XNAS:NBBC NewBridge Bancorp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the quarterly period ended: March 31, 2012

Commission File Number: 000-11448

 

 

NEWBRIDGE BANCORP

(Exact name of Registrant as specified in its Charter)

 

 

 

North Carolina   56-1348147
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

1501 Highwoods Boulevard, Suite 400

Greensboro, North Carolina

  27410
(Address of principal executive offices)   (Zip Code)

(336) 369-0900

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

 

Large accelerated filer   ¨      Smaller reporting company   x
Non-accelerated filer   ¨      Accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

At May 9, 2012, 15,655,868 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

NEWBRIDGE BANCORP

FORM 10-Q

TABLE OF CONTENTS

 

         Page  

PART I

Financial Information

  

Item 1

 

Financial Statements

     3   
 

Consolidated Balance Sheets March 31, 2012 and December 31, 2011

     3   
 

Consolidated Statements of Income Three Months Ended March 31, 2012 and 2011

     4   
 

Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2012 and 2011

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2012 and 2011

     6   
 

Consolidated Statements of Cash Flows Three Months Ended March 31, 2012 and 2011

     7   
 

Notes to Consolidated Financial Statements

     9   

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 4

 

Controls and Procedures

     33   

PART II

Other Information

  

Item 1

 

Legal Proceedings

     34   

Item 1A

 

Risk Factors

     34   

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3

 

Defaults Upon Senior Securities

     34   

Item 4

 

Removed and Reserved

     34   

Item 5

 

Other Information

     34   

Item 6

 

Exhibits

     35   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

NewBridge Bancorp and Subsidiary

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

     March 31
2012
(Unaudited)
    December 31
2011
 

Assets

    

Cash and due from banks

   $ 29,821      $ 27,629   

Interest-bearing bank balances

     5,730        26,363   

Loans held for sale

     7,676        7,851   

Investment securities

     394,904        337,811   

Loans

     1,173,671        1,200,070   

Less allowance for credit losses

     (27,918     (28,844
  

 

 

   

 

 

 

Net loans

     1,145,753        1,171,226   

Premises and equipment

     36,612        36,225   

Real estate acquired in settlement of loans

     30,032        30,587   

Bank-owned life insurance

     44,219        43,727   

Deferred tax assets

     29,781        32,263   

Other assets

     21,440        20,882   
  

 

 

   

 

 

 

Total assets

   $ 1,745,968      $ 1,734,564   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing

   $ 211,246      $ 172,351   

Savings, NOW and money market accounts

     871,813        852,941   

Time deposits

     366,135        393,384   
  

 

 

   

 

 

 

Total deposits

     1,449,194        1,418,676   

Borrowings from the Federal Home Loan Bank

     64,000        86,700   

Other borrowings

     46,774        46,774   

Accrued expenses and other liabilities

     18,954        19,027   
  

 

 

   

 

 

 

Total liabilities

     1,578,922        1,571,177   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock, par value $.01 per share:

    

Authorized 10,000,000 shares; issued and outstanding (liquidation preference $1,000 per share) – 52,372

     51,864        51,789   

Common stock, par value $5 per share:

    

Authorized 50,000,000 shares; issued and outstanding – 15,655,868

     78,279        78,279   

Paid-in capital

     87,136        87,190   

Directors’ deferred compensation plan

     (575     (575

Retained deficit

     (46,744     (47,525

Accumulated other comprehensive income (loss)

     (2,914     (5,771
  

 

 

   

 

 

 

Total shareholders’ equity

     167,046        163,387   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,745,968      $ 1,734,564   
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

3


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Income

(Unaudited; dollars in thousands, except per share data)

 

     Three Months Ended
March 31
 
     2012     2011  

Interest Income

    

Interest and fees on loans

   $ 14,922      $ 17,236   

Interest on investment securities:

    

Taxable

     3,389        3,474   

Tax exempt

     196        191   

Interest-bearing bank balances and Federal funds sold

     15        4   
  

 

 

   

 

 

 

Total interest income

     18,522        20,905   
  

 

 

   

 

 

 

Interest Expense

    

Deposits

     1,744        2,687   

Borrowings from the Federal Home Loan Bank

     259        348   

Other borrowings

     347        492   
  

 

 

   

 

 

 

Total interest expense

     2,350        3,527   
  

 

 

   

 

 

 

Net interest income

     16,172        17,378   

Provision for credit losses

     3,443        6,073   
  

 

 

   

 

 

 

Net interest income after provision for credit losses

     12,729        11,305   
  

 

 

   

 

 

 

Noninterest Income

    

Retail banking

     2,254        2,500   

Mortgage banking services

     563        425   

Wealth management services

     594        546   

Gain on sale of investment securities

     —          1,961   

Writedowns and losses on sales of real estate acquired in settlement of loans

     (1,008     (1,486

Bank-owned life insurance

     467        408   

Other

     130        180   
  

 

 

   

 

 

 

Total noninterest income

     3,000        4,534   
  

 

 

   

 

 

 

Noninterest Expense

    

Personnel

     7,061        7,290   

Occupancy

     1,004        1,043   

Furniture and equipment

     778        964   

Technology and data processing

     1,020        983   

Legal and professional

     671        625   

FDIC insurance

     441        795   

Real estate acquired in settlement of loans

     318        389   

Other

     2,308        2,305   
  

 

 

   

 

 

 

Total noninterest expense

     13,601        14,394   
  

 

 

   

 

 

 

Income before income taxes

     2,128        1,445   

Income tax expense

     617        433   
  

 

 

   

 

 

 

Net Income

     1,511        1,012   

Dividends and accretion on preferred stock

     (730     (730
  

 

 

   

 

 

 

Net Income available to common shareholders

   $ 781      $ 282   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.05      $ 0.02   

Diluted

   $ 0.05      $ 0.02   

Weighted average shares outstanding:

    

Basic

     15,655,868        15,655,868   

Diluted

     16,299,355        16,697,944   

See notes to consolidated financial statements

 

4


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited; dollars in thousands)

 

     Three Months Ended
March 31
 
     2012     2011  

Net Income

   $ 1,511      $ 1,012   

Other Comprehensive Income (Loss), Net of Tax:

    

Unrealized gains on securities:

    

Unrealized holding gains (losses) arising during period

     2,867        (2,203

Defined benefit pension plans:

    

Amortization of post retirement benefit

     (10     (10
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     2,857        (2,213
  

 

 

   

 

 

 

Comprehensive Income (Loss)

   $ 4,368      $ (1,201
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

 

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Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended March 31, 2012 and 2011

(Unaudited; dollars in thousands)

 

     Preferred
Stock
     Common Stock      Paid -in    

Directors’
Deferred

Compensation

    Retained
Earnings
    Accumulated
Other
Comprehensive
    Total
Shareholders’
 
        Shares      Amount      Capital     Plan     (Deficit)     Income (Loss)     Equity  

Balances at December 31, 2010

   $ 51,490         15,655,868       $ 78,279       $ 87,048      $ (618   $ (49,286   $ (995   $ 165,918   

Net Income

                  1,012          1,012   

Change in accumulated other comprehensive income net of deferred income taxes

                    (2,213     (2,213

Dividends and accretion on preferred stock

     75                   (730       (655

Stock-based compensation expense

              11              11   

Common Stock distributed

                43            43   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2011

   $ 51,565         15,655,868       $ 78,279       $ 87,059      $ (575   $ (49,004   $ (3,208   $ 164,116   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2011

   $ 51,789         15,655,868       $ 78,279       $ 87,190      $ (575   $ (47,525   $ (5,771   $ 163,387   

Net Income

                  1,511          1,511   

Change in accumulated other comprehensive Income net of deferred income taxes

                    2,857        2,857   

Dividends and accretion on preferred stock

     75                   (730       (655

Stock-based compensation expense

              (54           (54
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2012

   $ 51,864         15,655,868       $ 78,279       $ 87,136      $ (575   $ (46,744   $ (2,914   $ 167,046   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements

 

6


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited; dollars in thousands)

 

     Three Months Ended
March 31
 
     2012     2011  

Cash Flow from operating activities

    

Net Income

   $ 1,511      $ 1,012   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     804        1,305   

Securities premium amortization and discount accretion, net

     (11     149   

(Gain) loss on sale of securities

     —          (1,961

Mortgage banking services

     (563     (425

Originations of loans held for sale

     (33,640     (20,692

Proceeds from sales of loans held for sale

     34,449        20,528   

(Increase) decrease in deferred tax assets

     611        427   

(Increase) decrease in income taxes receivable

     (150     —     

(Increase) decrease in interest earned but not received

     (340     (258

Increase (decrease) in interest accrued but not paid

     (57     (133

Write downs of real estate acquired in settlement of loans

     553        1,421   

Loss on sales of real estate acquired in settlement of loans

     455        65   

Net (increase) decrease in other assets

     (747     (2,214

Net increase (decrease) in other liabilities

     (17     (874

Provision for credit losses

     3,443        6,073   

Stock-based compensation

     (54     11   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,247        4,434   
  

 

 

   

 

 

 

Cash Flow from investing activities

    

Purchases of securities available for sale

     (72,006     (3,651

Proceeds from sales, maturities and calls of securities available for sale

     19,660        50,494   

Net (increase) decrease in loans

     19,075        (6,265

Purchases of premises and equipment

     (1,126     (1,403

Proceeds from sales of premises and equipment

     58        —     

Proceeds from sales of real estate acquired in settlement of loans

     2,487        2,561   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (31,852     41,736   
  

 

 

   

 

 

 

Cash Flow from financing activities

    

Net increase in demand deposits, NOW, money market and savings accounts

     57,768        31,853   

Net (decrease) in time deposits

     (27,249     (29,552

Net increase (decrease) in other borrowings

     —          —     

Net increase (decrease) in borrowings from FHLB

     (22,700     (25,000

Dividends paid

     (655     (655

Common stock distributed

     —          43   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     7,164        (23,311
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (18,441     22,859   

Cash and cash equivalents at the beginning of the period

     53,992        29,075   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 35,551      $ 51,934   
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

7


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited; dollars in thousands)

 

Consolidated Statements of Cash Flows
     Three Months Ended
March 31
 
     2012     2011  

Supplemental disclosures of cash flow information

    

Cash paid during the periods for:

    

Interest

   $ 2,407      $ 3,660   

Income Taxes

     150        —     

Supplemental disclosures of noncash transactions

    

Transfer of loans to real estate acquired in settlement of loans

   $ 2,939      $ 3,658   

Unrealized gains/(losses) on securities available for sale:

    

Change in securities available for sale

     4,738        (3,640

Change in deferred income taxes

     (1,871     1,437   

Change in shareholders’ equity

     2,867        (2,203

See notes to consolidated financial statements

 

8


Table of Contents

NewBridge Bancorp and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and provisions for credit losses considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

NewBridge Bancorp (“Bancorp” or the “Company”) is a bank holding company incorporated under the laws of North Carolina (“NC”) and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp’s principal asset is stock of its banking subsidiary, NewBridge Bank (the “Bank”). Accordingly, throughout this Quarterly Report on Form 10-Q, there are frequent references to the Bank.

Through its branch network, the Bank provides a wide range of banking products to individuals, small to medium-sized businesses and other organizations in its market areas, including interest bearing and non-interest bearing checking accounts, certificates of deposit, individual retirement accounts, overdraft protection, personal and corporate trust services, safe deposit boxes, online banking, corporate cash management, brokerage, financial planning and asset management, mortgage loans and secured and unsecured loans.

As of March 31, 2012, the Bank operated four active non-bank subsidiaries: Peoples Finance Company of Lexington, Inc. (“Peoples Finance”), LSB Properties, Inc. (“LSB Properties”), Henry Properties, LLC (“Henry Properties”) and Prince George Court Holdings, Inc. (“Prince George”). Peoples Finance, a NC licensed finance company, with approximately $0.12 million of loans outstanding as of March 31, 2012, is no longer actively soliciting loans. LSB Properties, Henry Properties and Prince George together own the real estate acquired in settlement of loans of the Bank.

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements in Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2012 (SEC File No. 000-11448) (the “Annual Report”). This Quarterly Report should be read in conjunction with the Annual Report.

Recent accounting pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This Update establishes common fair value measurement and disclosure requirements in GAAP and IFRS through changes in the description and disclosure of fair value measurements, clarification about the application of existing requirements, and changes to particular principles for measuring fair value or for disclosing information about those measurements. This guidance became effective during the first interim period beginning after December 15, 2011. The application of this Update did not have a material effect on our consolidated financial position or consolidated results of operations.

 

9


Table of Contents

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. This Update requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Presentation of comprehensive income in the statement of changes in shareholders’ equity will no longer be acceptable. This Update does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, the option for an entity to present components of other comprehensive income net or before related tax effects, or how earnings per share is calculated or presented. This Update became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the new disclosure requirements in this first quarter 2012 Form 10-Q.

Reclassification

Certain items for 2011 have been reclassified to conform to the 2012 presentation. Such reclassifications had no effect on net income, total assets or shareholders’ equity as previously reported.

Note 2 — Net Income Per Share

Basic and diluted net income per share is computed based on the weighted average number of shares outstanding during each period. Diluted net income per share reflects the potential dilution that could occur if stock options or warrants were exercised, or restricted stock vested, resulting in the issuance of common stock sharing in the net income of the Company. A summary of basic and diluted net income per share follows (in thousands, except per share data):

 

     For the three months ended March 31  
     2012      2011  

Basic:

     

Net income available to common shareholders

   $ 781       $ 282   
  

 

 

    

 

 

 

Weighted average shares outstanding

     15,655,868         15,655,868   
  

 

 

    

 

 

 

Net income per share, basic

   $ 0.05       $ 0.02   
  

 

 

    

 

 

 

Diluted:

     

Net income available to common shareholders

   $ 781       $ 282   
  

 

 

    

 

 

 

Weighted average shares outstanding

     15,655,868         15,655,868   

Effect of dilutive securities:

     

Stock options

     —           —     

Restricted stock units

     19,347         13,442   

Warrant

     624,140         1,028,634   
  

 

 

    

 

 

 

Weighted average shares outstanding and dilutive potential shares outstanding

     16,299,355         16,697,944   
  

 

 

    

 

 

 

Net income per share, diluted

   $ 0.05       $ 0.02   
  

 

 

    

 

 

 

 

10


Table of Contents

Note 3 — Investment Securities

Investment securities consist of the following (in thousands):

 

                   March 31, 2012               
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Market
Value
     Average
Yield
    Average
Duration1
 

U.S. government agency securities

   $ 35,992       $ 130       $ (53   $ 36,069         2.26     2.24   

Mortgage backed securities

     29,389         2,742         —          32,131         5.24        2.93   

Collateralized mortgage obligations

     21,603         137         (198     21,542         5.61        2.27   

Commercial mortgage backed securities

     51,197         758         (183     51,772         3.50        3.99   

Corporate bonds

     152,561         1,475         (2,182     151,854         3.88        3.67   

Covered bonds

     66,302         2,063         —          68,365         4.22        2.88   

State and municipal obligations

     19,355         569         (163     19,761         6.37 (2)      5.46   
  

 

 

    

 

 

    

 

 

   

 

 

      

Total debt securities

     376,399         7,874         (2,779     381,494         4.08 (2)      3.38   

Federal Home Loan Bank stock

     7,185         —           —          7,185        

Other equity securities

     5,775         450         —          6,225        
  

 

 

    

 

 

    

 

 

   

 

 

      

Total investment securities

   $ 389,359       $ 8,324       $ (2,779   $ 394,904        
  

 

 

    

 

 

    

 

 

   

 

 

      

 

                   December 31, 2011               
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Market
Value
     Average
Yield
    Average
Duration1
 

U.S. government agency securities

   $ 39,000       $ 147       $ —        $ 39,147         2.79     1.06   

Mortgage backed securities

     31,917         2,926         —          34,843         5.21        3.55   

Collateralized mortgage obligations

     23,599         168         (332     23,435         4.69        2.03   

Commercial mortgage backed securities

     30,169         153         (33     30,289         3.47        4.43   

Corporate bonds

     118,573         385         (4,282     114,676         3.77        3.98   

Covered bonds

     61,414         1,243         (131     62,526         5.25        2.12   

State and municipal obligations

     19,371         425         (288     19,508         6.47 (2)      5.64   
  

 

 

    

 

 

    

 

 

   

 

 

      

Total debt securities

     324,043         5,447         (5,066     324,424         4.13 (2)      3.37   

Federal Home Loan Bank stock

     7,185         —           —          7,185        

Other equity securities

     5,775         427         —          6,202        
          

 

 

      

Total investment securities

   $ 337,003       $ 5,874       $ (5,066   $ 337,811        
  

 

 

    

 

 

    

 

 

   

 

 

      

 

(1) Average remaining duration to maturity, in years
(2) Fully taxable equivalent basis

All securities were classified as available for sale as of each date presented.

The following is a schedule of securities in a loss position as of March 31, 2012 (in thousands):

 

     Less than 1 year     1 Year or More     Total  
     Market
Value
     Unrealized
Loss
    Market
Value
     Unrealized
Loss
    Market
Value
     Unrealized
Loss
 

U.S. government agency securities

   $ 11,939       $ (53   $ —         $ —        $ 11,939       $ (53

State and municipal obligations

     383         —          2,935         (163     3,318         (163

Corporate bonds

     53,619         (802     13,605         (1,380     67,224         (2,182

Collateralized mortgage obligations

     9,711         (198     —           —          9,711         (198

Commercial mortgage backed securities

     20,905         (183     —           —          20,905         (183

Other equity securities

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

   $ 96,557       $ (1,236   $ 16,540       $ (1,543   $ 113,097       $ (2,779
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

 

11


Table of Contents

Investment securities with an amortized cost of $78,775,000 and $79,211,000, as of March 31, 2012, and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes. The Bank has obtained $50,000,000 in letters of credit, which are used in lieu of securities to pledge against public deposits.

Investment securities with a book value of $31,510,000 were sold during the three months ended March 31, 2011 to dispose of agency mortgage backed securities with an average life of 1 year or less that had significant gain positions and to reduce the Company’s exposure to certain corporate debt securities and certain types of collateralized mortgage obligations. The Company recognized a gain of $1,961,000 on the sale of those securities. No investment securities were sold during the three months ended March 31, 2012.

Since none of the unrealized losses are greater than 20% of the original cost of any individual investment and do not relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, and the Company has the intent and ability to hold until recovery, none of the securities are deemed to be other than temporarily impaired.

 

12


Table of Contents

Note 4 — Loans and Allowance for Credit Losses

Loans are summarized as follows (in thousands):

 

     March 31,
2012
     December 31
2011
 

Secured by owner-occupied nonfarm nonresidential properties

   $ 261,794       $ 269,972   

Secured by other nonfarm nonresidential properties

     159,392         157,594   

Other commercial and industrial

     115,083         119,877   
  

 

 

    

 

 

 

Total Commercial

     536,269         547,443   

Construction loans – 1 to 4 family residential

     6,805         7,781   

Other construction and land development

     78,351         81,630   
  

 

 

    

 

 

 

Total Real estate - construction

     85,156         89,411   

Closed-end loans secured by 1 to 4 family residential properties

     283,781         287,268   

Lines of credit secured by 1 to 4 family residential properties

     205,185         209,634   

Loans secured by 5 or more family residential properties

     25,441         25,883   
  

 

 

    

 

 

 

Total Real estate - mortgage

     514,407         522,785   

Credit cards

     7,384         7,649   

Other revolving credit plans

     9,245         9,444   

Other consumer loans

     15,242         17,648   
  

 

 

    

 

 

 

Total Consumer

     31,871         34,741   

All other loans

     5,968         5,690   
  

 

 

    

 

 

 

Total Other

     5,968         5,690   
  

 

 

    

 

 

 

Total loans

   $ 1,173,671       $ 1,200,070   
  

 

 

    

 

 

 

Nonperforming assets are summarized as follows (in thousands):

 

     March 31
2012
    December 31
2011
 

Commercial nonaccrual loans, not restructured

   $ 17,905      $ 15,773   

Commercial nonaccrual loans, restructured

     8,116        7,489   

Non-commercial nonaccrual loans

     10,038        9,569   

Non-commercial nonaccrual loans, restructured

     990        283   
  

 

 

   

 

 

 

Total nonaccrual loans

     37,049        33,114   

Troubled debt restructured, accruing

     6,633        7,406   

Accruing loans which are contractually past due 90 days or more

     29        14   
  

 

 

   

 

 

 

Total nonperforming loans

     43,711        40,534   

Real estate acquired in settlement of loans

     30,032        30,587   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 73,743      $ 71,121   
  

 

 

   

 

 

 

Restructured loans, performing (1)

   $ 3,101      $ 4,888   
  

 

 

   

 

 

 

Nonperforming loans to loans outstanding at end of period

     3.72     3.38

Nonperforming assets to total assets at end of period

     4.22     4.10

Allowance for credit losses to non-performing loans

     63.87     71.16

 

(1) Loans restructured in a previous year without an interest rate concession or forgiveness of debt that are performing in accordance with their modified terms.

Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, restructured loans, and real estate acquired in settlement of loans. Loans are placed on nonaccrual status

 

13


Table of Contents

when: (i) management has concerns relating to the ability to collect the loan principal and interest and (ii) generally when such loans are 90 days or more past due. No assurance can be given, however, that economic conditions will not adversely affect borrowers and result in increased credit losses.

Commitments to lend additional funds to borrowers whose loans have been restructured are not material at March 31, 2012.

 

14


Table of Contents

The aging of loans is summarized in the following table (in thousands):

 

March 31, 2012

   30-89 days
past due
     90+ days
past due
     Nonaccrual
Loans
     Total past due
+ nonaccrual
     Current      Total loans
receivable
 

Secured by owner-occupied nonfarm nonresidential property

   $ 3,534       $ —         $ 8,401       $ 11,935       $ 249,859       $ 261,794   

Secured by other nonfarm nonresidential property

     747         —           4,896         5,643         153,749         159,392   

Other commercial and industrial

     2,454         —           491         2,945         112,138         115,083   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     6,735         —           13,788         20,523         515,746         536,269   

Construction loans – 1 to 4 family residential

     476         —           446         922         5,883         6,805   

Other construction and land development

     2,657         —           6,931         9,588         68,763         78,351   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – construction

     3,133         —           7,377         10,510         74,646         85,156   

Closed-end loans secured by 1 to 4 family residential property

     6,614         —           13,610         20,224         263,557         283,781   

Lines of credit secured by 1 to 4 family residential property

     2,680         —           1,814         4,494         200,691         205,185   

Loans secured by 5 or more family residential property

     3,808         —           283         4,091         21,350         25,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate - mortgage

     13,102         —           15,707         28,809         485,598         514,407   

Credit cards

     97         29         —           126         7,258         7,384   

Other revolving credit plans

     130         —           142         272         8,973         9,245   

Other consumer loans

     333         —           35         368         14,874         15,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     560         29         177         766         31,105         31,871   

Loans to other depository institutions

     —           —           —           —           —           —     

All other loans

     —           —           —           —           5,968         5,968   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Other

     —           —           —           —           5,968         5,968   

Total loans

   $ 23,530       $ 29       $ 37,049       $ 60,608       $ 1,113,063       $ 1,173,671   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

   30-89 days      90+ days      Nonaccrual      Total past due             Total loans  
   past due      past due      Loans      + nonaccrual      Current      receivable  

Secured by owner-occupied nonfarm nonresidential property

   $ 4,514       $ —         $ 7,718       $ 12,232       $ 257,740       $ 269,972   

Secured by other nonfarm nonresidential property

     2,134         —           1,310         3,444         154,150         157,594   

Other commercial and industrial

     1,199         —           437         1,636         118,241         119,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     7,847         —           9,465         17,312         530,131         547,443   

Construction loans – 1 to 4 family residential

     650         —           447         1,097         6,684         7,781   

Other construction and land development

     2,776         —           9,016         11,792         69,838         81,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – construction

     3,426         —           9,463         12,889         76,522         89,411   

Closed-end loans secured by 1 to 4 family residential property

     7,483         —           12,744         20,227         267,041         287,268   

Lines of credit secured by 1 to 4 family residential property

     5,489         —           975         6,464         203,170         209,634   

Loans secured by 5 or more family residential property

     3,852         —           302         4,154         21,729         25,883   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate - mortgage

     16,824         —           14,021         30,845         491,940         522,785   

Credit cards

     146         14         —           160         7,489         7,649   

Other revolving credit plans

     339         —           125         464         8,980         9,444   

Other consumer loans

     372         —           40         412         17,236         17,648   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     857         14         165         1,036         33,705         34,741   

Loans to other depository institutions

     —           —           —           —           —           —     

All other loans

     —           —           —           —           5,690         5,690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Other

     —           —           —           —           5,690         5,690   

Total loans

   $ 28,954       $ 14       $ 33,114       $ 62,082       $ 1,137,988       $ 1,200,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

At March 31, 2012 and December 31, 2011 there were $15.7 million and $15.2 million, respectively, of loans classified as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as TDRs, the Company further evaluates the loans as performing or nonperforming. Nonperforming TDRs originally classified as non-accrual are able to be reclassified as accruing if, subsequent to restructure, they experience six consecutive months of payment performance according to the restructured terms. Further, a TDR may be considered performing and subsequently removed from impaired status in years subsequent to the restructuring if it meets the following criteria:

 

   

At the time of restructure, the loan was made at a market rate of interest; and

 

   

The loan has shown at least 6 consecutive months of payment performance in accordance with the restructured terms; and

 

   

The loan has been included in the TDR disclosures for at least one Annual Report on Form 10-K

Modifications of terms for loans and their inclusion as TDRs are based on individual facts and circumstances. Loan modifications that are included as TDRs may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal payments, regardless of the period of the modification. The loans included in all loan classes as TDRs at March 31, 2012 had either an interest rate modification or a deferral of principal payments, which the Company considers are concessions. All loans designated as TDRs were modified due to financial difficulties experienced by the borrower. The Company has $3,101,000 of performing TDRs at March 31, 2012 which were restructured in a prior year and therefore are excluded from nonperforming status.

The Company monitors the performance of modified loans on an ongoing basis. Loans retain their accrual status at the time of their modification. As a result, if a loan is on non-accrual at the time it is modified, it stays as non-accrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. A modified loan will be reclassified to non-accrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. A loan on non-accrual will be individually evaluated based on sustained adherence to the terms of the modification agreement for a minimum of six months prior to being reclassified to accrual status. Non-performing TDRs are considered impaired.

The following table provides information about TDRs identified during the current period (in thousands, except number of contracts):

 

     Modifications for the Period Ended
March 31, 2012
 
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Trouble debt restructurings:

        

Commercial

     6       $ 3,509       $ 2,652   

Real estate - construction

     2         185         185   
  

 

 

    

 

 

    

 

 

 
     8       $ 3,694       $ 2,837   
  

 

 

    

 

 

    

 

 

 

 

 

16


Table of Contents

A TDR is considered to be in default if it is 90 days or more past due at the end of any month during the reporting period. There were no TDRs within twelve months of their modification date that defaulted during the three months ended March 31, 2012.

Interest income is not typically accrued on impaired loans, but there are $6.6 million in restructured loans at March 31, 2012 that are considered impaired and are accruing. The following table shows interest income recognized on these loans for the three months ended March 31, 2012 (in thousands):

 

     Interest
Income
Recognized
 

Three Months Ended March 31, 2012

  

Commercial

   $ 21   

Real estate - construction

     7   

Real estate – mortgage

     46   

Consumer

     1   
  

 

 

 

Total

   $ 75   
  

 

 

 

 

17


Table of Contents

Classified loans are summarized in the following table (in thousands):

 

      March 31
2012
     December 31
2011
 

Loans identified as impaired

   $ 35,043       $ 32,591   

Other nonperforming loans

     8,668         7,943   
  

 

 

    

 

 

 

Total nonperforming loans

     43,711         40,534   

Performing classified loans

     75,282         87,959   
  

 

 

    

 

 

 

Total classified loans

   $ 118,993       $ 128,493   
  

 

 

    

 

 

 

Loans specifically identified and evaluated for impairment totaled $35.0 million and $32.6 million at March 31, 2012 and December 31, 2011, respectively, as displayed in the following tables (in thousands).

 

            Impaired Loans                
     Recorded
Balance
     Unpaid Principal
Balance
     Specific
Allowance
     Average
Record Investment
 

March 31, 2012

           

Loans without a specific valuation allowance

           

Commercial

   $ 5,544       $ 6,790       $ —         $ 6,851   

Real estate - construction

     4,654         6,165         —           5,890   

Real estate – mortgage

     5,991         6,257         —           6,448   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     16,189         19,212         —           19,189   

Loans with a specific valuation allowance

           

Commercial

     9,312         9,312         2,287         9,918   

Real estate – construction

     1,642         1,651         361         1,668   

Real estate – mortgage

     7,804         8,909         1,795         8,723   

Consumer

     96         96         96         104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     18,854         19,968         4,539         20,413   

Total impaired loans

           

Commercial

     14,856         16,102         2,287         16,769   

Real estate – construction

     6,296         7,816         361         7,558   

Real estate – mortgage

     13,795         15,166         1,795         15,171   

Consumer

     96         96         96         104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,043       $ 39,180       $ 4,539       $ 39,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Impaired Loans                
     Recorded
Balance
     Unpaid Principal
Balance
     Specific
Allowance
     Average
Record Investment
 

December 31, 2011

           

Loans without a specific valuation allowance

           

Commercial

   $ 2,722       $ 2,856       $ —         $ 3,497   

Real estate - construction

     6,874         8,571         —           8,655   

Real estate – mortgage

     6,429         6,536         —           8,128   

Consumer

     —           —           —           57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     16,025         17,963         —           20,337   

Loans with a specific valuation allowance

           

Commercial

     8,014         8,329         1,972         4,251   

Real estate – construction

     1495         1,515         203         2,954   

Real estate – mortgage

     6,940         7,240         1,874         7,472   

Consumer

     117         117         117         86   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     16,566         17,201         4,166         14,763   

Total impaired loans

           

Commercial

     10,736         11,185         1,972         7,749   

Real estate – construction

     8,369         10,086         203         11,608   

Real estate – mortgage

     13,369         13,776         1,874         15,600   

Consumer

     117         117         117         143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,591       $ 35,164       $ 4,166       $ 35,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the reserving method for the quarter ended March 31, 2012, the year ended December 31, 2011 and the quarter ended March 31, 2011 were as follows:

 

     Commercial      Real Estate -
Construction
     Real Estate -
Mortgage
     Consumer      Other      Total
Loans
 

March 31, 2012

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 2,287       $ 361       $ 1,795       $ 96       $ —         $ 4,539   

Collectively evaluated for impairment

     5,423         4,537         11,881         1,192         346         23,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 7,710       $ 4,898       $ 13,676       $ 1,288       $ 346       $ 27,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial      Real Estate -
Construction
     Real Estate -
Mortgage
     Consumer      Other      Total Loans  

December 31, 2011

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 1,972       $ 203       $ 1,874       $ 117       $ —         $ 4,166   

Collectively evaluated for impairment

     6,554         6,264         10,079         1,749         32         24,678   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 8,526       $ 6,467       $ 11,953       $ 1,866       $ 32       $ 28,844   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial      Real  Estate-
Construction
     Real Estate  -
Mortgage
     Consumer      Other      Total
Loans
 

March 31, 2011

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 1,111       $ 210       $ 753       $ 109       $ —         $ 2,183   

Collectively evaluated for impairment

     5,989         6,500         12,246         2,139         —           26,874   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 7,100       $ 6,710       $ 12,999       $ 2,248       $ —         $ 29,057   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial      Real Estate  -
Construction
     Real  Estate-
Mortgage
     Consumer      Other      Total
Loans
 

March 31, 2012

                 

Recorded investment in loans:

                 

Individually evaluated for impairment

   $ 14,856       $ 6,296       $ 13,795       $ 96       $ —         $ 35,043   

Collectively evaluated for impairment

     521,413         78,860         500,612         31,775         5,968         1,138,628   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment in loans

   $ 536,269       $ 85,156       $ 514,407       $ 31,871       $ 5,968       $ 1,173,671   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial      Real Estate  -
Construction
     Real Estate  -
Mortgage
     Consumer      Other      Total
Loans
 

December 31, 2011

                 

Recorded investment in loans:

                 

Individually evaluated for impairment

   $ 10,736       $ 8,369       $ 13,369       $ 117       $ —         $ 32,591   

Collectively evaluated for impairment

     536,707         81,042         509,416         34,624         5,690         1,167,479   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment in loans

   $ 547,443       $ 89,411       $ 522,785       $ 34,741       $ 5,690       $ 1,200,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial      Real Estate -
Construction
     Real Estate  -
Mortgage
     Consumer      Other      Total
Loans
 

March 31, 2011

                 

Recorded investment in loans:

                 

Individually evaluated for impairment

   $ 7,547       $ 14,429       $ 14,301       $ 220       $ —         $ 36,497   

Collectively evaluated for impairment

     523,416         113,936         527,332         48,769         4,680         1,218,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment in loans

   $ 530,963       $ 128,365       $ 541,633       $ 48,989       $ 4,680       $ 1,254,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Bank’s policy for impaired loan accounting subjects all loans to impairment recognition except for large groups of smaller balance homogeneous loans such as credit card, residential mortgage and consumer loans. The Bank generally considers loans 90 days or more past due and all nonaccrual loans to be impaired.

The following table summarizes, by internally assigned risk grade, the risk grade for loans for which the bank has assigned a risk grade (in thousands).

 

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Table of Contents
     March 31
2012
     December 31
2011
 
     Pass      Special
Mention
     Sub-
standard
     Doubtful      Total      Pass      Special
Mention
     Sub-
standard
     Doubtful      Total  

Commercial

   $ 435,509       $ 53,278       $ 70,915       $ 1,070       $ 560,772       $ 437,475       $ 56,172       $ 79,229       $ 301       $ 573,177   

Real estate – construction

     38,550         10,761         20,378         1,659         71,348         35,622         14,304         23,667         757         74,350   

Real estate – mortgage

     55,068         7,843         13,707         165         76,783         57,089         7,363         14,517         171         79,140   

Consumer

     —           —           —           —           —           —           —           —           —           —     

Other

     5,069         —           —           —           5,069         4,954         —           —           —           4,954   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 534,196       $ 71,882       $ 105,000       $ 2,894       $ 713,972       $ 535,140       $ 77,839       $ 117,413       $ 1,229       $ 731,621   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An analysis of the changes in the allowance for credit losses follows (in thousands):

 

     Three
Months
Ended
March 31,
2012
     Three
Months
Ended
March 31,
2011
 

Balance, beginning of period

   $ 28,844       $ 28,752   

Loans charged off:

     

Secured by owner-occupied nonfarm nonresidential properties

     919         123   

Secured by other nonfarm nonresidential properties

     105         212   

Other commercial and industrial

     311         865   
  

 

 

    

 

 

 

Total Commercial

     1,335         1,200   

Construction loans – 1-4 family residential

     —           18   

Other construction and land development

     848         1,116   
  

 

 

    

 

 

 

Total Real estate – construction

     848         1,134   

Closed-end loans secured by 1 to 4 family residential properties

     499         1,736   

Lines of credit secured by 1 to 4 family residential properties

     1,869         461   

Loans secured by 5 or more family residential properties

     —           —     
  

 

 

    

 

 

 

Total Real estate – mortgage

     2,368         2,197   

Credit cards

     112         104   

Other consumer loans

     171         276   
  

 

 

    

 

 

 

Total consumer

     283         380   

Total other

     —           1,300   
  

 

 

    

 

 

 

Total chargeoffs

     4,834         6,211   

Recoveries of loans previously charged off:

     

Total Commercial

     75         137   

Total Real estate - construction

     175         86   

Total Real estate - mortgage

     130         113   

Total Consumer

     73         104   

Total Other

     12         3   
  

 

 

    

 

 

 

Total Recoveries

     465         443   
  

 

 

    

 

 

 

Net loans charged off

     4,369         5,768   

Provision for credit losses

     3,443         6,073   
  

 

 

    

 

 

 

Balance, end of period

   $ 27,918       $ 29,057   
  

 

 

    

 

 

 

 

20


Table of Contents

Loans totaling $7,676,000 and $7,851,000, as of March 31, 2012 and December 31, 2011, respectively, were held for sale, and stated at the lower of cost or market on an individual basis.

Loans totaling $502,563,000 and $506,449,000, as of March 31, 2012 and December 31, 2011, respectively, were pledged to secure lines of the credit with the Federal Home Loan Bank and Federal Reserve Bank.

Note 5 — Stock Compensation Plans

The Company recorded $(54,000) and $11,000 of total stock-based compensation expense for the three-month periods ended March 31, 2012 and March 31, 2011, respectively. The current period credit is due to a change in expectation related to vesting of outstanding performance based awards. The stock-based compensation expense is calculated on a ratable basis over the vesting periods of the related stock options or restricted stock grants and is reported under personnel expense. This expense had no impact on the Company’s reported cash flows. As of March 31, 2012, there was $760,000 of total unrecognized stock-based compensation expense. This expense will be fully recognized by December of 2015.

For purposes of determining estimated fair value of the stock options and restricted stock grants, the Company has computed the estimated fair values of all stock-based compensation using the Black-Scholes option pricing model and, for stock options and restricted stock grants granted prior to December 31, 2011, has applied the assumptions set forth in the Annual Report. During the first quarter of 2012, no stock options or restricted stock grants were granted to employees or directors.

On January 11, 2012, the Company’s Board of Directors awarded a total of 121,616 restricted stock units to certain executive officers. The fair value of these restricted stock units is $3.89 per unit, which was the closing price of the Company’s common stock on that date. Half of the restricted stock units vest over a period of four years and half vest, subject to meeting certain performance criteria, over a period of three years and are subject to the Company repaying certain portions of the funds it received under the U.S. Department of the Treasury (the “U.S. Treasury”) Capital Purchase Program. The stock-based compensation expense for these awards was immaterial for the first three months of 2012.

 

21


Table of Contents

Note 6 – Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value for each class of the Company’s financial instruments.

Cash and cash equivalents. The carrying amounts for cash and due from banks approximate fair value because of the short maturities of those instruments.

Investment securities. The fair value of investment securities is based on quoted prices in active markets for identical assets, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities, corresponding to the “significant other observable inputs” definition of GAAP. The fair value of equity investments in the restricted stock of the FHLB equals the carrying value as the fair value is not readily determinable.

Loans. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Substantially all residential mortgage loans held for sale are pre-sold and their carrying value approximates fair value. The fair value of variable rate loans with frequent repricing and negligible credit risk approximates book value.

Investment in bank-owned life insurance. The carrying value of bank-owned life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits. The fair value of noninterest-bearing demand deposits and NOW, savings, and money market deposits are the amounts payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal funds purchased and retail repurchase agreements. The carrying value of federal funds purchased and retail repurchase agreements are considered to be a reasonable estimate of fair value.

Wholesale repurchase agreements and other borrowings. The fair values of these liabilities are estimated using the discounted values of the contractual cash flows. The discount rate is estimated using the rates currently in effect for similar borrowings.

Accrued interest. The carrying amounts of accrued interest approximate fair value.

Financial instruments with off-balance sheet risk. The carrying value of financial instruments with off-balance sheet risk is considered to approximate fair value, since a large majority of these future financing commitments would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value. The various financial instruments are disclosed in Note 16 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

 

22


Table of Contents

The table below presents the estimated fair values of financial instruments as of March 31, 2012 and December 31, 2011:

 

       Estimated Fair Value  

March 31, 2012

   Carrying
Value
     Quoted prices
in active
markets for
identical assets
(Level 1)
     Significant
other
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
     Total  

Financial assets:

              

Cash and short term investments

   $ 35,551       $ 35,551       $ -       $ -       $ 35,551   

Loans

     1,173,671         -         -         1,171,534         1,171,534   

Financial liabilities:

              

Deposits

     1,449,194         -         1,451,082         -         1,451,082   

Wholesale repurchase agreements

     21,000         -         23,772         -         23,772   

Junior Subordinated notes

     25,774         -         -         11,524         11,524   

FHLB borrowings

     64,000         -         64,894         -         64,894   
       Estimated Fair Value  

December 31, 2011

   Carrying
Value
     Quoted prices
in active
markets for
identical assets
(Level 1)
     Significant
other
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
     Total  

Financial assets:

              

Cash and short term investments

   $ 53,992       $ 53,992       $ -       $ -       $ 53,992   

Loans

     1,200,070         -         -         1,197,885         1,197,885   

Financial liabilities:

              

Deposits

     1,418,676         -         1,420,704         -         1,420,704   

Wholesale repurchase agreements

     21,000         -         23,772         -         23,772   

Junior Subordinated notes

     25,774         -         -         10,857         10,857   

FHLB borrowings

     86,700         -         87,911         -         87,911   

The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on current economic conditions, risk characteristics of various financial instruments, and such other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset (in thousands):

 

     Quoted prices in active
markets for identical
assets (Level 1)
     Significant other
observable
inputs (Level 2)
     Significant
unobservable
inputs (Level 3)
 

Available for sale securities at March 31, 2012

   $ —         $ 387,719       $ —     

Available for sale securities at December 31, 2011

     —           330,626         —     

 

23


Table of Contents

The table below presents the assets measured at fair value on a non-recurring basis categorized by the level of inputs used in the valuation of each asset (in thousands):

 

     Quoted prices in active
markets for identical
assets (Level 1)
     Significant other
observable
inputs (Level 2)
     Significant
unobservable
inputs (Level 3)
 

Loans held for sale at March 31, 2012

   $ —         $ 7,676       $ —     

Loans held for sale at December 31, 2011

     —           7,851         —     

Real estate acquired in settlement of loans at March 31, 2012

     —           —           30,032   

Real estate acquired in settlement of loans at December 31, 2011

     —           —           30,587   

Impaired loans, net of allowance at March 31, 2012

     —           —           30,504   

Impaired loans, net of allowance at December 31, 2011

     —           —           28,425   

Note 7 – U.S. Treasury Capital Purchase Program

Pursuant to the U.S. Department of the Treasury (the “U.S. Treasury”) Capital Purchase Program (the “CPP”), on December 12, 2008, the Company issued and sold to the U.S. Treasury (i) 52,372 shares of Bancorp’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 2,567,255 shares of the Company’s common stock at an exercise price of $3.06 per share, for an aggregate purchase price of $52,372,000 in cash. The Warrant may be exercised by U.S. Treasury at any time before it expires on December 12, 2018. The fair value of the Warrant of $1,497,000 was estimated on the date of the grant using the Black-Scholes option-pricing model. The Series A Preferred Stock pays cumulative dividends of five percent for the first five years and nine percent thereafter, unless the Company redeems the shares.

 

24


Table of Contents

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 (“Bancorp” or 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 Bancorp including but not limited to Bancorp’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 Bancorp to increased regulation and may adversely affect Bancorp; (2) the strength of the United States economy generally, and the strength of the local economies in which Bancorp conducts operations, may be different than expected, resulting in, among other things, a continued deterioration in credit quality, including the resultant effect on Bancorp’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 Bancorp’s capital markets and capital management activities; (6) the timely development of competitive new products and services by Bancorp 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 Bancorp; (8) the willingness of customers to substitute competitors’ products and services for Bancorp’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 Bancorp’s borrowers which could impact repayment of such borrowers’ outstanding loans; and (17) Bancorp’s success at managing the risks involved in the foregoing. Bancorp 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 Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2012 (the “Annual Report”). Bancorp 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 Bancorp.

 

25


Table of Contents

Introduction

Bancorp is a bank holding company incorporated under the laws of North Carolina (“NC”) and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp’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.”

 

26


Table of Contents

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Net Interest Income

Net interest income for the first quarter of 2012, on a taxable equivalent basis, was $16.3 million, a decrease of $1.2 million, or 6.9%, from $17.5 million for the first quarter of 2011. Average earning assets in the first quarter of 2012 decreased $79.2 million, or 4.8%, to $1.58 billion, compared to $1.66 billion in the first quarter of 2011. Average interest-bearing liabilities for the first quarter of 2012 decreased $92.7 million, or 6.4%, to $1.37 billion, compared to $1.46 billion for the first quarter of 2011. Taxable-equivalent net interest margin decreased to 4.15% for the first quarter of 2012, compared to 4.28% for the first quarter of 2011, a decrease of 13 basis points. The interest rate spread decreased in the first quarter of 2012 by 10 basis points compared to the first quarter of 2011.

The decrease in net interest margin and interest rate spread was driven primarily by lower yields on investment securities due to a change in portfolio composition, and a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. The par value of the Company’s investment in U.S. Government Agency securities decreased to $36.0 million at March 31, 2012 from $96.3 million at March 31, 2011 due to calls on higher yielding bonds. At March 31, 2012, the par value of the Company’s investment in corporate bonds was $152.8 million compared to $38.8 million at March 31, 2011. The weighted average duration of the Company’s investment securities of 3.4 years at March 31, 2012 was approximately half of the weighted average duration a year earlier. The average yield on earning assets during the first quarter of 2012 was 39 basis points lower than the average yield on earning assets during the comparable period in 2011, while the average rate on interest-bearing liabilities decreased by 29 basis points during the same time period. 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, 2012 and 2011.

Interest Rate Risk Management

Interest rate risk management is a part of the Company’s overall asset/liability management process. The primary oversight of asset/liability management rests with the Bank’s Asset and Liability Committee, which is comprised of the Bank’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and other senior executives. The Committee meets on a monthly basis to review the asset/liability management activities of the Bank and monitor compliance with established policies. Activities of the Asset and Liability Committee are reported to the Audit and Risk Management Committee of the Company and the Bank.

A primary objective of interest rate risk management is to ensure the stability and quality of the Company’s primary earnings component, net interest income. This process involves monitoring the Company’s balance sheet in order to determine the potential impact that changes in the interest rate environment may have on net interest income. Rate sensitive assets and liabilities have interest rates that are subject to change within a specific time period, due to either maturity or to contractual agreements which allow the instruments to reprice prior to maturity. Interest rate sensitivity management seeks to ensure that both assets and liabilities react to changes in interest rates within a similar time period, thereby minimizing the risk to net interest income.

The Company uses several interest rate risk measurement tools provided by a national asset liability management consultant to help manage this risk. The Company’s Asset/Liability policy provides guidance for acceptable levels of interest rate risk and potential remediations. Management provides the consultant with key assumptions, which are used as inputs into the measurement tools. The Company has not experienced any material changes in interest rate risk since the end of the fiscal year ended December 31, 2011.

 

27


Table of Contents

(Fully taxable equivalent basis1,dollars in thousands)

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 
     Average
Balance
    Interest
Income/
Expense
     Annualized
Average
Yield/Rate
    Average
Balance
    Interest
Income/
Expense
     Annualized
Average
Yield/Rate
 

Earning assets:

              

Loans receivable2

   $ 1,191,042      $ 14,922         5.04   $ 1,335,001      $ 17,236         5.24

Taxable securities

     337,773        3,365         4.01        288,312        3,453         4.86   

Tax exempt securities

     17,808        292         6.59        15,683        282         7.30   

FHLB stock

     7,185        24         1.34        10,399        21         0.83   

Interest-bearing bank balances

     23,978        15         0.25        7,579        4         0.21   

Federal funds sold

     —          —           —          —          —           —     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total earning assets

     1,577,786        18,618         4.75        1,656,974        20,996         5.14   

Non-earning assets:

              

Cash and due from banks

     26,348             27,999        

Premises and equipment

     36,442             38,649        

Other assets

     124,789             109,955        

Allowance for credit losses

     (29,182          (29,894     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total assets

   $ 1,736,183      $ 18,618         $ 1,803,683      $ 20,996      
  

 

 

   

 

 

      

 

 

   

 

 

    

Interest-bearing liabilities:

              

Savings deposits

   $ 42,447      $ 9         0.09   $ 40,190      $ 10         0.10

NOW deposits

     441,058        406         0.37        440,366        751         0.69   

Money market deposits

     377,836        457         0.49        317,761        552         0.70   

Time deposits

     382,891        872         0.92        472,488        1,374         1.18   

Other borrowings

     46,840        259         2.22        62,252        492         3.21   

Borrowings from Federal Home Loan Bank

     73,968        347         1.89        124,634        348         1.13   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     1,365,040        2,350         0.69        1,457,691        3,527         0.98   

Other liabilities and shareholders’ equity:

              

Demand deposits

     184,347             163,633        

Other liabilities

     20,529             17,121        

Shareholders’ equity

     166,267             165,238        
  

 

 

   

 

 

      

 

 

   

 

 

    

Total liabilities and shareholders’ equity

   $ 1,736,183        2,350         $ 1,803,683        3,527      
  

 

 

   

 

 

      

 

 

   

 

 

    

Net interest income and net interest margin3

     $ 16,268         4.15     $ 17,469         4.28
    

 

 

    

 

 

     

 

 

    

 

 

 

Interest rate spread4

          4.06          4.16
       

 

 

        

 

 

 

 

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 $96 for 2012 and $91 for 2011.

2 

The average loans receivable balances include non-accruing loans. Amortization of loan fees, net of deferred costs, of $169 and $189 for the three months ended March 31, 2012 and 2011, 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.

 

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Noninterest Income and Expense

In the first quarter of 2012, noninterest income decreased to $3.0 million, from $4.5 million during the same period in 2011. The Company recognized gains on the sale of investment securities of $2.0 million during the first quarter of 2011. No investment securities were sold during the three months ended March 31, 2012. Service charge income decreased 9.8% to $2.3 million in the first quarter of 2012 from $2.5 million in the first quarter of 2011 due primarily to ongoing regulatory changes in the industry and changes in consumer behavior. Mortgage revenue increased to $563,000 in the first quarter of 2012, compared to $425,000 in the first quarter of 2011, due to higher volume of mortgage originations.

In the first quarter of 2012, noninterest expense decreased to $13.6 million from $14.4 million in the first quarter of 2011. Federal Deposit Insurance Corporation (“FDIC”) insurance expense decreased to $0.4 million in the first quarter of 2012 from $0.8 million in the first quarter of 2011. On February 7, 2011, the FDIC adopted a new assessment formula, which became effective in the second quarter of 2011. The application of their new amended formula had the effect of reducing the Bank’s assessments. In the third quarter of 2011, the Bank received a new rating which further reduced the Bank’s assessments. In addition, the Company recorded decreases in personnel expense, occupancy expense, and furniture and equipment expense as a result of the Company’s continued focus on efficiency and a disciplined cost management culture.

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

 

     Three Months Ended
March 31,
     Percentage  
     2012      2011      Variance  

Other operating expenses:

        

Advertising

   $ 397       $ 437         (9.2 )% 

Bankcard expense

     109         132         (17.4

Postage

     197         214         (7.9

Telephone

     171         150         14.0   

Amortization of core deposit intangible

     182         182         0.0   

Stationery, printing and supplies

     115         146         (21.2

Other expense

     1,137         1,044         8.9   
  

 

 

    

 

 

    
   $ 2,308       $ 2,305         0.1   
  

 

 

    

 

 

    

Income Taxes

The Company recorded income tax expense of $617,000 for the first quarter of 2012, compared to income tax expense of $433,000 for the first quarter of 2011. The Company’s effective tax rate was 29.0% for the three-month period ended March 31, 2012, compared to 30.0% for the first quarter of 2011. The change in the effective rate is primarily as a result of a $12.0 million additional investment in bank owned life insurance in the fourth quarter of 2011.

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 charge-off 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

 

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Company, like many financial institutions, has recently faced a challenging credit environment and will likely continue to face such an environment in the coming months as a result of the overall economic slowdown in the region and the nation. The majority of the Bank’s loan portfolio is comprised of loans secured by real estate, and is therefore subject to risk as a result of the weak real estate market. No assurances can be given that future economic conditions will not adversely affect borrowers and result in increases in credit losses and non-performing asset levels.

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 also analyzes loans in the portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. 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, 2012, the allowance for credit losses was $27.9 million, or 2.38% of total loans outstanding, compared to $28.8 million, or 2.40% of loans outstanding at December 31, 2011, and $29.1 million, or 2.32% of loans outstanding, at March 31, 2011. At March 31, 2012, the allowance for credit losses was 63.87% of nonperforming loans compared to 71.16% at December 31, 2011 and 58.13% at March 31, 2011. Based on analysis of the current loan portfolio and levels of current problem assets and potential problem loans, management believes the allowance for credit losses to be adequate. Additional information regarding the allowance for credit losses is presented in the table headed “Asset Quality Analysis” on the following page.

Nonperforming loans totaled $43.7 million at March 31, 2012 compared to $40.5 million at December 31, 2011 and $50.0 million at March 31, 2011. The increase from the 2011 year end and the decrease from the prior year first quarter reflects fluctuations in non-accrual loans. Real estate acquired in settlement of loans (“OREO”) was $30.0 million at March 31, 2012, $30.6 million at December 31, 2011, and $26.3 million at March 31, 2011. Approximately $2.9 million was transferred from loans into OREO and approximately $3.0 million of such assets were disposed of during the first three months of 2012. A net loss of $1.0 million has been recorded on the disposition and writedowns of OREO in the current year, through March 31, 2012, compared to a net loss of $1.5 million in the first quarter of 2011. The Company recorded $318,000 of expenses on OREO during the first three months of 2012, compared to $389,000 million in the first quarter of 2011. Nonperforming assets (comprised of nonaccrual loans, restructured loans and OREO) totaled $73.7 million, or 4.22% of total assets, at March 31, 2012, compared to $71.1 million, or 4.10% of total assets, at December 31, 2011 and $76.3 million, or 4.28% of total assets, a year ago.

The provision for credit losses charged to operations for the three months ended March 31, 2012 totaled $3.4 million, compared to $6.1 million for the three months ended March 31, 2011. Net charge-offs for the three months ended March 31, 2012 were $4.4 million, or 1.48% of average loans held for investment on an annualized basis, compared to net charge-offs of $5.8 million, or 1.75% of average loans held for investment on an annualized basis, for the three months ended March 31, 2011.

 

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Asset Quality Analysis

(Dollars in thousands)

 

     Three
Months
Ended
March 31,
2012
    Year Ended
December 31,
2011
    Three
Months
Ended
March 31,
2011
 

Allowance for credit losses:

      

Balance, beginning of period

   $ 28,844      $ 28,752      $ 28,752   

Loans charged off:

      

Secured by owner-occupied nonfarm nonresidential properties

     919        1,131        123   

Secured by other nonfarm nonresidential properties

     105        956        212   

Other commercial and industrial

     311        2,958        865   
  

 

 

   

 

 

   

 

 

 

Total Commercial

     1,335        5,045        1,200   

Construction loans – 1-4 family residential

     —          209        18   

Other construction and land development

     848        3,776        1,116   
  

 

 

   

 

 

   

 

 

 

Total Real estate – construction

     848        3,985        1,134   

Closed-end loans secured by 1 to 4 family residential properties

     499        3,603        1,736   

Lines of credit secured by 1 to 4 family residential properties

     1,869        2,443        461   

Loans secured by 5 or more family residential properties

     —          776        —     
  

 

 

   

 

 

   

 

 

 

Total Real estate – mortgage

     2,368        6,822        2,197   

Credit cards

     112        398        104   

Other consumer loans

     171        1,047        276   
  

 

 

   

 

 

   

 

 

 

Total consumer

     283        1,445        380   

Total other

     —          1,300        1,300   
  

 

 

   

 

 

   

 

 

 

Total chargeoffs

     4,834        18,597        6,211   

Recoveries of loans previously charged off:

      

Total Commercial

     75        495        137   

Total Real estate - construction

     175        534        86   

Total Real estate - mortgage

     130        443        113   

Total Consumer

     73        401        104   

Total Other

     12        31        3   
  

 

 

   

 

 

   

 

 

 

Total Recoveries

     465        1,904        443   
  

 

 

   

 

 

   

 

 

 

Net loans charged off

     4,369        16,693        5,768   

Provision for credit losses

     3,443        16,785        6,073   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 27,918      $ 28,844      $ 29,057   
  

 

 

   

 

 

   

 

 

 

Nonperforming Assets:

      

Commercial nonaccrual loans, not restructured

   $ 17,905      $ 15,773      $ 18,528   

Commercial nonaccrual loans, restructured

     8,116        7,489        12,215   

Non-commercial nonaccrual loans

     10,038        9,569        10,997   

Non-commercial nonaccrual loans, restructured

     990        283        683   
  

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     37,049        33,114        42,423   

Troubled debt restructured, accruing

     6,633        7,406        7,531   

Loans 90 days or more past due and still accruing

     29        14        32   
  

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     43,711        40,534        49,986   

Real estate acquired in settlement of loans

     30,032        30,587        26,329   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 73,743      $ 71,121      $ 76,315   
  

 

 

   

 

 

   

 

 

 

Asset Quality Percentages:

      

Nonperforming loans to total loans outstanding at end of period

     3.72     3.38     3.98

Nonperforming assets to total assets at end of period

     4.22     4.10     4.28

Allowance for credit losses as a percentage of total loans

outstanding at end of period

     2.38     2.40     2.32

Allowance for credit losses to nonperforming loans

     63.87     71.16     58.13

Net charge-offs as a percentage of average loans outstanding during the period (Annualized for interim periods)

     1.48     1.32     1.76

 

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Liquidity Management

Liquidity management refers to the policies and practices that ensure the Company has the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Bank’s customers. Deposit withdrawals, loan funding and general corporate activity create the primary needs for liquidity for the Bank. Liquidity is derived from sources such as deposit growth; maturity, calls or sales of investment securities; principal and interest payments on loans; access to borrowed funds or lines of credit; and profits.

During the first three months of 2012, the Company had net cash provided by operating activities of $6.2 million, compared to $4.4 million of net cash provided by operating activities in the first three months of 2011. The increase was primarily the result of a reduction in the increase in other assets of $1.5 million for the first quarter of 2012 compared to the first quarter of 2011, and a reduction in the provision for credit losses of $2.6 million for the first quarter of 2012 compared to the first quarter of 2011. At March 31, 2011 other assets included $1.4 million of proceeds receivable from the sale of real estate acquired in settlement of loans. In addition, there was a gain on the sale of securities of $2.0 million during the first quarter of 2011, while no securities were sold during the first quarter of 2012.

Net cash used by investing activities for the first three months of 2012 was $31.9 million, compared to net cash provided by investing activities in the first three months of 2011 of $41.7 million. This change is primarily attributable to purchases of securities available for sale of $72.0 million during the first quarter of 2012, compared to $3.7 million in purchases during the same period last year. Proceeds from securities sales, maturities and calls were $19.7 million during the first quarter of 2012, compared to $50.5 million during the first quarter of 2011. During the first three months of 2012, there was a decrease in loans of $19.1 million compared to an increase in loans of $6.3 million during the same period last year.

During the three months ended March 31, 2012, financing activities provided $7.2 million, compared to net cash used by financing activities of $23.3 million during the same period of 2011. The change was primarily the result of an increase in demand, NOW, money market and savings deposits of $57.8 million during the first quarter of 2012, compared to an increase of $31.9 million for these deposits during the first quarter of 2011.

Cash and cash equivalents totaled $35.6 million at March 31, 2012, compared to $54.0 million at December 31, 2011 and $51.9 million at March 31, 2011.

The Company has borrowing capacity of approximately $260.2 million with the Federal Home Loan Bank of Atlanta (“FHLB”), of which approximately $146.2 million was available at March 31, 2012. These borrowings are collateralized by FHLB stock, investment securities, qualifying 1 to 4 family residential mortgage loans, and qualifying commercial real estate loans. The Bank provides various reports to the FHLB on a regular basis to maintain the availability of the credit line. Each borrowing request to the FHLB is initiated through an advance application that is subject to approval by the FHLB before funds are advanced under the line of credit. The Bank also has $18.5 million of borrowing capacity through the Federal Reserve Bank System, of which none was used as of March 31, 2012. The line with the Federal Reserve Bank of Richmond (“Federal Reserve”) is collateralized using investment securities and qualified loans.

Capital Resources and Shareholders’ Equity

Pursuant to the U.S. Department of the Treasury (the “U.S. Treasury”) Capital Purchase Program (the “CPP”), on December 12, 2008, the Company issued and sold to the U.S. Treasury (i) 52,372 shares of Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 2,567,255 shares of the Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $52,372,000 in cash. The Securities Purchase Agreement grants the holders of the Series A Preferred Stock, the Warrant and the common stock of the Company to be issued under the Warrant, certain registration rights, and subjects the Company to certain of

 

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the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009 and related regulations. The Bank is currently restricted from paying dividends to the Company unless it receives advance approval from the FDIC and the N. C. Commissioner of Banks (“Commissioner”).

The Company did not repurchase any of its equity securities during 2011 or the first quarter of 2012.

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Commissioner, the Federal Reserve and the FDIC, which are the primary banking regulatory agencies for the Bank and the Company, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are required to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines.

As shown in the accompanying table, the Company and the Bank have capital levels exceeding the minimum levels for “well capitalized” banks and bank holding companies as of March 31, 2012.

 

     Regulatory Capital  
     Well
Capitalized
    Adequately
Capitalized
    Company     Bank  

Total Capital

     10.0     8.0     14.45     14.20

Tier 1 Capital

     6.0        4.0        13.18        12.92   

Leverage Capital

     5.0        4.0        10.62        10.42   

The Company holds $3.9 million of the $52.4 million received from the U.S. Treasury under the CPP, which may be invested in the Bank to increase the Bank’s total risk based capital percentage from the present level of 14.20%.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of future period net interest income or other comprehensive income.

The Company considers interest rate risk to be its most significant market risk, which is discussed under the heading “Interest Rate Risk Management” on page 27.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s management, including its Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”) evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2012. Based upon that evaluation, the Company’s CEO, CFO and CAO each concluded that as of March 31, 2012, the end of the period covered by this Quarterly Report on Form 10-Q, the Company maintained effective disclosure controls and procedures.

Changes in internal control over financial reporting

There have been no changes to the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

There have been no material changes to the Company’s Risk Factors as previously disclosed in Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of equity securities during the first quarter of 2012 which were not registered under the Securities Act of 1933, as amended. The Company did not repurchase any of its equity securities during the first quarter of 2012.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Removed and Reserved

Item 5. Other Information

Not applicable

 

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Table of Contents
Item 6. Exhibits

 

Exhibit
No.

  

Description

3.1    Articles of Incorporation, and amendments thereto, incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046).
3.2    Articles of Merger of FNB with and into LSB, including amendments to the Articles of Incorporation, as amended, incorporated by reference to Exhibit 3.4 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007 (SEC File No. 000-11448).
3.3    Amended and Restated Bylaws adopted by the Board of Directors on August 17, 2004 and amended on July 23, 2008 (with identified Bylaw approved by the shareholders) incorporated by reference to Exhibit 3.3 of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on May 8, 2009 (SEC File No. 000-11448).
4.1    Specimen certificate of common stock, $5.00 par value, incorporated by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007 (SEC
File No. 000-11448).
4.2    Amended and Restated Trust Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.02 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086).
4.3    Guarantee Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.03 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086).
4.4    Indenture, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.04 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC
(SEC File No. 000-13086).
4.5    Articles of Amendment, filed with the North Carolina Department of the Secretary of State on December 12, 2008, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).
4.6    Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).
4.7    Warrant for Purchase of Shares of Common Stock issued by Bancorp to the United States Department of the Treasury on December 12, 2008, incorporated herein by reference to Exhibit 4.3 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).
10.1      Benefit Equivalency Plan of FNB Southeast, effective January 1, 1994 incorporated herein by reference to Exhibit 10 of the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1995, filed with the SEC
(SEC File No. 000-13086).*
10.2      1994 Director Stock Option Plan, incorporated herein by reference to Exhibit 4 of the Registration Statement on Form S-8 filed with the SEC on July 15, 1994 (SEC File No. 33-81664).*

 

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10.3    1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1995 filed with the SEC on March 28, 1996 (SEC File No. 000-11448).*
10.4    Omnibus Equity Compensation Plan, incorporated herein by reference to Exhibit 10(B) of the Annual Report on Form 10-KSB40 for the fiscal year ended December 31, 1996, filed with the SEC on March 31, 1997 (SEC File No. 000-13086).*
10.5    Amendment to Benefit Equivalency Plan of FNB Southeast, effective January 1, 1998., incorporated herein by reference to Exhibit 10.16 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the SEC on March 25, 1999 (SEC File No. 000-13086).*
10.6    Amendment Number 1 to 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 4.5 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046).*
10.7    Long Term Stock Incentive Plan for certain senior management employees of FNB Southeast incorporated herein by reference to Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the SEC on March 27, 2003 (SEC File No. 000-13086).*
10.8    Form of Stock Option Award Agreement for a Director adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448).*
10.9    Form of Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448).*
10.10    Form of Amendment to the applicable Grant Agreements under the 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448).*
10.11    Form of Amendment to the Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448).*
10.12    Restated Form of Director Fee Deferral Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448).*
10.13    Form of Stock Appreciation Rights Award Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448).*
10.14    FNB Amended and Restated Directors Retirement Policy, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on August 3, 2007 (SEC File No. 000-11448).*
10.15    Amendment to the FNB Directors and Senior Management Deferred Compensation Plan Trust Agreement among Regions Bank d/b/a/ Regions Morgan Keegan Trust, FNB Southeast and FNB, dated July 31, 2007, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K, filed with the SEC on August 3, 2007 (SEC File No. 000-11448).*

 

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Table of Contents
10.16    Directors and Senior Management Deferred Compensation Plan Trust Agreement between FNB Southeast and Morgan Trust Company, incorporated herein by reference to Exhibit 99.7 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).*
10.17    Second Amendment to the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy Trust Agreement among Regions Bank d/b/a/ Regions Morgan Keegan Trust, Bancorp and the Bank, which is incorporated by reference to Exhibit 99.8 of the current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). *
10.18    Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).*
10.19    First Amendment to the Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.10 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).*
10.20    Bancorp Amended and Restated Long Term Stock Incentive Plan, formerly the “FNB Long Term Stock Incentive Plan” (the “2006 Omnibus Plan”), incorporated herein by reference to Exhibit 10.27 of the Quarterly Report on Form 10-Q filed with the SEC on May 9, 2008 (SEC File No. 000-11448).*
10.21    Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.44 of the Quarterly Report on Form 10-Q, filed with the SEC on August 11, 2008 (SEC File No. 000-11448).*
10.22    Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.45 of the Quarterly Report on Form 10-Q, filed with the SEC on August 11, 2008 (SEC File No. 000-11448).*
10.23    Letter Agreement, dated December 12, 2008, between Bancorp and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A and the Warrant, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).
10.24    Form of Employment Agreement Amendment, dated December 12, 2008 among Bancorp, the Bank and the senior executive officers of Bancorp, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).*
10.25    Promissory Note by Ramsey K. Hamadi in favor of the Bank incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on April 21, 2009 (SE File No. 000-11448).*
10.26    Excessive and Luxury Expenditure Policy of Bancorp and the Bank, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 9, 2009 (SEC File No. 000-11448)
10.27    Employment and Change of Control Agreement among Bancorp, the Bank and Pressley A. Ridgill, executed September 9, 2009, and effective January 1, 2010, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 11, 2009 (SEC File No. 000-11448).*
10.28    Form of Amendment to Employment and Change of Control Agreement, dated September 16, 2009, among Bancorp, the Bank and the senior executive officers of Bancorp, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on September 16, 2009 (SEC File No. 000-11448).*

 

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10.29    Employment and Change of Control Agreement with William W. Budd, Jr. incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 11, 2010 (SEC File No. 000-11448).*
10.30    Employment and Change of Control Agreement with Robin S. Hager, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on August 3, 2010 (SEC File No. 000-11448).*
10.31    Employment and Change of Control Agreement among Bancorp, the Bank and David P. Barksdale, dated January 12, 2012, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on January 30, 2012 (SEC File No. 000-11448).*
10.32    Employment and Change of Control Agreement among Bancorp, the Bank and Ramsey K. Hamadi, dated March 2, 2012, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on March 2, 2012 (SEC File No. 000-11448).*
10.33    Second Amendment to the Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 11, 2012. *
10.34    Third Amendment to the Trust Agreement for the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy, effective March 5, 2012.*
10.35    Appointment of Successor Trustee under the Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management dated March 5, 2012.*
10.37    Third Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees.*
10.38    Fourth Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees.*
31.01    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1       Financial Statements filed in XBRL format.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 10, 2012       NEWBRIDGE BANCORP
                (Registrant)
    By:  

/s/ Ramsey K. Hamadi

    Name: Ramsey K. Hamadi
   

Title: Senior Executive Vice P