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NBBC > SEC Filings for NBBC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for NEWBRIDGE BANCORP

Form 10-Q for NEWBRIDGE BANCORP


9-May-2014

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 subsidiary. 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:

Revenues are lower than expected;

Credit quality deterioration, which could cause an increase in the provision for credit losses;

Competitive pressure among depository institutions increases significantly;

Changes in consumer spending, borrowings and savings habits;

Technological changes and security and operations risks associated with the use of technology;

The cost of additional capital is more than expected;

The interest rate environment could reduce interest margins;

Asset/liability repricing risks, ineffective hedging and liquidity risks;

Counterparty risk;

General economic conditions, particularly those affecting real estate values, either nationally or in the market areas in which we do or anticipate doing business, are less favorable than expected;

The effects of the Federal Deposit Insurance Corporation ("FDIC") deposit insurance premiums and assessments;

The effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System;

Volatility in the credit or equity markets and its effect on the general economy;

Demand for the products or services of the Company, as well as its ability to attract and retain qualified people;

The costs and effects of legal, accounting and regulatory developments and compliance;

Regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule;

The effects of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, and the enactment of further regulations related to this Act;

More stringent capital requirements effective January 1, 2015;

Risks associated with the Company's growth strategy, including acquisitions; and

The effects of any intangible or deferred tax asset impairments that may be required in the future.

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 14 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 12, 2014 (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. Business combination and the acquisition method of accounting are discussed in Note 10 of the Notes to Consolidated Financial Statements.

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net Interest Income

Net interest income for the first quarter of 2014, on a taxable-equivalent basis, was $16.7 million, an increase of $1.6 million, or 10.3%, from $15.2 million for the first quarter of 2013. Average earning assets in the first quarter of 2014 increased $238.4 million, or 15.2%, to $1.81 billion, compared to $1.57 billion in the first quarter of 2013. Average interest-bearing liabilities for the first quarter of 2014 increased $271.0 million, or 21.2%, to $1.55 billion, compared to $1.28 billion for the first quarter of 2013. The increases in average earning assets and average interest-bearing liabilities and the resulting increase in net interest income are primarily due to the acquisition of Security Savings Bank, SSB ("Security Savings") on October 1, 2013 and organic growth in the loan portfolio. Average loan balances grew $260.0 million from the same period last year, in part due to $131 million of average loans acquired from Security Savings.

Taxable-equivalent net interest margin decreased to 3.75% for the first quarter of 2014, compared to 3.92% for the first quarter of 2013, a decrease of 17 basis points. The interest rate spread decreased to 3.69% in the first quarter of 2014, compared to 3.83% in the first quarter of 2013, a decrease of 14 basis points. The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. In addition, during the first quarter of 2014, reversal of interest income on loans placed on nonaccrual reduced interest income by $200,000, and accelerated premium amortization on investments reduced interest income by $153,000. By contrast, in the first quarter of 2013, the Company experienced a net recovery of $303,000 of interest income from nonaccruing loans that were repaid. The average yield on earning assets during the first quarter of 2014 decreased 20 basis points to 4.07% from 4.27% during the comparable period in 2013, while the average rate on interest-bearing liabilities decreased 6 basis points to 0.38% from 0.44%. 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, 2014 and 2013.

(Fully taxable-equivalent basis(1), dollars in thousands)

                                          Three Months Ended                            Three Months Ended
                                            March 31, 2014                                March 31, 2013
                                               Interest      Annualized                      Interest      Annualized
                                 Average        Income/        Average         Average        Income/        Average
                                 Balance        Expense      Yield/Rate        Balance        Expense      Yield/Rate
Earning assets:
Loans receivable(2)            $ 1,428,862     $  15,111            4.29 %   $ 1,168,844     $  13,426            4.66 %
Taxable securities                 354,886         2,713            3.06         364,874         2,749            3.01
Tax exempt securities               13,692           233            6.81          16,597           299            7.21
Federal Home Loan Bank stock         9,112            83            3.64           7,075            43            2.43
Interest-bearing bank
balances                             1,223             1            0.33          11,999             7            0.24

Total earning assets             1,807,775        18,141            4.07       1,569,389        16,524            4.27

Non-earning assets:
Cash and due from banks             30,798                                        24,412
Premises and equipment              43,822                                        35,446
Other assets                       119,141                                       100,203
Allowance for credit losses        (24,703 )                                     (26,827 )

Total assets                   $ 1,976,833     $  18,141                     $ 1,702,623     $  16,524

Interest-bearing
liabilities:
Savings deposits               $    63,731     $       8            0.05 %   $    45,453     $       6            0.05 %
NOW deposits                       440,620           165            0.15         418,634           201            0.19
Money market deposits              353,183           149            0.17         324,589           155            0.19
Time deposits                      481,377           535            0.45         339,445           426            0.51
Other borrowings                    56,143           385            2.78          46,925           326            2.82
Borrowings from Federal
Home Loan Bank                     151,655           186            0.50         100,647           253            1.02

Total interest-bearing
liabilities                      1,546,709         1,428            0.38       1,275,693         1,367            0.44

Other liabilities and
shareholders' equity:
Demand deposits                    244,968                                       209,522
Other liabilities                   15,842                                        20,354
Shareholders' equity               169,314                                       197,054
Total liabilities and
shareholders' equity           $ 1,976,833         1,428                     $ 1,702,623         1,367

Net interest income and net
interest margin(3)                             $  16,713            3.75 %                   $  15,157            3.92 %

Interest rate spread(4)                                             3.69 %                                        3.83 %

(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 $77 for 2014 and $100 for 2013.

(2) The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $(2) and $1 for the three months ended March 31, 2014 and 2013, 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 2014, noninterest income decreased 7.4% to $4.3 million, from $4.7 million during the same period in 2013. 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, 2014. Retail banking income increased 6.4% to $2.6 million in the first quarter of 2014 from $2.4 million in the first quarter of 2013. Mortgage banking revenue decreased $429,000, or 76.9%, to $129,000 from $558,000 during the same period last year due to a lower level of mortgage loan production resulting from increases in interest rates. Wealth management revenue increased 11.5% to $716,000 in the first quarter of 2014 from $642,000 in the first quarter of 2013 as the division continued to increase assets under management to $226.9 million at March 31, 2014 from $200.1 million at March 31, 2013. The Company also had a net gain of $314,000 on other equity investments, which is reflected within other noninterest income, during the first quarter of 2014, compared to $269,000 during the same period in 2013.

In the first quarter of 2014, noninterest expense increased 10.3% to $15.5 million, from $14.0 million in the first quarter of 2013. Personnel expense increased 6.6% to $8.3 million, from $7.8 million in the prior year first quarter due primarily to the hiring of commercial lenders in the Raleigh and Charlotte markets, the addition of key lending personnel in the Piedmont Triad market, and the additional personnel resulting from the acquisition of Security Savings in October, 2013. Occupancy expense increased $172,000, or 17.0%, to $1.2 million, and furniture and equipment expense increased $88,000, or 10.7%, to $907,000 in the first quarter of 2014 from $1.0 million and $819,000, respectively, during the same period in 2013 due primarily to the acquisition of Security Savings. FDIC insurance expense declined $56,000, or 12.4%, to $397,000 in the first quarter of 2014, from $453,000 in the first quarter of 2013; in the fourth quarter of 2013, the Bank received a new risk rating, which reduced the Bank's FDIC insurance assessments. Real estate acquired in settlement of loans expense increased to $398,000 in the first quarter of 2014, from $36,000 in the same period last year. Acquisition-related expense in the first quarter of 2014 was $88,000 with no comparable expense in the prior year period. Other noninterest expense increased $283,000, or 12.8%, to $2.5 million, compared to $2.2 million in the first quarter of 2013.

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

                                               Three Months Ended
                                                    March 31,             Percentage
                                             2014             2013         Variance

   Other operating expenses:
   Advertising                               $      267      $   349            (23.5 )%
   Bankcard expense                                 118          110              7.3
   Postage                                          210          192              9.4
   Telephone                                        105          208            (49.5 )
   Amortization of core deposit intangible          270          182             48.4
   Stationery, printing and supplies                115          116             (0.9 )
   Other expense                                  1,410        1,055             33.6
                                             $    2,495      $ 2,212             12.8

Income Taxes

The Company recorded income tax expense of $1.9 million for the first quarter of 2014 at an effective tax rate of 35.5%. The effective tax rate for the first quarter of 2013 was 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.

Asset Quality and Allowance for Credit Losses

The Company's allowance for credit losses, which is utilized to absorb actual losses in its 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. Due to the concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in North Carolina. No assurances can be given that future economic conditions will not adversely affect borrowers, and/or real estate values in North Carolina, and result in increases in credit losses and nonperforming asset levels.

In the fourth quarter of 2013, the Company implemented enhancements to the methodology for estimating the allowance for credit losses. These enhancements included several refinements to the data accumulation processes for determining the probability of default and loss given default for the various classes of loans that are more statistically sound than those previously employed. In addition, commercial risk graded loans are now segregated between those that are real estate secured and those that are not. A more robust identification of qualitative factors has also been embedded in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance. The revisions did not have a material impact on the allowances recorded at March 31, 2014 or December 31, 2013.

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, 2014, the allowance for credit losses was $24.4 million, or 1.69% of loans held for investment, compared to $24.6 million, or 1.73% of loans held for investment at December 31, 2013, and $26.1 million, or 2.23% of loans held for investment at March 31, 2013. At March 31, 2014, the allowance for credit losses was 190.35% of nonperforming loans, 261.23% at December 31, 2013 and 134.47% at March 31, 2013. 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. In the first quarter of 2014, the Company changed its methodology for allocating the allowance for credit losses by portfolio segment. Prior period allocations were revised to conform to the new methodology. The change in methodology did not change the total allowance for credit losses. Additional information regarding the allowance for credit losses is presented in the table headed "Asset Quality Analysis" on page 39.

Nonperforming loans totaled $12.8 million at March 31, 2014, compared to $9.4 million at December 31, 2013 and $19.4 million at March 31, 2013. Real estate acquired in settlement of loans was $5.6 million at March 31, 2014, $7.6 million at December 31, 2013, and $4.8 million at March 31, 2013. Approximately $550,000 was transferred from loans into real estate acquired in settlement of loans, and approximately $2.2 million of real estate acquired in settlement of loans was disposed of during the first three months of 2014. A net loss of $245,000 has been recorded on the disposition and writedowns of real estate acquired in settlement of loans in the current year, through March 31, 2014, compared to a net gain of $125,000 in the first quarter of 2013. The Company recorded $153,000 of expenses on real estate acquired in settlement of loans during the first three months of 2014, compared to $161,000 in the first quarter of 2013. Nonperforming assets (comprised of nonaccrual loans, restructured loans and real estate acquired in settlement of loans) totaled $18.5 million, or 0.91% of total assets, at March 31, 2014, compared to $17.0 million, or 0.86% of total assets, at December 31, 2013 and $24.2 million, or 1.41% of total assets, a year ago.

The Bank is well within the regulatory commercial real estate high concentration guidelines in land acquisition, development and construction ("AD&C portfolio") loans, as well as total commercial real estate loans. At March 31, 2014, the Bank's concentration levels were 58.47% and 243.99%, 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 $115.7 million at March 31, 2014, including $30.0 million of speculative residential construction and residential acquisition and development.

The provision for credit losses charged to operations for the three months ended March 31, 2014 totaled $144,000, compared to $979,000 for the three months ended March 31, 2013. Net chargeoffs for the three months ended March 31, 2014 were $259,000, or 0.07% of average loans held for investment on an annualized basis, compared to net chargeoffs of $1.5 million, or 0.54% of average loans held for investment on an annualized basis, for the three months ended March 31, 2013.

Asset Quality Analysis

(Dollars in thousands)



                               Beginning        Charge                                          Ending
                                Balance          Offs         Recoveries       Provision       Balance
At or for the Quarter Ended
March 31, 2014
Loans - excluding PCI
Commercial                    $    11,480     $      133     $        373     $      (373 )   $   11,347
Real estate - construction          2,027              4               70            (240 )        1,853
Real estate - mortgage             10,479            523              197             530         10,683
Consumer                              469            224               56             161            462
Other                                  95              -                3              (8 )           90
Total                         $    24,550     $      884     $        699     $        70     $   24,435

PCI loans
Commercial                    $         -     $       52     $          -     $        52     $        -
Real estate - construction              -              -                -               -              -
Real estate - mortgage                  -             22                -              22              -
Consumer                                -              -                -               -              -
Other                                   -              -                -               -              -
Total                         $         -     $       74     $          -     $        74     $        -

Total loans
Commercial                    $    11,480     $      185     $        373     $      (321 )   $   11,347
Real estate - construction          2,027              4               70            (240 )        1,853
Real estate - mortgage             10,479            545              197             552         10,683
Consumer                              469            224               56             161            462
Other                                  95              -                3              (8 )           90
Total                         $    24,550     $      958     $        699     $       144     $   24,435

At or for the Year Ended
December 31, 2013
Loans - excluding PCI
Commercial                    $    12,314     $    2,212     $      1,260     $       118     $   11,480
Real estate - construction          2,058          1,308              496             781          2,027
Real estate - mortgage             11,673          3,552            1,544             814         10,479
Consumer                              466          1,116              389             730            469
Other                                 119            338               66             248             95
Total                         $    26,630     $    8,526     $      3,755     $     2,691     $   24,550

PCI loans
Commercial                    $         -     $        -     $          -     $         -     $        -
Real estate - construction              -              -                -               -              -
Real estate - mortgage                  -              -                -               -              -
Consumer                                -              -                -               -              -
Other                                   -              -                -               -              -
Total                         $         -     $        -     $          -     $         -     $        -

. . .
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