XNAS:NBBC NewBridge Bancorp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

the Securities Exchange Act of 1934

 

For the quarterly period ended 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)

 

 

 

North Carolina   56-1348147
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

1501 Highwoods Boulevard, Suite 400

Greensboro, North Carolina

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

(336) 369-0900

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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 Contents

NEWBRIDGE BANCORP

FORM 10-Q

TABLE OF CONTENTS

 

          Page  

PART I

Financial Information

  

  

Item 1

  

Financial Statements

     3   
  

Consolidated Balance Sheets June 30, 2012 and December 31, 2011

     3   
  

Consolidated Statements of Income Three Months and Six Months Ended June 30, 2012 and 2011

     4   
  

Consolidated Statements of Comprehensive Income Three Months and Six Months Ended June 30, 2012 and 2011

     5   
  

Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2012 and 2011

     6   
  

Consolidated Statements of Cash Flows Six Months Ended June 30, 2012 and 2011

     7   
  

Notes to Consolidated Financial Statements

     9   

Item 2

  

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

     25   

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

     39   

Item 4

  

Controls and Procedures

     39   

PART II

Other Information

  

  

Item 6

  

Exhibits

     40   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

NewBridge Bancorp and Subsidiary

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

     June  30
2012
(Unaudited)
    December 31
2011
 

Assets

    

Cash and due from banks

   $ 26,006      $ 27,629   

Interest-bearing bank balances

     35,936        26,363   

Loans held for sale

     5,741        7,851   

Investment securities

     388,968        337,811   

Loans

     1,162,630        1,200,070   

Less allowance for credit losses

     (25,231     (28,844
  

 

 

   

 

 

 

Net loans

     1,137,399        1,171,226   

Premises and equipment

     36,471        36,225   

Real estate acquired in settlement of loans

     24,491        30,587   

Bank-owned life insurance

     44,613        43,727   

Deferred tax assets

     28,126        32,263   

Other assets

     20,685        20,882   
  

 

 

   

 

 

 

Total assets

   $ 1,748,436      $ 1,734,564   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing

   $ 192,066      $ 172,351   

Savings, NOW and money market accounts

     850,978        852,941   

Time deposits

     406,153        393,384   
  

 

 

   

 

 

 

Total deposits

     1,449,197        1,418,676   

Borrowings from the Federal Home Loan Bank

     64,000        86,700   

Other borrowings

     46,774        46,774   

Accrued expenses and other liabilities

     18,914        19,027   
  

 

 

   

 

 

 

Total liabilities

     1,578,885        1,571,177   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock, par value $.01 per share:

    

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

     51,939        51,789   

Common stock, par value $5 per share:

    

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

     78,279        78,279   

Paid-in capital

     87,209        87,190   

Directors’ deferred compensation plan

     (468     (575

Retained deficit

     (46,552     (47,525

Accumulated other comprehensive (loss)

     (856     (5,771
  

 

 

   

 

 

 

Total shareholders’ equity

     169,551        163,387   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,748,436      $ 1,734,564   
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

3


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Income

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

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2012     2011     2012     2011  

Interest Income

        

Interest and fees on loans

   $ 14,581      $ 16,694      $ 29,503      $ 33,930   

Interest on investment securities

        

Taxable

     3,544        2,974        6,933        6,448   

Tax exempt

     189        191        385        382   

Interest bearing bank balances and Federal funds sold

     5        20        20        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     18,319        19,879        36,841        40,784   

Interest Expense

        

Deposits

     1,385        2,574        3,129        5,262   

Borrowings from the Federal Home Loan Bank

     269        284        528        631   

Other borrowings

     342        492        689        984   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,996        3,350        4,346        6,877   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     16,323        16,529        32,495        33,907   

Provision for credit losses

     2,360        3,020        5,803        9,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     13,963        13,509        26,692        24,814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Retail banking

     2,325        2,554        4,579        5,054   

Mortgage banking services

     553        268        1,116        693   

Wealth Management services

     561        626        1,155        1,171   

Gain on sale of investment securities

     —          —          —          1,961   

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

     (2,976     (1,585     (3,984     (3,071

Bank Owned Life Insurance

     378        304        845        712   

Other

     168        234        298        415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,009        2,401        4,009        6,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Personnel

     7,226        7,352        14,287        14,641   

Occupancy

     1,024        1,017        2,028        2,060   

Furniture and equipment

     885        924        1,663        1,888   

Technology and data processing

     1,015        960        2,035        1,877   

Legal and Professional

     690        742        1,361        1,368   

FDIC insurance

     441        632        882        1,427   

Real Estate Acquired in Settlement of Loans

     205        393        523        782   

Other

     2,253        2,559        4,561        4,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     13,739        14,579        27,340        28,973   

Income before income taxes

     1,233        1,331        3,361        2,776   

Income tax Expense

     312        190        929        624   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     921        1,141        2,432        2,152   

Dividends and accretion on preferred stock

     (729     (730     (1,459     (1,459
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income available to common shareholders

   $ 192      $ 411      $ 973      $ 693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share

        

Basic

   $ 0.01      $ 0.03      $ 0.06      $ 0.04   

Diluted

   $ 0.01      $ 0.02      $ 0.06      $ 0.04   

Weighted average shares outstanding

        

Basic

     15,655,868        15,655,868        15,655,868        15,655,868   

Diluted

     16,465,346        16,521,391        16,380,989        16,602,032   

See notes to consolidated financial statements

 

4


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited; dollars in thousands)

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2012     2011     2012     2011  

Net Income

   $ 921      $ 1,141      $ 2,432      $ 2,152   

Other Comprehensive Income (Loss), Net of Tax:

        

Unrealized gains on securities:

        

Unrealized holding gains (losses) arising during period

     2,068        2,053        4,935        1,037   

Reclassification adjustment for (gains) losses included in net income

     —          —          —          (1,187

Defined benefit pension plans:

        

Amortization of post retirement benefit

     (10     (9     (20     (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     2,058        2,044        4,915        (169
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 2,979      $ 3,185      $ 7,347      $ 1,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements

 

5


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

Six months ended June 30, 2012 and 2011

(Unaudited; dollars in thousands)

 

                                 Directors’           Accumulated        
                                 Deferred     Retained     Other     Total  
     Preferred      Common Stock      Paid-in      Compensation     Earnings     Comprehensive     Shareholders’  
     Stock      Shares      Amount      Capital      Plan     (Deficit)     Income (Loss)     Equity  

Balances at December 31, 2010

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

Net Income

                   2,152          2,152   

Change in accumulated other comprehensive income net of deferred income taxes

                     (169     (169

Dividends and accretion on preferred stock

     149                    (1,459       (1,310

Stock-based compensation expense

              67               67   

Common stock distributed

                 43            43   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2011

   $ 51,639         15,655,868       $ 78,279       $ 87,115       $ (575   $ (48,593   $ (1,164   $ 166,701   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2011

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

Net Income

                   2,432          2,432   

Change in accumulated other comprehensive income net of deferred income taxes

                     4,915        4,915   

Dividends and accretion on preferred stock

     150                    (1,459       (1,309

Stock-based compensation expense

              19               19   

Common stock distributed

                 107            107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2012

   $ 51,939         15,655,868       $ 78,279       $ 87,209       $ (468   $ (46,552   $ (856   $ 169,551   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements

 

6


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited; dollars in thousands)

 

     Six Months Ended  
     June 30  
     2012     2011  

Cash Flow from operating activities

    

Net Income

   $ 2,432      $ 2,152   

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

    

Depreciation and amortization

     1,719        2,896   

Securities premium amortization and discount accretion, net

     62        214   

(Gain) loss on sale of securities

     —          (1,961

Mortgage banking services

     (1,116     (693

Originations of loans held for sale

     (68,688     (39,615

Proceeds from sales of loans held for sale

     71,985        114,549   

(Increase) decrease in deferred tax assets

     917        (264

(Increase) in income taxes receivable

     (153     —     

Decrease in interest earned but not received

     57        554   

(Decrease) in interest accrued but not paid

     (153     (236

Write downs of real estate acquired in settlement of loans

     1,802        3,277   

Loss on sales of real estate acquired in settlement of loans

     2,182        (206

Net (increase) decrease in other assets

     (2,136     2,732   

Net increase in other liabilities

     40        1,526   

Provision for credit losses

     5,803        9,093   

Stock-based compensation

     19        67   
  

 

 

   

 

 

 

Net cash provided by operating activities

     14,772        94,085   
  

 

 

   

 

 

 

Cash Flow from investing activities

    

Purchases of securities available for sale

     (107,199     (27,426

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

     65,300        58,566   

Net (increase) decrease in loans

     22,106        (3,126

Purchases of premises and equipment

     (1,767     (1,991

Proceeds from sales of premises and equipment

     120        2,154   

Proceeds from sales of real estate acquired in settlement of loans

     7,999        4,143   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (13,441     32,320   
  

 

 

   

 

 

 

Cash Flow from financing activities

    

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

     17,752        33,764   

Net increase (decrease) in time deposits

     12,769        (59,670

Net (decrease) in other borrowings

     —          (15,000

Net (decrease) in borrowings from FHLB

     (22,700     (32,500

Dividends paid

     (1,309     (1,310

Common stock distributed

     107        43   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     6,619        (74,673
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     7,950        51,732   

Cash and cash equivalents at the beginning of the period

     53,992        29,075   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 61,942      $ 80,807   
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

7


Table of Contents

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited; dollars in thousands)

 

 

Consolidated Statements of Cash Flows
     Six Months Ended  
     June 30  
     2012     2011  

Supplemental disclosures of cash flow information

    

Cash paid during the periods for:

    

Interest

   $ 4,499      $ 7,113   

Income Taxes

     250        —     

Supplemental disclosures of noncash transactions

    

Transfer of loans to real estate acquired in settlement of loans

   $ 5,887      $ 6,225   

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

    

Change in securities available for sale

     8,155        (248

Change in deferred income taxes

     (3,220     98   

Change in shareholders’ equity

     4,935        (150

See notes to consolidated financial statements

 

8


Table of Contents

NewBridge Bancorp and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation

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

 

9


Table of Contents

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. This Update requires companies to present the total 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):

 

     For the three months ended
June 30
     For the six months ended
June 30
 
     2012      2011      2012      2011  

Basic:

           

Net income available to common shareholders

   $ 192       $ 411       $ 973       $ 693   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     15,655,868         15,655,868         15,655,868         15,655,868   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share, basic

   $ 0.01       $ 0.03       $ 0.06         0.04   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income available to common shareholders

   $ 192       $ 411       $ 973       $ 693   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     15,655,868         15,655,868         15,655,868         15,655,868   

Effect of dilutive securities:

           

Stock options

     —           —           —           —     

Restricted stock units

     37,078         8,484         23,319         8,601   

Warrant

     772,400         857,039         701,802         937,563   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding and dilutive potential shares outstanding

     16,465,346         16,521,391         16,380,989         16,602,032   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share, diluted

   $ 0.01       $ 0.02       $ 0.06       $ 0.04   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

Note 3 — Investment Securities

Investment securities consist of the following (in thousands):

 

                   June 30, 2012               
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Market
Value
     Average
Yield
    Average
Duration(1)
 

U. S. Treasury securities

   $ 10,000       $ —         $ —        $ 10,000         0.06     0.07   

U.S. government agency securities

     35,989         172         —          36,161         1.84        0.50   

Agency mortgage backed securities

     26,473         2,475         —          28,948         5.33        2.19   

Collateralized mortgage obligations

     19,641         572         (10     20,203         5.68        3.08   

Commercial mortgage backed securities

     55,354         1,145         (133     56,366         3.37        3.71   

Corporate bonds

     152,573         2,668         (1,615     153,626         3.85        3.41   

Covered bonds

     46,606         2,510         —          49,116         3.75        3.78   

State and municipal obligations

     19,244         589         (82     19,751         6.28 (2)      4.65   
  

 

 

    

 

 

    

 

 

   

 

 

      

Total debt securities

     365,880         10,131         (1,840     374,171         3.81 (2)      3.08   

Federal Home Loan Bank stock

     8,351         —           —          8,351        

Other equity securities

     5,775         671         —          6,446        
  

 

 

    

 

 

    

 

 

   

 

 

      

Total investment securities

   $ 380,006       $ 10,802       $ (1,840   $ 388,968        
  

 

 

    

 

 

    

 

 

   

 

 

      

 

                   December 31, 2011               
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Market
Value
     Average
Yield
    Average
Duration(1)
 

U.S. government agency securities

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

Agency mortgage backed securities

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

Collateralized mortgage obligations

     23,599         168         (332     23,435         4.69        2.03   

Commercial mortgage backed securities

     30,169         153         (33     30,289         3.47        4.43   

Corporate bonds

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

Covered bonds

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

State and municipal obligations

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

 

 

    

 

 

    

 

 

   

 

 

      

Total debt securities

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

Federal Home Loan Bank stock

     7,185         —           —          7,185        

Other equity securities

     5,775         427         —          6,202        
  

 

 

    

 

 

    

 

 

   

 

 

      

Total investment securities

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

 

 

    

 

 

    

 

 

   

 

 

      

 

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

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

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 Contents

The following is a schedule of investment securities in a loss position as of June 30, 2012 (in thousands):

 

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

Collateralized mortgage obligations

   $ 402       $ (10   $ —         $ —        $ 402       $ (10

Commercial mortgage backed securities

     13,966         (133     —           —          13,966         (133

Corporate bonds

     34,869         (580     13,950         (1,035     48,819         (1,615

State and municipal obligations

     —           —          2,463         (82     2,463         (82
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities in a loss position

   $ 49,237       $ (723   $ 16,413       $ (1,117   $ 65,650       $ (1,840
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 Contents

Note 4 — Loans and Allowance for Credit Losses

Loans are summarized as follows (in thousands):

 

     June 30,
2012
     December 31
2011
 

Secured by owner-occupied nonfarm nonresidential properties

   $ 264,843       $ 269,972   

Secured by other nonfarm nonresidential properties

     172,718         157,594   

Other commercial and industrial

     101,509         119,877   
  

 

 

    

 

 

 

Total Commercial

     539,070         547,443   

Construction loans – 1 to 4 family residential

     7,766         7,781   

Other construction and land development

     69,211         81,630   
  

 

 

    

 

 

 

Total Real estate – construction

     76,977         89,411   

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

     283,796         287,268   

Lines of credit secured by 1 to 4 family residential properties

     204,122         209,634   

Loans secured by 5 or more family residential properties

     23,425         25,883   
  

 

 

    

 

 

 

Total Real estate – mortgage

     511,343         522,785   

Credit cards

     7,289         7,649   

Other revolving credit plans

     9,051         9,444   

Other consumer loans

     12,849         17,648   
  

 

 

    

 

 

 

Total Consumer

     29,189         34,741   

All other loans

     6.051         5,690   
  

 

 

    

 

 

 

Total Other

     6,051         5,690   
  

 

 

    

 

 

 

Total loans

   $ 1,162,630       $ 1,200,070   
  

 

 

    

 

 

 

Nonperforming assets are summarized as follows (in thousands):

 

     June 30,
2012
    December 31,
2011
 

Commercial nonaccrual loans, not restructured

   $ 10,331      $ 15,773   

Commercial nonaccrual loans, restructured

     8,243        7,489   

Non-commercial nonaccrual loans, not restructured

     8,195        9,569   

Non-commercial nonaccrual loans, restructured

     2,616        283   
  

 

 

   

 

 

 

Total nonaccrual loans

     29,385        33,114   

Troubled debt restructured loans, accruing

     5,230        7,406   

Accruing loans which are contractually past due 90 days or more

     65        14   
  

 

 

   

 

 

 

Total nonperforming loans

     34,680        40,534   

Real estate acquired in settlement of loans

     24,491        30,587   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 59,171      $ 71,121   
  

 

 

   

 

 

 

Nonperforming loans to loans outstanding at end of period

     2.98     3.38

Nonperforming assets to total assets at end of period

     3.38     4.10

Allowance for credit losses to nonperforming loans

     72.75     71.16

Restructured loans, performing(1)

   $ 2,443      $ 4,888   
  

 

 

   

 

 

 

 

(1) Loans restructured in a prior calendar year at a market rate of interest and which have experienced at least six consecutive months of payment performance in accordance with the restructured terms.

 

13


Table of Contents

Nonperforming 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.

 

14


Table of Contents

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

 

June 30, 2012

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

Secured by owner-occupied nonfarm nonresidential properties

   $ 4,892       $ —         $ 5,781       $ 10,673       $ 254,170       $ 264,843   

Secured by other nonfarm nonresidential properties

     1,621         —           4,546         6,167         166,551         172,718   

Other commercial and industrial

     1,612         —           619         2,231         99,278         101,509   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     8,125         —           10,946         19,071         519,999         539,070   

Construction loans – 1 to 4 family residential

     —           —           613         613         7,153         7,766   

Other construction and land development

     3,004         —           2,980         5,984         63,227         69,211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – construction

     3,004         —           3,593         6,597         70,380         76,977   

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

     4,308         —           11,961         16,269         267,527         283,796   

Lines of credit secured by 1 to 4 family residential properties

     2,674         —           2,315         4,989         199,133         204,122   

Loans secured by 5 or more family residential properties

     497         —           283         780         22,645         23,425   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – mortgage

     7,479         —           14,559         22,038         489,305         511,343   

Credit cards

     79         65         —           144         7,145         7,289   

Other revolving credit plans

     16         —           156         172         8,879         9,051   

Other consumer loans

     238         —           131         369         12,480         12,849   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     333         65         287         685         28,504         29,189   

All other loans

     —           —           —           —           6,051         6,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Other

     —           —           —           —           6,051         6,051   

Total loans

   $ 18,941       $ 65       $ 29,385       $ 48,391       $ 1,114,239       $ 1,162,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

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

Secured by owner-occupied nonfarm nonresidential properties

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

Secured by other nonfarm nonresidential properties

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

Other commercial and industrial

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

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

Construction loans – 1 to 4 family residential

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

Other construction and land development

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – construction

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

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

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

Lines of credit secured by 1 to 4 family residential properties

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

Loans secured by 5 or more family residential properties

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – mortgage

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

Credit cards

     146         14         —           160         7,489         7,649   

Other revolving credit plans

     339         —           125         464         8,980         9,444   

Other consumer loans

     372         —           40         412         17,236         17,648   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

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

All other loans

     —           —           —           —           5,690         5,690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Other

     —           —           —           —           5,690         5,690   

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

At 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:

 

   

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

 

   

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

 

   

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

Modifications of terms for loans and their inclusion as TDRs are based on individual facts and circumstances. Loan modifications that are included as TDRs may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal payments. 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):

 

     Modifications for the three months ended
June 30, 2012
     Modifications for the six months ended
June 30,2012
 
    

Number
of

Contracts

     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
    

Number
of

Contracts

     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings:

           

Commercial

     1       $ 3,100       $ 2,900         7       $ 6,609       $ 5,552   

Real estate – construction

     —           —           —           2         185         185   

Real estate – mortgage

     3         569         569         3         569         569   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 3,669       $ 3,469         12       $ 7,363       $ 6,306   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

A TDR is considered to be in default if it is 90 days or more past due at the end of any month during the reporting period.

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):

 

     Defaults for the three
months ended

June 30, 2012
     Defaults for the six
months ended

June 30, 2012
 
     Number
of

Contracts
     Recorded
Investment
     Number
of

Contracts
     Recorded
Investment
 

TDR Defaults:

           

Commercial

     0       $ 0         2       $ 489   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0       $ 0         2       $ 489   
  

 

 

    

 

 

    

 

 

    

 

 

 

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):

 

     Three Months
Ended
June 30, 2012
     Six Months
Ended

June  30, 2012
 

Interest Income Recognized:

     

Commercial

   $ 40       $ 61   

Real estate – construction

     2         9   

Real estate – mortgage

     22         68   

Consumer

     1         2   
  

 

 

    

 

 

 

Total

   $ 65       $ 140   
  

 

 

    

 

 

 

 

17


Table of Contents

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

 

                                           
     June 30      December 31  
     2012      2011  

Loans identified as impaired

   $ 32,955       $ 32,591   

Other nonperforming loans

     1,725         7,943   
  

 

 

    

 

 

 

Total nonperforming loans

     34,680         40,534   

Performing classified loans

     71,673         87,959   
  

 

 

    

 

 

 

Total classified loans

   $ 106,353       $ 128,493   
  

 

 

    

 

 

 

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).

 

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

June 30, 2012

       

Loans without a specific valuation allowance:

       

Commercial

  $ 9,713      $ 10,685      $ —        $ 11,312   

Real estate – construction

    2,161        2,958        —          3,031   

Real estate – mortgage

    6,778        7,137        —          7,571   

Consumer

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    18,652        20,780        —          21,914   

Loans with a specific valuation allowance:

       

Commercial

    5,221        5,521        1,230        5,250   

Real estate – construction

    1,297        1,297        545        1,300   

Real estate – mortgage

    7,689        10,198        1,204        10,023   

Consumer

    96        96        96        100   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    14,303        17,112        3,075        16,673   

Total impaired loans:

       

Commercial

    14,934        16,206        1,230        16,562   

Real estate – construction

    3,458        4,255        545        4,331   

Real estate – mortgage

    14,467        17,335        1,204        17,594   

Consumer

    96        96        96        100   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 32,955      $ 37,892      $ 3,075      $ 38,587   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

December 31, 2011

       

Loans without a specific valuation allowance:

       

Commercial

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

Real estate – construction

    6,874        8,571        —          8,655   

Real estate – mortgage

    6,429        6,536        —          8,128   

Consumer

    —          —          —          57   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    16,025        17,963        —          20,337   

Loans with a specific valuation allowance:

       

Commercial

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

Real estate – construction

    1,495        1,515        203        2,954   

Real estate – mortgage

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

Consumer

    117        117        117        86   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

Total impaired loans:

       

Commercial

    10,736        11,185        1,972        7,748   

Real estate – construction

    8,369        10,086        203        11,609   

Real estate – mortgage

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

Consumer

    117        117        117        143   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The 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:

 

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

June 30, 2012

                 

Allowance for credit losses:

                 

Individually evaluated for impairment

   $ 1,230       $ 545       $ 1,204       $ 96       $      —         $ 3,075   

Collectively evaluated for impairment

     4,498         6,165         10,285         1,203         5         22,156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $     5,728       $     6,710       $   11,489       $   1,299       $ 5       $      25,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

December 31, 2011

                 

Allowance for credit losses:

                 

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

June 30, 2011

                 

Allowance for credit losses:

                 

Individually evaluated for impairment

   $     1,304       $ 456       $ 1,008       $ —         $ —         $ 2,768   

Collectively evaluated for impairment

     6,014         6,234         10,911         2,113         —           25,272   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 7,318       $     6,690       $   11,919       $   2,113       $      —         $      28,040   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

June 30, 2012

                 

Recorded investment in loans:

                 

Individually evaluated for impairment

   $ 14,934       $ 3,458       $ 14,467       $ 96       $ —         $ 32,955   

Collectively evaluated for impairment

     524,136         73,519         496,876         29,093         6,051         1,129,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment in loans

   $ 539,070       $   76,977       $ 511,343       $ 29,189       $   6,051       $ 1,162,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

December 31, 2011

                 

Recorded investment in loans:

                 

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment in loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

June 30, 2011

                 

Recorded investment in loans:

                 

Individually evaluated for impairment

   $ 7,165       $ 13,077       $ 17,124       $ 117       $ —         $ 37,483   

Collectively evaluated for impairment

     532,151         116,796         513,901         39,265         4,692         1,206,805   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment in loans

   $ 539,316       $ 129,873       $ 531,025       $ 39,382       $   4,692       $ 1,244,288   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

19


Table of Contents

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).

 

                                                                                                                                                     
    June 30 2012     December 31 2011  
    Pass     Special
Mention
    Sub-
Standard
    Doubtful     Total     Pass     Special
Mention
    Sub-
standard
    Doubtful     Total  

Commercial

  $ 449,062      $ 47,453      $ 65,921      $ 996      $ 563,432      $ 437,475      $ 56,172      $ 79,229      $ 301      $ 573,177   

Real estate – construction

    36,915        9,197        16,673        219        63,004        35,622        14,304        23,667        757        74,350   

Real estate – mortgage

    55,175        8,603        11,670        64        75,512        57,089        7,363        14,517        171        79,140   

Consumer

    —          —          —          —          —          —          —          —          —          —     

Other

    5,343        —          —          —          5,343        4,954        —          —          —          4,954   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 546,495      $ 65,253      $ 94,264      $ 1,279      $ 707,291      $ 535,140      $ 77,839      $ 117,413      $ 1,229      $ 731,621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months
Ended

June 30, 2012
     Three Months
Ended

June 30, 2011
     Six Months
Ended
June 30, 2012
     Six Months
Ended
June 30, 2011
 

Balance, beginning of period

   $ 27,918       $ 29,057       $ 28,844       $ 28,752   

Loans charged off:

           

Secured by owner-occupied nonfarm nonresidential properties

     227         331         1,146         454   

Secured by other nonfarm nonresidential properties

     505         156         610         368   

Other commercial and industrial

     274         772         585         1,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     1,006         1,259         2,341         2,459   

Construction loans – 1-4 family residential

     210         83         210         101   

Other construction and land development

     1,684         1,031         2,532         2,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – construction

     1,894         1,114         2,742         2,248   

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

     2,027         876         2,526         2,612   

Lines of credit secured by 1 to 4 family residential properties

     300         932         2,169         1,393   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Real estate – mortgage

     2,327         1,808         4,695         4,005   

Credit cards

     99         75         211         179   

Other consumer loans

     149         255         320         531   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     248         330         531         710   

Total other

     2         —           2         1,300   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total chargeoffs

     5,477         4,511         10,311         10,722   

Recoveries of loans previously charged off:

           

Total Commercial

     101         61         176         198   

Total Real estate – construction

     10         98         185         184   

Total Real estate – mortgage

     270         182         400         295   

Total Consumer

     48         117         121         221   

Total Other

     1         16         13         19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Recoveries

     430         474         895         917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans charged off

     5,047         4,037         9,416         9,805   

Provision for credit losses

     2,360         3,020         5,803         9,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 25,231       $ 28,040       $ 25,231       $ 28,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Loans 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 Contents

Note 6 — Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

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

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

 

22


Table of Contents

The table below presents the estimated fair values of financial instruments as of June 30, 2012 and December 31, 2011 (in thousands):

 

       Estimated Fair Value  

June 30, 2012

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

(Level 2)
     Significant
unobservable
inputs

(Level  3)
     Total  

Financial assets:

              

Cash and short term investments

   $ 61,942       $ 61,942       $ —         $ —         $ 61,942   

Loans

     1,162,630         —           —           1,153,042         1,153,042   

Financial liabilities:

              

Deposits

     1,449,197         —           1,451,459         —           1,451,459   

Wholesale repurchase agreements

     21,000         —           23,643         —           23,643   

Junior Subordinated notes

     25,774         —           —           10,921         10,921   

FHLB borrowings

     64,000         —           65,065         —           65,065   

 

       Estimated Fair Value  

December 31, 2011

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

(Level 2)
     Significant
unobservable
inputs

(Level 3)
     Total  

Financial assets:

              

Cash and short term investments

   $ 53,992       $ 53,992       $ —         $ —         $ 53,992   

Loans

     1,200,070         —           —           1,197,885         1,197,885   

Financial liabilities:

              

Deposits

     1,418,676         —           1,420,704         —           1,420,704   

Wholesale repurchase agreements

     21,000         —           23,772         —           23,772   

Junior Subordinated notes

     25,774         —           —           10,857         10,857   

FHLB borrowings

     86,700         —           87,911         —           87,911   

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

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

 

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

Available for sale securities at June 30, 2012

   $ —         $ 380,617       $ 8,351   

Available for sale securities at December 31, 2011

     —           330,626         7,185   

 

23


Table of Contents

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

 

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

Loans held for sale at June 30, 2012

   $ —         $ 5,741       $ —     

Loans held for sale at December 31, 2011

     —           7,851         —     

Real estate acquired in settlement of loans at June 30, 2012

     —           —           24,491   

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

     —           —           30,587   

Impaired loans, net of allowance at June 30, 2012

     —           —           29,880   

Impaired loans, net of allowance at December 31, 2011

     —           —           28,425   

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.

 

24


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The discussion presented herein is intended to provide an overview of the changes in financial condition and results of operations during the time periods required by Item 303 of Regulation S-K for NewBridge Bancorp (“Bancorp” or the “Company”) and its wholly-owned subsidiary NewBridge Bank (the “Bank”).

The consolidated financial statements also include the accounts and results of operations of the Bank’s wholly-owned subsidiaries. This discussion and analysis is intended to complement the unaudited financial statements, notes and supplemental financial data in this Quarterly Report on Form 10-Q, and should be read in conjunction therewith.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of Bancorp including but not limited to Bancorp’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects”, “anticipates”, “should”, “estimates”, “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation: (1) recently enacted legislation, or legislation enacted in the future, or any proposed federal programs may subject Bancorp to increased regulation and may adversely affect Bancorp; (2) the strength of the United States economy generally, and the strength of the local economies in which Bancorp conducts operations, may be different than expected, resulting in, among other things, a continued deterioration in credit quality, including the resultant effect on Bancorp’s loan portfolio and allowance for credit losses; (3) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”); (4) inflation, deflation, interest rate, market and monetary fluctuations; (5) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate and market liquidity conditions) and the impact of such conditions on Bancorp’s capital markets and capital management activities; (6) the timely development of competitive new products and services by Bancorp and the acceptance of these products and services by new and existing customers; (7) the willingness of customers to accept third party products marketed by Bancorp; (8) the willingness of customers to substitute competitors’ products and services for Bancorp’s products and services and vice versa; (9) the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking and securities); (10) technological changes; (11) changes in consumer spending and saving habits; (12) the effect of corporate restructurings, acquisitions and/or dispositions, and the failure to achieve the expected revenue growth and/or expense savings from such corporate restructurings, acquisitions and/or dispositions; (13) the current stresses in the financial and real estate markets, including possible continued deterioration in property values; (14) unanticipated regulatory or judicial proceedings; (15) the impact of changes in accounting policies by the Securities and Exchange Commission (the “SEC”); (16) adverse changes in financial performance and/or condition of Bancorp’s borrowers which could impact repayment of such borrowers’ outstanding loans; and (17) Bancorp’s success at managing the risks involved in the foregoing. Bancorp cautions that the foregoing list of important factors is not exhaustive. See also those risk factors identified in the section headed “Risk Factors”, beginning on page 13 of Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 22, 2012 (the “Annual Report”). Bancorp undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time by or on behalf of Bancorp.

 

25


Table of Contents

Introduction

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

The Company’s results of operations are dependent primarily on the results of operations of the Bank and thus are dependent to a significant extent on net interest income, which is the difference between the income earned on the Bank’s loan and investment portfolios and cost of funds, consisting of interest paid on deposits and borrowings. Results of operations are also affected by the Company’s provision for credit losses, mortgage loan sales activities, service charges and other fee income, and noninterest expense. The Company’s noninterest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing, professional fees, and advertising and business promotion expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.

Commercial banking in North Carolina is extremely competitive, due in large part to intrastate and interstate branching laws. Many of the Company’s competitors are significantly larger and have greater resources. The Company continues to encounter significant competition from a number of sources, including bank holding companies, financial holding companies, commercial banks, thrift institutions, credit unions and other financial institutions and financial intermediaries. The Company competes in its market areas with some of the largest banking organizations in the Southeast and nationally, almost all of which have numerous branches in NC. The Company’s competition is not limited to financial institutions based in NC. The enactment of federal legislation authorizing nationwide interstate banking has greatly increased the size and financial resources of some of the Company’s competitors. Many of its competitors have substantially higher lending limits due to their greater total capitalization, and many perform functions for their customers that the Company generally does not offer. The Company primarily relies on providing quality products and services at a competitive price within its market areas. As a result of interstate banking legislation, the Company’s market is open to future penetration by banks located in other states.

The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and significant changes in its results of operations for the periods presented. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Annual Report.

Application of Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiary comply with accounting principles generally accepted in the United States and conform to standards within the banking industry. The preparation of the financial information contained in this Quarterly Report on Form 10-Q requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s management evaluates these estimates on an ongoing basis. A summary of the allowance for credit losses, the most complex and subjective accounting policy of the Company, is discussed under the heading Asset Quality and Allowance for Credit Losses” as well as in Note 4 of the Notes to Consolidated Financial Statements.

 

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Table of Contents

Three 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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(Fully taxable equivalent basis1, dollars in thousands)

 

    Three Months Ended     Three Months Ended  
    June 30, 2012     June 30, 2011  
    Average
Balance
    Interest
Income/
Expense
    Annualized
Average
Yield/Rate
    Average
Balance
    Interest
Income/
Expense
    Annualized
Average
Yield/Rate
 

Earning assets:

           

Loans receivable2

  $ 1,176,015      $ 14,581        4.99   $ 1,298,832      $ 16,694        5.16

Taxable securities

    373,176        3,517        3.79        251,964        2,953        4.70   

Tax exempt securities

    17,806        281        6.35        16,255        282        6.96   

FHLB stock

    7,559        27        1.44        9,664        21        0.86   

Interest-bearing bank balances

    12,033        5        0.17        32,514        20        0.25   

Federal funds sold

    —          —          —          —          —          —     
 

 

 

   

 

 

     

 

 

   

 

 

   

Total earning assets

    1,586,589        18,411        4.67        1,609,229        19,970        4.98   

Non-earning assets:

           

Cash and due from banks

    26,616            35,781       

Premises and equipment

    36,578            37,706       

Other assets

    121,922            107,384       

Allowance for credit losses

    (27,963         (29,988    
 

 

 

   

 

 

     

 

 

   

 

 

   

Total assets

  $ 1,743,742      $ 18,411        $ 1,760,112      $ 19,970     
 

 

 

   

 

 

     

 

 

   

 

 

   

Interest-bearing liabilities:

           

Savings deposits

  $ 44,707      $ 6        0.05   $ 41,598      $ 10        0.10

NOW deposits

    434,307        349        0.32        439,153        710        0.65   

Money market deposits

    375,501        344        0.37        358,642        703        0.79   

Time deposits

    364,675        686        0.76        429,205        1,151        1.08   

Other borrowings

    47,282        342        2.91        61,279        492        3.22   

Borrowings from Federal Home Loan Bank

    87,505        269        1.24        86,299        284        1.32   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,353,977        1,996        0.59        1,416,176        3,350        0.95   

Other liabilities and shareholders’ equity:

           

Demand deposits

    201,997            165,070       

Other liabilities

    19,154            15,902       

Shareholders’ equity

    168,614            162,964       
 

 

 

   

 

 

     

 

 

   

 

 

   

Total liabilities and shareholders’ equity

  $ 1,743,742        1,996        $ 1,760,112        3,350     
 

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income and net interest margin3

    $ 16,415        4.16     $ 16,620        4.14
   

 

 

   

 

 

     

 

 

   

 

 

 

Interest rate spread4

        4.07         4.03
     

 

 

       

 

 

 

 

1 

Income related to securities exempt from federal income taxes is stated on a fully taxable equivalent basis, assuming a federal income tax rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $92 for 2012 and $91 for 2011.

2 

The average loans receivable balances include non-accruing loans. Amortization of loan fees, net of deferred costs, of $120 and $150 for the three months ended June 30, 2012 and 2011, respectively, are included in interest income.

3 

Net interest margin is computed by dividing net interest income by average earning assets.

4 

Earning assets yield minus interest-bearing liability rate.

 

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Noninterest Income and Expense

In the 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):

 

     Three Months Ended         
     June 30,      Percentage  
     2012      2011      Variance  

Other noninterest expense:

        

Advertising

   $ 386       $ 376         2.7

Bankcard expense

     103         161         (36.0

Postage

     189         146         29.5   

Telephone

     172         175         (1.7

Amortization of core deposit intangible

     182         182         0.0   

Stationery, printing and supplies

     100         104         (3.8

Other expense

     1,121         1,415         (20.8
  

 

 

    

 

 

    

Total noninterest expense

   $ 2,253       $ 2,559         (12.0
  

 

 

    

 

 

    

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 Contents

billion, 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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(Fully taxable equivalent basis1, dollars in thousands)

 

    Six Months Ended
June 30, 2012
    Six Months Ended
June 30, 2011
 
    Average
Balance
    Interest
Income/
Expense
    Annualized
Average
Yield/Rate
    Average
Balance
    Interest
Income/
Expense
    Annualized
Average
Yield/Rate
 

Earning assets:

           

Loans receivable2

  $ 1,183,528      $ 29,503        5.01   $ 1,316,817      $ 33,930        5.20

Taxable securities

    355,474        6,882        3.89        270,038        6,407        4.78   

Tax exempt securities

    17,807        573        6.47        15,970        564        7.13   

FHLB stock

    7,372        51        1.39        10,029        42        0.84   

Interest-bearing bank balances

    18,005        20        0.22        20,115        24        0.24   

Federal funds sold

    —          —          —          —          —          —     
 

 

 

   

 

 

     

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