1% to $501.4 million, and land acquisition, development and construction loans decreased 15.4% to $75.7 million. Commercial loans totaled $545.3 million at year end 2012, a decrease of 0.4% from the end of 2011. Consumer loans decreased 22.6% during 2012, ending the year at $26.9 million.

Investment securities (at amortized cost) totaled $379.1 million at year end 2012, a 12.5% increase from $337.0 million at year end 2011. U.S. government agency securities totaled $67.1 million, or 17.7% of the portfolio, at year end 2012, compared to $39.0 million, or 11.6% of the portfolio one year earlier. Mortgage backed securities totaled $64.7 million, or 17.1% of the portfolio, at December 31, 2012, compared to $62.1 million, or 18.4% of the portfolio, at the previous year end. State and municipal obligations amounted to $18.0 million at year end 2012, and comprised 4.7% of the portfolio, compared to $19.4 million, or 5.7% of the portfolio, a year earlier. Corporate bonds totaled $195.5 million, or 51.6% of the portfolio at December 31, 2012, of which $44.9 million were covered bonds, compared to total corporate bonds of $180.0 million, or 53.4% of the portfolio at December 31, 2011, of which $61.4 million were covered bonds. CMOs totaled $10.4 million, or 2.7% of the portfolio at year end 2012, compared to $23.6 million, or 7.0% of the portfolio, at the end of the previous year. The table, "Investment Securities," on page 52, presents the composition of the securities portfolio for the last three years, as well as information about cost and fair value, and the table "Investment Securities Portfolio Maturity Schedule" presents the maturities, fair values and weighted average yields.

Total deposits decreased $86.2 million to $1.33 billion at December 31, 2012, a 6.1% decrease from a total of $1.42 billion one year earlier. The decline in deposits was due primarily to lower time deposit balances, which fell $59.4 million for the year. Retail time deposits declined $75.9 million for the year as the Company chose not to compete for high priced time deposits. Noninterest-bearing deposits increased $33.7 million for the year to $206.0 million due in part to changes in the rate and fee structures the Company applied to certain product offerings in the fourth quarter of 2012.

Net Interest Income

Like most financial institutions, the primary component of the Company's revenue is net interest income. Net interest income is the difference between interest income, principally from loans and investments, and interest expense on client deposits and borrowings. Changes in net interest income result from changes in volume and mix of the various interest-earning asset and interest-bearing liability components and changes in interest rates earned and paid. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Spread and margin are influenced by the levels and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest-bearing liabilities.

Average Balances and Net Interest Income Analysis. The accompanying table sets forth, for the years 2011 through 2013, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or rates, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Average loans include nonaccruing loans, the effect of which is to lower the average yield.

Average Balances and Net Interest Income Analysis Fully taxable-equivalent basis(1) (dollars in thousands)

                                                              2013                                     2012                                     2011
                                                            Interest                                 Interest                                 Interest
                                                Average      Income/     Average         Average      Income/     Average         Average      Income/     Average
                                                Balance      Expense    Yield/Rate       Balance      Expense    Yield/Rate       Balance      Expense    Yield/Rate

Earning assets:
Loans receivable(1)                           $ 1,247,095   $  56,617         4.54 %   $ 1,175,938   $  57,676         4.90 %   $ 1,271,790   $  65,871         5.18 %
Taxable securities(2)                             355,864      11,239         3.16         357,463      12,492         3.49         279,417      12,672         4.54
Tax-exempt securities                              15,519       1,115         7.18          17,502       1,119         6.39          16,494       1,132         6.86
FHLB stock                                          7,631         195         2.56           7,323         122         1.67           9,150          78         0.85
Interest-bearing bank balances                      7,656          23         0.30          16,923          40         0.24          24,270          60         0.25

Total earning assets                            1,633,765      69,189         4.24       1,575,149      71,449         4.54       1,601,121      79,813         4.99

Non-earning assets:
Cash and due from banks                            25,020                                   25,681                                   28,684
Premises and equipment                             37,327                                   36,284                                   37,248
Other assets                                      108,266                                  117,213                                  111,986
Allowance for credit losses                      (26,309)                                 (29,872)                                 (29,230)

Total assets                                  $ 1,778,069                              $ 1,724,455                              $ 1,749,809

Interest-bearing liabilities:
Savings deposits                              $    51,197   $      26         0.05 %   $    44,144   $      26         0.06 %   $    40,766   $      41         0.10 %
NOW deposits                                      425,435         709         0.17         428,299       1,242         0.29         430,695       2,504         0.58
Money market deposits                             339,664         602         0.18         365,718       1,204         0.33         353,567       2,447         0.69
Time deposits                                     368,189       1,779         0.48         377,289       2,663         0.71         433,523       4,501         1.04
Other borrowings                                   48,773       1,332         2.73          46,957       1,367         2.91          54,215       1,648         3.04
Borrowings from Federal
Home Loan Bank                                    120,136       1,195         0.99          79,941       1,012         1.27          87,720       1,178         1.34

Total interest-bearing liabilities              1,353,394       5,643         0.42       1,342,348       7,514         0.56       1,400,486      12,319         0.88

Other liabilities and shareholders' equity:
Demand deposits                                   228,635                                  196,365                                  166,077
Other liabilities                                  19,302                                   19,362                                   16,909
Shareholders' equity                              176,738                                  166,380                                  166,337

Total liabilities and
shareholders' equity                          $ 1,778,069                              $ 1,724,455                              $ 1,749,809

Net interest income and net
interest margin(3)                                          $  63,546         3.89 %                 $  63,935         4.06 %                 $  67,494         4.22 %

Interest rate spread(4)                                                       3.82 %                                   3.98 %                                   4.11 %

(1) Average loans receivable include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $136, $600 and $741, for 2013, 2012 and 2011, respectively, are included in interest income.

(2) 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 $370 for 2013, $369 for 2012 and $358 for 2011.

(3) Net interest margin is computed by dividing taxable-equivalent net interest income by average earning assets.

(4) Interest rate spread is computed by subtracting interest-bearing liability rate from earning asset yield.

Volume and Rate Variance Analysis

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