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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 June 30, 2012 For the quarterly period ended: June 30, 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 August 7, 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 ContentsNewBridge Bancorp and Subsidiary Consolidated Balance Sheets (Dollars in thousands, except per share data)
See notes to consolidated financial statements
3
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 Six months ended June 30, 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 and six-month periods ended June 30, 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 the 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 June 30, 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 $80,000 of loans outstanding as of June 30, 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 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 is no longer 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 its Quarterly Report on Form 10-Q for the period ended March 31, 2012. 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. During 2012, the Company’s investment strategy has focused more on corporate bonds in order to take advantage of higher yield potential compared to other available investment alternatives and to supplement earning asset growth. Accordingly, the balance of corporate bond investments has increased notably during the period. All corporate bond investments are investment grade, as determined by S&P and Moody’s credit ratings.
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Table of ContentsThe following is a schedule of investment securities in a loss position as of June 30, 2012 (in thousands):
Investment securities with an amortized cost of $87,647,000 and $79,211,000, as of June 30, 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 first quarter of 2011 to dispose of agency mortgage backed securities with a remaining 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 six months ended June 30, 2012. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost. As of June 30, 2012, management does not have the intent to sell any of the securities classified as available for sale in the table above which have unrealized losses and believes that it is not likely that we will have to sell any such securities before a recovery of cost given the current liquidity position. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or re-pricing date or if market yields for such investments decline. Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality.
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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):
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Table of ContentsNonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, certain restructured loans, and real estate acquired in settlement of loans. Loans are placed on nonaccrual status 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 June 30, 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 June 30, 2012 and December 31, 2011, there were $16.1 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 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 nonaccrual may be reclassified as accruing if, subsequent to restructure, they experience six consecutive months of payment performance in accordance with 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. The loans included as TDRs at June 30, 2012 had either an interest rate modification or a deferral of one or more principal payments. All loans designated as TDRs were modified due to financial difficulties experienced by the borrower. The Company has $2,443,000 of performing TDRs at June 30, 2012 which meet the above criteria 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 nonaccrual at the time it is modified, it stays as nonaccrual, 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 nonaccrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. A loan on nonaccrual may be reclassified to accrual status following an evaluation and having experienced at least six consecutive months of payment performance in accordance with the restructured terms. Nonperforming 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. The following table provides information about TDRs restructured in the previous 12 months that subsequently defaulted during the stated periods (in thousands, except number of contracts):
Interest income is not typically accrued on impaired loans, but there are $5.2 million in TDRs at June 30, 2012 that are considered impaired and are accruing. The following table shows interest income recognized on TDRs for the three and six months ended June 30, 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 $33.0 million and $32.6 million at June 30, 2012 and December 31, 2011, respectively, as summarized in the following tables (in thousands).
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Table of ContentsThe balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on the reserving method as of June 30, 2012, December 31, 2011 and June 30, 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.
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Table of ContentsThe following table summarizes, by internally assigned risk grade, the risk grade for loans for which the Bank has assigned a risk grade (in thousands).
An analysis of the changes in the allowance for credit losses follows (in thousands):
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Table of ContentsLoans totaling $5,741,000 and $7,851,000, as of June 30, 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 $475,237,000 and $506,449,000, as of June 30, 2012 and December 31, 2011, respectively, were pledged to secure lines of the credit with the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond. Note 5 — Stock Compensation Plans The Company recorded $19,000 and $67,000 of total stock-based compensation expense for the six-month periods ended June 30, 2012 and June 30, 2011, respectively. The reduced expense during the current period is primarily due to revised expectations as to the achievement of certain conditions affecting the 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, restricted stock grants or restricted stock units and is reported under personnel expense. This expense had no impact on the Company’s reported cash flows. As of June 30, 2012, there was $688,000 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 stock options, restricted stock grants and restricted stock units, 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. 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. Vesting is also subject to the Company repurchasing, or the U.S. Department of the Treasury (the “U.S. Treasury”) selling, some or all of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) issued by the U.S. Treasury under the Capital Purchase Program (the “CPP). The stock-based compensation expense for these awards was immaterial for the first six 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 the Annual Report.
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Table of ContentsThe table below presents the estimated fair values of financial instruments as of June 30, 2012 and December 31, 2011 (in thousands):
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 (CPP) On December 12, 2008, the Company issued and sold to the U.S. Treasury (i) 52,372 shares of 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 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” as well as in Note 4 of the Notes to Consolidated Financial Statements.
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Table of ContentsThree Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011 Net Interest Income Net interest income for the second quarter of 2012, on a taxable equivalent basis, was $16.4 million, a decrease of $0.2 million, or 1.2%, from $16.6 million for the second quarter of 2011. Average earning assets in the second quarter of 2012 decreased $22.6 million, or 1.4%, to $1.59 billion, compared to $1.61 billion in the second quarter of 2011. Average interest-bearing liabilities in the second quarter of 2012 decreased $62.2 million, or 4.4%, to $1.35 billion, compared to $1.42 billion in the second quarter of 2011. Taxable equivalent net interest margin increased to 4.16% for the second quarter of 2012, compared to 4.14% for the second quarter of 2011. The interest rate spread increased in the second quarter of 2012 by four basis points compared to the second quarter of 2011. The increase in net interest margin and interest rate spread was driven primarily by a lower cost of funds rate partially offset by an overall lower yield on the investment portfolio and a lower yield on the loan portfolio. The par value of the Company’s investment in U.S. government agency securities decreased to $36.0 million at June 30, 2012 from $92.3 million at June, 30, 2011 due to calls on higher yielding securities. At June 30, 2012, the par value of the Company’s investment in corporate bonds was $152.8 million compared to $56.8 million at June 30, 2011. The weighted average duration of the Company’s investment securities was 3.1 years at June 30, 2012, compared to 5.6 years at June 30, 2011. The sustained low interest rate environment continues to impact loan yields. The annualized average yield on loans decreased to 4.99% for the three months ended June 30, 2012 compared to 5.16% for the three months ended June 30, 2011. The average yield on earning assets during the second quarter of 2012 was 31 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 36 basis points during the same time period. The highest cost category of deposits remains retail time deposits, which had an average interest rate of 0.76% for the second quarter 2012. Approximately $124.9 million of retail time deposits with a weighted average rate of 0.58% will mature in the third quarter of 2012. An additional $62.5 million of retail time deposits with approximately the same weighted average rate will mature by year end 2012. The following table provides an analysis of average volumes, yields and rates and net interest income on a taxable equivalent basis for the three months ended June 30, 2012 and 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 second quarter of 2012, noninterest income decreased to $1.0 million, from $2.4 million during the same period in 2011. Writedowns and losses on sales of real estate acquired in settlement of loans increased to $3.0 million, from $1.6 million during the same period last year. No investment securities were sold during the three months ended June 30, 2012 or June 30, 2011. Retail Banking income decreased 9.0% to $2.3 million in the second quarter of 2012 from $2.6 million in the second quarter of 2011 due primarily to ongoing regulatory changes in the industry and changes in consumer behavior. Mortgage Banking revenue increased to $0.6 million in the second quarter of 2012, compared to $0.3 million in the second quarter of 2011, due to higher volume of mortgage originations. In the second quarter of 2012, noninterest expense decreased to $13.7 million from $14.6 million in the second quarter of 2011. Federal Deposit Insurance Corporation (“FDIC”) insurance expense decreased to $0.4 million in the second quarter of 2012 from $0.6 million in the second 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 the new assessment formula had the effect of reducing the Bank’s assessments. In the third quarter of 2011, the Bank received a new risk rating which further reduced the Bank’s assessments. In addition, since March 31, 2011 the Company recorded decreases in personnel expense, furniture and equipment expense, and legal and professional 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 (dollars in thousands):
Income Taxes The Company recorded income tax expense of $312,000 for the second quarter of 2012, compared to income tax expense of $190,000 for the second quarter of 2011. The Company’s effective tax rate was 25.3% for the three-month period ended June 30, 2012, compared to 14.3% for the second quarter of 2011. The change in the effective tax rate is primarily a result of an increase in the 2012 income tax expense to reflect a higher expected tax rate for the full year ending December 31, 2012, from that expected at June 30, 2011 for the full year ending December 31, 2011. Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011 Net Interest Income Net interest income for the first half of 2012, on a taxable equivalent basis, was $32.7 million, a decrease of $1.4 million, or 4.1%, from $34.1 million for the first half of 2011. Average earning assets in the first half of 2012 decreased $50.8 million, or 3.1%, to $1.58 billion, compared to $1.66 billion in the first half of 2011. Average interest-bearing liabilities in the first half of 2012 decreased $77.3 million, or 5.4%, to $1.36
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Table of Contentsbillion, compared to $1.44 billion in the first half of 2011. Taxable equivalent net interest margin decreased to 4.15% for the first half of 2012, compared to 4.21% for the first half of 2011, a decrease of six basis points. The interest rate spread decreased in the first half of 2012 by three basis points compared to the first half of 2011. The decrease in net interest margin and interest rate spread was driven primarily by an overall lower yield the investment portfolio 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 June 30, 2012 from $92.3 million at June 30, 2011 due to calls on higher yielding securities. At June 30, 2012, the par value of the Company’s investment in corporate bonds was $152.8 million compared to $56.8 million at June 30, 2011. The weighted average duration of the Company’s investment securities was 3.1 years at June 30, 2012, compared to 5.6 years at June 30, 2011. For the six months ended June 30, 2012, the annualized average yield on loans decreased to 5.01% from 5.20% for the six months ended June 30, 2011. The net interest margin is also impacted by changes in interest income from nonaccrual loans. For the six months ended June 30, 2012, nonaccrual interest decreased the net interest margin by nine basis points compared to 12 basis points for the six months ended June 30, 2011. The average yield on earning assets during the first half of 2012 was 35 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 33 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 taxable equivalent basis for the six months ended June 30, 2012 and 2011.
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Table of Contents(Fully taxable equivalent basis1, dollars in thousands)
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