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NBBC > SEC Filings for NBBC > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for NEWBRIDGE BANCORP

Form 10-Q for NEWBRIDGE BANCORP


7-Aug-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 Securities and Exchange Commission (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. Business combination and the acquisition method of accounting are discussed in Note 2 of the Notes to Consolidated Financial Statements. 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 5 of the Notes to Consolidated Financial Statements. Income taxes and the valuation allowance against deferred tax assets are discussed in Note 6 of the Notes to Consolidated Financial Statements.

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Net Interest Income

Net interest income for the second quarter of 2014, on a taxable equivalent basis, was $20.4 million, an increase of $4.9 million, or 31.6%, from $15.5 million for the second quarter of 2013. Average earning assets in the second quarter of 2014 increased $641.0 million, or 40.9%, to $2.21 billion, compared to $1.57 billion in the second quarter of 2013. Average interest-bearing liabilities in the second quarter of 2014 increased $594.2 million, or 46.6%, to $1.87 billion, compared to $1.28 billion in the second 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, the acquisition of CapStone Bank ("CapStone") on April 1, 2014 and organic growth in the loan and deposit portfolios.

Taxable-equivalent net interest margin decreased to 3.70% for the second quarter of 2014, compared to 3.97% for the second quarter of 2013, a decrease of 27 basis points. The interest rate spread decreased to 3.64% in the second quarter of 2014, compared to 3.89% in the second quarter of 2013, a decrease of 25 basis points. The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on the loan portfolio. For the three months ended June 30, 2014, the annualized average yieldon loans decreased to 4.29% from 4.67% for the three months ended June 30, 2013. The average yield on earning assets during the second quarter of 2014 decreased 26 basis points to 4.04% from 4.30% during the comparable period in 2013, while the average rate on interest-bearing liabilities decreased one basis point to 0.40% from 0.41%. 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, 2014 and 2013.

(Fully taxable equivalent basis1, dollars in thousands)

                                          Three Months Ended                            Three Months Ended
                                             June 30, 2014                                 June 30, 2013
                                               Interest      Annualized                      Interest      Annualized
                                 Average        Income/        Average         Average        Income/        Average
                                 Balance        Expense      Yield/Rate        Balance        Expense      Yield/Rate
Earning assets:
Loans receivable2              $ 1,731,815     $  18,506            4.29 %   $ 1,180,844     $  13,740            4.67 %
Taxable securities                 409,913         3,182            3.11         357,732         2,739            3.06
Tax exempt securities               33,991           420            4.94          16,058           271            6.75
Federal Home Loan Bank stock        12,387           115            3.71           6,319            40            2.53
Interest-bearing bank
balances                            20,193            40            0.79           6,317             6            0.38

Total earning assets             2,208,299        22,263            4.04       1,567,270        16,796            4.30

Non-earning assets:
Cash and due from banks             32,069                                        25,187
Premises and equipment              46,541                                        34,999
Other assets                       155,173                                       101,311
Allowance for credit losses        (24,459 )                                     (26,516 )

Total assets                   $ 2,417,623     $  22,263                     $ 1,702,251     $  16,796

Interest-bearing
liabilities:
Savings deposits               $    67,630     $      12            0.07 %   $    47,865     $       6            0.05 %
NOW deposits                       484,906           207            0.17         424,568           170            0.16
Money market deposits              405,893           199            0.20         333,532           145            0.17
 Time deposits                     607,822           632            0.42         328,514           401            0.49
Other borrowings                    76,216           638            3.36          47,349           330            2.80
Borrowings from Federal Home
Loan Bank                          228,049           180            0.32          94,490           244            1.04

Total interest-bearing
liabilities                      1,870,516         1,868            0.40       1,276,318         1,296            0.41

Other liabilities and
shareholders' equity:
Demand deposits                    302,397                                       222,243
Other liabilities                   15,139                                        18,271
Shareholders' equity               229,571                                       185,419
Total liabilities and
shareholders' equity           $ 2,417,623         1,868                     $ 1,702,251         1,296

Net interest income and net
interest margin3                               $  20,395            3.70 %                   $  15,500            3.97 %

Interest rate spread4                                               3.64 %                                        3.89 %

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 $140 for 2014 and $90 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 $(61) and $111 for the three months ended June 30, 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 second quarter of 2014, noninterest income was $4.2 million, unchanged from the second quarter of 2013. CapStone investment securities having a book value of $9.2 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the three months ended June 30, 2014. The Company recognized gains on the sales of investment securities of $70,000 during the second quarter of 2013. Retail banking income increased 4.7% to $2.7 million in the second quarter of 2014 from $2.6 million in the second quarter of 2013. Mortgage banking revenue decreased $246,000, or 50.5%, to $241,000 from $487,000 during the same period last year due to a lower level of mortgage loan production resulting from increases in mortgage interest rates. Wealth management revenue increased 17.3% to $713,000 in the second quarter of 2014 from $608,000 in the second quarter of 2013. The Company also had a net gain of $74,000 on other equity investments, which is reflected within other noninterest income, during the second quarter of 2014, compared to $18,000 during the same period in 2013.

In the second quarter of 2014, noninterest expense increased 62.5% to $22.0 million, from $13.6 million in the second quarter of 2013. The increase was primarily due to acquisition-related expense in the second quarter of 2014 of $4.8 million. There was no comparable expense in the prior year period. Personnel expense increased 28.5% to $9.6 million, from $7.5 million in the prior year second quarter. The increase in personnel expense is 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 and the acquisition of CapStone in April, 2014. In addition, the Company recorded accruals of $533,000 in the second quarter of 2014 for severance expenses, primarily due to the recently announced retail banking realignment. Occupancy expense increased $217,000, or 21.2%, to $1.2 million, and furniture and equipment expense increased $96,000, or 11.3%, to $948,000 in the second quarter of 2014 from $1.0 million and $852,000, respectively, during the same period in 2013 due primarily to the acquisitions of Security Savings and CapStone. FDIC insurance expense declined $16,000, or 3.7%, to $416,000 in the second quarter of 2014, from $432,000 in the second quarter of 2013 despite a significant increase in the assessment base due to the acquisitions of Security Savings and CapStone; 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 (benefit) increased to $(62,000) in the second quarter of 2014, from $(473,000) 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
                                                2014          2013         Variance

   Other noninterest expense:
   Advertising                               $      429      $   455             (5.7 )%
   Bankcard expense                                 140          124             12.9
   Postage                                          212          161             31.7
   Telephone                                        124          199            (37.7 )
   Amortization of core deposit intangible          456          182            150.5
   Stationery, printing and supplies                146          126             15.9
   Other expense                                  1,438        1,165             23.4
   Total noninterest expense                 $    2,945      $ 2,412             22.1

Income Taxes

The Company recorded income tax expense of $657,000 for the second quarter of 2014 at an effective tax rate of 36.1%. The effective tax rate for the second quarter of 2013 was (131.4)% as the Company recorded the reversal of a substantial portion of the impairment of its deferred tax asset to carry it at estimated realizable value. (See Note 6 of the Notes to Consolidated Financial Statements.)

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Net Interest Income

Net interest income for the first half of 2014, on a taxable equivalent basis, was $37.1 million, an increase of $6.5 million, or 21.0%, from $30.7 million for the first half of 2013. Average earning assets in the first half of 2014 increased $440.8 million, or 28.1%, to $2.01 billion, compared to $1.57 billion in the first half of 2013. Average interest-bearing liabilities in the first half of 2014 increased $433.5 million, or 34.0%, to $1.71 billion, compared to $1.28 billion in the first half 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 on October 1, 2013, the acquisition of CapStone on April 1, 2014 and organic growth in the loan and deposit portfolios.

Taxable equivalent net interest margin decreased to 3.72% for the first half of 2014, compared to 3.94% for the first half of 2013, a decrease of 22 basis points. The interest rate spread decreased to 3.67% in the first half of 2014, compared to 3.86% in the first half of 2013, a decrease of 19 basis points. The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on the loan portfolio.For the six months ended June 30, 2014, the annualized average yield on loans decreased to 4.29% from 4.66% for the six months ended June 30, 2013. The average yield on earning assets during the first half of 2014 decreased 22 basis points to 4.06% from 4.28% during the comparable period in 2013, while the average rate on interest-bearing liabilities decreased three basis points to 0.39% from 0.42%. 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, 2014 and 2013.

(Fully taxable equivalent basis1, dollars in thousands)

                                           Six Months Ended                              Six Months Ended
                                             June 30, 2014                                 June 30, 2013
                                               Interest      Annualized                      Interest      Annualized
                                 Average        Income/        Average         Average        Income/        Average
                                 Balance        Expense      Yield/Rate        Balance        Expense      Yield/Rate
Earning assets:
Loans receivable2              $ 1,581,176     $  33,617            4.29 %   $ 1,174,877     $  27,166            4.66 %
Taxable securities                 382,551         5,895            3.08         361,283         5,488            3.04
Tax exempt securities               23,897           654            5.47          16,326           570            6.98
Federal Home Loan Bank stock        10,759           198            3.68           6,695            83            2.48
Interest-bearing bank
balances                            10,761            41            0.77           9,143            13            0.29

Total earning assets             2,009,144        40,405            4.06       1,568,324        33,320            4.28

Non-earning assets:
Cash and due from banks             31,437                                        24,801
Premises and equipment              45,189                                        35,221
Other assets                       137,257                                       100,761
Allowance for credit losses        (24,581 )                                     (26,671 )

 Total assets                  $ 2,198,446     $  40,405                     $ 1,702,436     $  33,320

Interest-bearing
liabilities:
Savings deposits               $    65,691     $      20            0.06 %   $    46,666     $      12            0.05 %
NOW deposits                       462,885           372            0.16         421,617           371            0.18
Money market deposits              379,684           348            0.18         329,085           300            0.18
Time deposits                      544,949         1,167            0.43         333,949           827            0.50
Other borrowings                    66,235         1,023            3.11          47,138           656            2.81
Borrowings from Federal
Home Loan Bank                     190,063           366            0.39          97,551           497            1.03

Total interest-bearing
liabilities                      1,709,507         3,296            0.39       1,276,006         2,663            0.42

Other liabilities and
shareholders' equity:
Demand deposits                    273,841                                       215,918
Other liabilities                   15,489                                        19,307
Shareholders' equity               199,609                                       191,205
Total liabilities and
shareholders' equity           $ 2,198,446         3,296                     $ 1,702,436         2,663

Net interest income and net
interest margin3                               $  37,109            3.72 %                   $  30,657            3.94 %

Interest rate spread4                                               3.67 %                                        3.86 %

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 $218 for 2014 and $190 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 $(61) and $112 for the six months ended June 30, 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 half of 2014, noninterest income decreased $356,000, or 4.0%, to $8.5 million, from $8.9 million during the same period in 2013. CapStone investment securities having a book value of $9.2 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the six months ended June 30, 2014. The Company recognized gains on the sale of investment securities of $278,000 during the first half of 2013. Retail banking income increased 5.5% to $5.3 million in the first half of 2014 from $5.0 million in the first half of 2013. Mortgage banking revenue decreased $675,000, or 64.6%, to $370,000 from $1.0 million during the same period last year due to a lower level of mortgage loan production resulting from increases in mortgage interest rates. Wealth management revenue increased 14.3% to $1.4 million in the first six months of 2014, from $1.3 million in the same period last year. The Company also had a net gain of $388,000 on other equity investments, which is reflected within other noninterest income, during the first half of 2014, compared to $287,000 during the same period in 2013.

In the first half of 2014, noninterest expense increased 36.0% to $37.5 million from $27.6 million in the first half of 2013. The increase was primarily due to acquisition-related expense in the first half of 2014 of $4.9 million. There was no comparable expense in the prior year period. Personnel expense increased 17.3% to $18.0 million, from $15.3 million in the first half of 2013. The increase in personnel expense is 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 and the acquisition of CapStone in April, 2014. In addition, the Company recorded accruals of $533,000 in the second half of 2014 for severance expenses, primarily due to the recently announced retail banking realignment. Occupancy expense increased $388,000, or 19.0%, to $2.4 million, and furniture and equipment expense increased $185,000, or 11.1%, to $1.9 million in the first six months of 2014 from $2.0 million and $1.7 million, respectively, during the same period in 2013 due primarily to the acquisitions of Security Savings and CapStone. FDIC insurance expense declined $72,000, or 8.1%, to $813,000 in the first half of 2014, from $885,000 in the first half of 2013 despite a significant increase in the assessment base due to the acquisitions of Security Savings and CapStone; 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
(benefit) increased to $336,000 in the first six months of 2014, from $(437,000)
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
                                                2014         2013         Variance
. . .
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