| • FORM 10-Q • CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT • CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT • CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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)
(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)
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 ContentsFORM 10-Q TABLE OF CONTENTS
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Table of ContentsPART I NewBridge Bancorp and Subsidiary (Dollars in thousands, except per share data)
See notes to consolidated financial statements
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Table of ContentsNewBridge Bancorp and Subsidiary Consolidated Statements of Income (Unaudited; dollars in thousands, except per share data)
See notes to consolidated financial statements
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Table of ContentsNewBridge Bancorp and Subsidiary Consolidated Statements of Comprehensive Income (Unaudited; dollars in thousands)
See notes to consolidated financial statements
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Table of ContentsNewBridge Bancorp and Subsidiary Consolidated Statements of Changes in Shareholders’ Equity Three months ended March 31, 2012 and 2011 (Unaudited; dollars in thousands)
See notes to consolidated financial statements
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Table of ContentsNewBridge Bancorp and Subsidiary Consolidated Statements of Cash Flows (Unaudited; dollars in thousands)
See notes to consolidated financial statements
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Table of ContentsNewBridge Bancorp and Subsidiary Consolidated Statements of Cash Flows (continued) (Unaudited; dollars in thousands) Consolidated Statements of Cash Flows
See notes to consolidated financial statements
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Table of ContentsNewBridge 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.
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Table of ContentsIn 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):
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Table of ContentsNote 3 — Investment Securities Investment securities consist of the following (in thousands):
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):
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Table of ContentsInvestment 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.
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Table of ContentsNote 4 — Loans and Allowance for Credit Losses Loans are summarized as follows (in thousands):
Nonperforming assets are summarized as follows (in thousands):
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
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Table of Contentswhen: (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.
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Table of ContentsThe aging of loans is summarized in the following table (in thousands):
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Table of ContentsAt 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:
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):
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Table of ContentsA 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):
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Table of ContentsClassified loans are summarized in the following table (in thousands):
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).
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Table of ContentsThe 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:
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
An analysis of the changes in the allowance for credit losses follows (in thousands):
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Table of ContentsLoans 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.
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Table of ContentsNote 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.
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Table of ContentsThe table below presents the estimated fair values of financial instruments as of March 31, 2012 and December 31, 2011:
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):
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Table of ContentsThe 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):
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.
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Table of ContentsItem 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.
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Table of ContentsIntroduction 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.”
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Table of ContentsThree 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.
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Table of Contents(Fully taxable equivalent basis1,dollars in thousands)
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Table of ContentsNoninterest 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):
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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Table of ContentsCompany, 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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Table of ContentsAsset Quality Analysis (Dollars in thousands)
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Table of ContentsLiquidity 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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Table of Contentsthe 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.
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 ContentsNot applicable. 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. Not applicable
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Table of ContentsSIGNATURES 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.
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